Item 2. Properties
Real Estate Investments
The Trust has direct ownership of six commercial real estate properties. These real estate investments are diversified geographically with 69% of the portfolio located in the Southeast, 25% in the Southwest and 6% in the Great Lakes Region based on the cost of the properties.
Properties owned by the Trust are leased to tenants either on a managed basis or under net lease arrangements. As the owner of managed property the Trust receives gross rentals and incurs operating expenses, such as property taxes, insurance, repairs, maintenance and common area utilities. Under net lease arrangements, the tenant, rather than the Trust, pays all operating expenses related to the leased premises. At December 31, 1998, five commercial properties were being leased on a managed basis and one property was leased on a net lease basis.
The five managed commercial properties consisted of four shopping centers and one business park. Managed commercial properties comprised 94% of the Trust's investment portfolio in 1998, compared to 95% in 1997 and 1996. Managed commercial properties provided 91% of USP's annual revenue in 1998, compared to 89% in 1997 and 88% in 1996. All managed properties have at least one tenant representing 22% or more of the revenue from that property. The Kroger Company at Mendenhall Commons in Memphis, Tennessee and Safeway at North Park Plaza in Phoenix, Arizona each represent approximately 12% of the total revenue of the Trust under leases expiring in 2012 and 2018, respectively.
The net leased property is an office/warehouse which represented approximately 6% of the Trust's investment portfolio in 1998, compared to 5% in 1997 and 1996, and generated 7% of the Trust's annual revenue in 1998, 1997, and in 1996. Trust properties and operations are summarized in the table on the next page.
The Trust's real estate investments are not expected to be substantially affected by current federal, state or local laws and regulations establishing ecological or environmental restrictions on the development and operations of such property. However, the enactment of new provisions or laws may reduce the Trust's ability to fulfill its investment objectives.
The Trust's properties and operations are summarized in the table below.
Real Estate Cost 1998 Revenue at December 31, 1998
Amount Percent Amount Percent
Managed Kingsley Square Orange Park, Florida $ 5,743,758 17% $ 775,274 15% First Tuesday Mall Carrollton, Georgia 7,168,583 21 820,553 16 Mendenhall Commons Memphis, Tennessee 8,795,032 25 976,643 18 North Park Plaza Phoenix, Arizona 8,680,330 25 1,135,596 21 Presidential Drive Atlanta, Georgia 1,922,882 6 327,317 6
32,310,585 94 4,035,383 76
Net Leased Yamaha Warehouse Cudahy, Wisconsin 2,197,937 6 371,100 7
Properties sold --- --- 802,144 15
Trust operations --- --- 123,328 2
$ 34,508,522 100% $ 5,331,955 100%
Recent Transactions
In December 1998, the Trust sold Geneva Square in Lake Geneva, Wisconsin for cash of $4,500,000. The Trust paid selling expenses of $20,165 and retired mortgage indebtedness on the property of $2,803,790. Gain on the sale was $528,282. Earlier in the year, the Trust received $248,000 from P.W. Enterprises, a tenant at Geneva Square, in final settlement of a bankruptcy claim filed in 1996.
During 1998, the Safeway lease at North Park Plaza in Phoenix, Arizona was extended to 2018 and modified to include an additional 18,000 square feet vacated in 1996 by Staples, Inc. Safeway is in the process of expanding into the former Staples space and is also remodeling their existing space. Safeway is responsible for the entire cost of the remodeling project.
At First Tuesday Mall in Carrollton, Georgia, the Trust had a lease with Belk Rhodes for 49,836 square feet. Belk Rhodes vacated this space in 1997 but continued to pay base rent. On July 30, 1998, this space was occupied by Martin's Family Clothing, pursuant to a ten year lease.
At Kingsley Square in Orange Park, Florida, the Trust has a lease with Publix Super Markets for 34,400 square feet. In 1997 the Trust received written notice from Publix that they planned to close their store and move to a new location. It is anticipated that Publix will vacate their space at the end of March 1999. The Trust anticipates receiving rent from Publix for the remainder of the lease term, which expires in February 2000. The Trust is attempting to secure a new tenant for this space.
The Yamaha Warehouse facility in Cudahy, Wisconsin has a lease with Yamaha Motor Corporation, its sole tenant. In March 1998, Yamaha exercised both of their remaining one-year options in order to renew their lease for two more years. The lease expires in June 2000. The Trust will be seeking a new lease with Yamaha or some other prospective tenant.
On February 1, 1999, the Trust prepaid the mortgage loan on Presidential Drive Business Park. The prepayment amount, including a 1% prepayment fee of $7,065 to the lender, was $713,548. On February 5, 1999, the Trust prepaid the mortgage loan on First Tuesday Mall. The prepayment amount, including a 1% prepayment fee of $4,636 to the lender, was $468,281.
On March 1, 1999, the mortgage loans payable on Mendenhall Commons and North Park Plaza matured, with remaining principal balances of $3,930,120 and $3,944,537, respectively. The Trust refinanced these properties with Monumental Life Insurance Company, an affiliate of AEGON Realty Advisors. The loan amount for Mendenhall is $3,925,000 with monthly debt service of $30,430. The loan amount for North Park is $3,940,000 with monthly debt service of $30,547. Debt service on both loans include principal amortization over twenty years and interest at an initial rate of 7%, which will be adjusted quarterly based on three month LIBOR plus 2%. The loans mature in one year and may be prepaid at any time without penalty.
The operating results and financial condition of the Trust greatly depend upon all tenants continuing to pay rent, and the Trust's ability to renew expiring tenant leases and obtain new leases at competitive rental rates.
As previously reported, the Board of Trustees has been exploring various strategic alternatives with the intent to maximize shareholder value. Raymond James & Associates, Inc. has been engaged as financial advisor to assist the Trust with these ongoing efforts. While a number of possibilities are being considered, there is no assurance any transaction will be consummated.
Item 3.
Item 3. Legal Proceedings
Legal Proceedings
The Trust is not a party to any pending legal proceedings which, in the opinion of management, are material to the Trust's financial position.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Part II.
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholders Matters
Distribution Information
The Trust is required to distribute at least 95% of its taxable income to continue its qualification as a real estate investment trust. Although the Trust expects to continue making distributions to shareholders, there is no assurance of future distributions, since they are dependent upon earnings, cash flow, the financial condition of the Trust and other factors.
Identification of Market and Price Range
At March 5, 1999, the Trust had 3,880,000 shares of beneficial interest issued and outstanding to 1,918 shareholders of record. The Trust's shares of beneficial interest are traded over-the- counter on the Nasdaq SmallCap Market under the symbol USPTS. At March 5, 1999, the Trust's per share high and low sales prices were $3.9375 and $3.875, respectively, as obtained from Wedbush/Morgan Securities, Inc., Newport Beach, California, Stifel Nicolaus, St. Louis, Missouri, and Herzog, Heine, Geduld, Inc., New York, New York, the principal market makers for shares of the Trust. These prices reflect quotations between dealers without adjustment for retail mark-up, mark-down or commission and do not necessarily represent actual transactions.
Market Price Range
Over-the-Counter Sales Prices
Quarter Ended High Low Close March 31 4 3/4 4 1/8 4 1/2 June 30 5 4 5/16 4 5/8 September 30 7 1/2 3 7/8 5 5/8 December 31 6 1/4 3 3/4 3 7/8
March 31 4 11/16 4 1/8 4 1/2 June 30 4 7/8 3 7/8 4 3/4 September 30 5 4 1/4 4 5/8 December 31 5 3/8 4 4 1/8
Income Tax Information
The percentages indicated below, multiplied by the amount of distributions received or reinvested during the year, result in the amount to be reported for income tax purposes. A Form 1099 is mailed to shareholders at the end of each year reflecting the distributions paid by the Trust in that year.
Dividend Character
1998 1997 1996
Ordinary Income 76.21% 50.75% 86.10%
Capital Gains 23.79% --- ---
Return of Capital --- 49.25% 13.90% Total 100.00% 100.00% 100.00%
Distributions paid, per share $.32 $.32 $.32
Advisor
AEGON USA Realty Advisors, Inc. Cedar Rapids, Iowa
Stock Transfer and Dividend Reinvestment Agent
USP Real Estate Investment Trust c/o Boston EquiServe, L.P. P.O. Box 8200 Boston, MA 02266-8200 Telephone: 1-800-426-5523
10-K Information
The 1998 Form 10-K filed with the Securities and Exchange Commission (exclusive of certain exhibits) is available without charge upon written request to Roger L. Schulz, Controller, USP Real Estate Investment Trust, 4333 Edgewood Road N.E., Cedar Rapids, Iowa 52499-5441.
Item 6.
Item 6. Selected Financial Data
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The discussion that follows should be read in the general context of the discussion in "Item 1. Business" and "Item 2. Properties."
Results of Operations
The Trust owns shopping centers, an office park and an office warehouse facility in six U.S. cities. The Trust's properties continue to compete with centers and office buildings of similar size, tenant mix and location. As of December 31, 1998, the combined leased occupancy of the Trust's six properties was 96%. Operating results in the forthcoming year will be influenced by the ability of current tenants to continue paying rent, and the Trust's ability to renew expiring tenant leases and obtain new leases at competitive rental rates.
The Trust sold Geneva Square in Lake Geneva, Wisconsin on December 22, 1998 for $4,500,000, recognizing a gain on the sale of $528,282. One of the anchor tenants at Geneva Square filed for bankruptcy and closed its 63,146 square foot store in 1996, representing 44% of the square feet at Geneva Square. Due to the size of this vacant space in relation to the demographics of the Lake Geneva real estate market, the Trust was unable to locate a suitable replacement tenant. This vacant space had a negative impact on the Trust's cash flow, and along with the prospect of a competing center to be built nearby, led the Trust to market the property for sale. The Trust was successful in selling the property in a short period of time.
1998 compared to 1997
The Trust's net earnings for the year ended December 31, 1998 were $1,472,257 ($.38 per share) compared to $896,286 ($.23 per share) for the year ended December 31, 1997. The net earnings for 1998 include a net gain on sale of $528,282 ($.14 per share) from the sale of Geneva Square Shopping Center in December 1998. The net earnings for 1997 include a net gain of $259,157 ($.07 per share) realized from a previously deferred installment sale. (All per share amounts are on a basic and diluted basis.) The increase in net earnings is primarily due to the gain from the sale of Geneva Square and rent settlements collected in 1998 from two previous tenants at Geneva Square.
Rental income was $5,218,707 in 1998 compared to $4,802,974 in 1997. This increase of $415,733 was primarily due to the receipt of settlements in the amount of $333,000 from two previous tenants at Geneva Square. Rental income increased by $175,415 at Kingsley Square in Orange Park, Florida due to OfficeMax, which began paying rent in May 1997. Rents at North Park Plaza Shopping Center in Phoenix, Arizona increased by $86,519 but was offset by a $78,228 decrease at First Tuesday Mall in Carrollton, Georgia.
Interest income was $113,248 in 1998 compared to $209,113 in 1997, a decrease of 46% due a lower balance of funds available for investment.
Property expenses before depreciation were $1,634,237 in 1998 compared to $1,705,298 in 1997, representing 31% of rental income for 1998 and 36% of rental income for 1997. Real estate taxes decreased by 8% as all properties experienced a reduction in property taxes. Repairs and maintenance expenses decreased by $102,978 or 19% due to tenant improvements made in 1997. Other property expenses increased by $66,132 or 43% primarily due to an increase in lease commissions, particularly at First Tuesday where unamortized lease commissions pertaining to Luria's, a former tenant, were written off in 1998.
Interest expense declined by $68,306 from 1997 to 1998 due to the normal amortization of mortgage loans payable and due to the underlying mortgage loan on College Square, which was assigned in December 1997. Other administrative expenses increased by $128,517 in 1998 primarily due to legal fees in connection with the Trust's efforts to maximize shareholder value. As previously reported, the Board of Trustees has been exploring various strategic alternatives with the intent to maximize shareholder value. Raymond James & Associates, Inc. has been engaged as financial advisor to assist the Trust with these ongoing efforts.
1997 compared to 1996
The Trust's net earnings for the year ended December 31, 1997 were $896,286 ($.23 per share) compared to $946,230 ($.24 per share) for the year ended December 31, 1996. The net earnings for 1997 include a realized gain on sale of $259,157 ($.07 per share), previously deferred from the installment sale of College Square Shopping Center in 1990. (All per share amounts are on a basic and diluted basis.) The decrease in net earnings from 1996 to 1997 was primarily due to lower revenue and an increase in repairs and maintenance expenses.
Rental income was $4,802,974 in 1997 compared to $4,965,259 in 1996. This decline of $162,285 was primarily due to several tenants who experienced financial difficulties and vacated their space. Rental income declined by $171,000 at Geneva Square in Lake Geneva, Wisconsin and by $103,000 at Kingsley Square in Orange Park, Florida. Rents at Geneva Square decreased primarily due to P.W. Enterprises filing a Chapter 11 reorganization plan and vacating their space in January 1996 and MMM Foods discontinuing their land lease rental payment in October 1996. Rents decreased at Kingsley Square primarily due to Luria's discontinuing their rent payments at the end of August 1996. The Trust has leased the space formerly occupied by Luria's to OfficeMax, which began paying rent in May 1997. The reduction in rental income from the above properties was partially offset by an increase in rents at Mendenhall Commons Shopping Center in Memphis, Tennessee and Presidential Drive Business Park in Atlanta, Georgia due to an increase in expense recoveries (additional rents) and fewer rent write-offs.
Interest income was $209,113 in 1997 compared to $252,054 in 1996, a decrease of 17%, due to a lower balance of funds available for investment.
Property expenses before depreciation were $1,705,298 in 1997 compared to $1,609,749 in 1996, representing 36% of rental income for 1997 and 32% of rental income for 1996. Repairs and maintenance increased by $171,000 or 45% due to tenant remodeling expenses along with parking lot, sidewalk, and roof repairs. The increase in repairs and maintenance was partially offset by a decrease in other property expenses which declined from $236,000 in 1996 to $153,000 in 1997. The decline in other property expenses in 1997 is primarily due to substantial legal fees incurred in 1996 related to the bankruptcy of P.W. Enterprises, litigation with former tenants, property appraisals and various consulting expenses.
Interest expense declined by $48,000 from 1996 to 1997 due to the normal amortization of mortgage loans payable. Other administrative expenses increased by $58,000 due to the engagement of Raymond James and Associates as financial advisor to assist the Trust with its ongoing efforts to maximize shareholder value, and legal expenses in relation to these efforts.
In December 1990, the Trust sold Hickory Hills Shopping Center in Hillsville, Virginia and College Square Shopping Center in Jefferson City, Tennessee. The Trust provided mortgage loan financing for these sales in the amount of $525,000 for Hickory Hills and $1,125,000 for College Square. The loans matured on December 20, 1997 and had yielded 9.5% to the Trust. Upon collection of the remaining principal balance of these loans in December 1997, the Trust assigned the underlying mortgage loan payable on College Square (which matures in December 1999) to the mortgagee. As a result of the assignment, the payoff on the College Square mortgage loan receivable was reduced by the outstanding mortgage balance on the underlying College Square mortgage loan payable.
Cash Flow and Funds from Operations
The Trust has for several years used "funds from operations" as a measurement of operating performance. Funds from operations is defined by the Trust as earnings from operations plus depreciation expense. Funds from operations does not represent operating income or cash flows from operations as defined by generally accepted accounting principles, and should not be construed as an alternative to operating income as an indicator of operating performance or to cash flows as a measure of liquidity. Management generally considers funds from operations to be a useful financial performance measure which, together with earnings, cash flows and other information, may be used by investors to evaluate the Trust. Funds from operations as presented by the Trust may not be comparable to similarly titled measures reported by other companies. The Trust's funds from operations for the three years ended December 31, 1998 and other property information are presented on the next page.
Liquidity and Capital Resources
The Trust's capital resources consist of its current equity in real estate investments. The Trust maintains its properties in good condition and provides adequate insurance coverage. Liquidity is represented by cash and cash equivalents ($3,423,296 at December 31, 1998) and the continued operation of the Trust's real estate portfolio. This liquidity is considered sufficient to meet current obligations, which include capital expenditures. During 1998, the Trust received net proceeds of $1,618,678 from the sale of Geneva Square.
Net cash provided by operating activities, as shown in the Statements of Cash Flows, was $1,820,940 for the year ended December 31, 1998. Major applications of cash in 1998 included $1,241,600 for distributions to shareholders and $3,242,651 in principal payments and repayments on mortgage loans payable. The Trust's debt service commitments for mortgage loans payable are described in Note 7 to the Financial Statements.
On February 1, 1999, the Trust prepaid the mortgage loan on Presidential Drive Business Park. The prepayment amount, including a 1% prepayment fee of $7,065 to the lender, was $713,548. On February 5, 1999, the Trust prepaid the mortgage loan on First Tuesday Mall. The prepayment amount, including a 1% prepayment fee of $4,636 to the lender, was $468,281.
The Board of Trustees continues to monitor occupancies, leasing activity, overall Trust operations, liquidity, and financial condition in determining quarterly distributions to shareholders.
Inflation
Low to moderate levels of inflation during the past few years have favorably impacted the Company's operation by stabilizing operating expenses. At the same time, low inflation has the indirect effect of reducing the Company's ability to increase tenant rents. The Trust's properties have tenants whose leases include expense reimbursements and other provisions to minimize the effect of inflation. These factors, in the long run, are expected to result in more attractive returns from the Trust's real estate portfolio as compared to short-term investment vehicles.
Year 2000 Issue
Management of the Trust is well aware of the issues and concerns surrounding the potential problems associated with computer systems that may not be able to distinguish the year 2000 from the year 1900, typically referred to as "the year 2000 issue." The Trust does not own or use any information technology directly, because all services necessary to conduct the day-to- day operations of the Trust are performed by AEGON USA Realty Advisors, Inc. and its affiliates (the Advisor). Nevertheless, the Trust could be adversely affected if computer systems, as well as certain embedded technology, used by the Advisor, tenants, vendors, financial institutions and other third parties do not properly process and calculate date-related information and data from and after January 1, 2000.
The most significant risks associated with year 2000 issues that could negatively impact the Trust include failure of tenants to pay rent, failure by the Trust to pay its own obligations, failure of various building systems at the Trust's real estate properties, failure of any and all third parties to provide services and failure of any and all information, accounting and recordkeeping systems or processes. The reasons for such failures could range from a simple inability to process electronic information in a timely manner to a total business failure somehow related to, or the result of, the year 2000 issue.
The Advisor has developed plans to modify, upgrade and/or replace portions of its information technology to ensure that its computer systems will function properly in the year 2000 and thereafter, and is in process of obtaining reasonable assurances that comparable steps are being taken by the Trust's' other major service providers. As of December 31, 1998, substantially all of the Advisor's mission critical systems were year 2000 compliant. The Advisor will continue conducting revalidation testing of its systems throughout 1999, including the development, review, and revision of business resumption and continuity plans.
The Trust is not expected to incur any direct costs associated with year 2000 issues. Based on these efforts to date, management of the Trust is not aware of any consequence of the year 2000 issue that it believes would have a material effect on the Trust's business, results of operations or financial condition. There can be no assurance, however, that these efforts will be sufficient to avoid any adverse impact to the Trust.
Item 8.
Item 8. Financial Statements and Supplementary Data
Notes to Financial Statements
1. Accounting Policies
The Trust is predominantly in the business of investing in real estate. Investments in real estate are stated at cost. The Trust provides an allowance for valuation of real estate when it is determined that the values have permanently declined below recorded book value.
The Trust records impairment losses when indicators of impairment are present and the undiscounted cash flows estimated to be generated by the real estate are less than their carrying amount. If real estate is considered to be impaired, it's carrying amount is written down to fair value and recognized as a net loss on property in the statement of earnings.
Expenditures for repairs and maintenance which do not add to the value or extend the useful life of property are expensed when incurred. Additions to existing properties, including replacements, improvements and expenditures which do add to the value or extend the useful life of property, are capitalized. Depreciation is calculated using the straight-line method over the estimated useful lives of the respective assets.
The Trust follows the operating method of accounting for leases, whereby scheduled rental income is recognized on a straight-line basis over the lease term. Contingent rental income is recognized in the period in which it arises. Interest on mortgage loans receivable and amortization of discounts are recognized as income over the period the respective loans are outstanding. The Trust provides for possible losses on mortgage loans, rents and other receivables when it is determined that collection of such receivables is doubtful. Rents and other receivables are stated net of an allowance for uncollectible accounts of $224,938 in 1998 and $321,764 in 1997. Cash equivalents include investments with original maturities of three months or less.
Gains on real estate sales are recognized for financial accounting purposes in accordance with Statement of Financial Accounting Standard No. 66, Accounting for Sales of Real Estate. Deferred gains are recognized as income using the installment method.
Since the Trust has no potentially dilutive securities outstanding, basic and diluted net earnings per share in accordance with Statement of Financial Accounting Standard No. 128, Earnings per Share, are the same.
During 1997, the Financial Accounting Standards Board issued Statement No. 131, Disclosures about Segments of an Enterprise and Related Information. Statement No. 131 establishes standards for reporting information about operating segments, products and markets. Generally, Statement No. 131 requires financial information to be reported on the basis on which it is used internally for evaluating segment performance and deciding how to allocate resources to segments. The Statement, which was required to be adopted by the Trust during 1998, had no impact on the financial statements as the Trust has only one operating segment, which involves the direct ownership of commercial real estate properties substantially on a managed basis.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The actual results of the Trust could differ as a result of those estimates.
2. Fair Values of Financial Instruments
Statement of Financial Accounting Standard No. 107, Disclosures about Fair Value of Financial Instruments, requires disclosure of fair value information about financial instruments.
The following methods and assumptions were used by the Trust in estimating its fair value disclosures for financial instruments.
Cash and cash equivalents: The carrying amounts of cash and cash equivalents approximates their fair values.
Mortgage loans payable: The fair values of mortgage loans payable are estimated utilizing discounted cash flow analysis, using interest rates reflective of current market conditions and the risk characteristics of the loans.
The following sets forth a comparison of the fair values and carrying values of the Trust's financial instruments subject to the provisions of Statement of Financial Accounting Standard No. 107:
1998 1997 Carrying Carrying Value Fair Value Value Fair Value Assets Cash and cash equivalents 3,423,296 3,423,296 1,606,427 1,606,427
Liabilities Mortgage loan payable 10,897,933 11,265,751 14,140,584 14,885,253
3. Real Estate
Investments in real estate consist entirely of managed and net leased commercial property. Information regarding the Trust's investment in each property is presented in the Schedule of Real Estate and Accumulated Depreciation below.
The activity in real estate and related depreciation for the three years ended December 31, 1998 is summarized in the table below.
Wholly owned managed properties with an aggregate cost of $32,310,585 are leased to tenants pursuant to lease agreements under which the Trust incurs normal real estate operating expenses associated with ownership. Yamaha Warehouse, a wholly- owned property with an aggregate cost of $2,197,937 is leased under a net lease agreement which requires the lessee to pay cash rental, property taxes and other expenses incurred in connection with the operation of the property.
In 1998, the Trust incurred capital expenditures of $28,280 for parking lot improvements at First Tuesday Mall. In 1997, the Trust incurred capital expenditures of $1,010,937. The improvements consisted of $833,526 for tenant build-outs (including $770,526 for OfficeMax at Kingsley Square) and $177,411 for parking lot and sidewalk improvements at First Tuesday Mall and at Presidential Drive Business Park.
On December 22, 1998, the Trust sold Geneva Square, a 143,676 square foot shopping center located in Lake Geneva, Wisconsin. The sale price was $4,500,000 from which the Trust paid selling expenses of $20,165 and retired mortgage indebtedness on the property of $2,803,790. Gain on the sale was $528,282.
4. Mortgage Loans Receivable
Mortgage loans receivable consist of notes received from financing property sales and are secured by the properties sold, subject to any underlying mortgage loans payable. The Trust received mortgage loans receivable of $1,650,000 as part of the consideration for the sales of Hickory Hills and College Square in 1990 and retained a mortgage payable on the property. Accordingly, the gain on this sale was deferred. The mortgage loans receivable matured on December 20, 1997 and had yielded 9.5% to the Trust. Upon maturity of these mortgage loans receivable, the Trust assigned the underlying mortgage loan payable on College Square to the mortgagee. As a result of the assignment, the proceeds from the College Square mortgage loan receivable were reduced by the outstanding mortgage loan payable of $193,981.
The activity in mortgage loans receivable for the two years ended December 31, 1997 (there was no activity in 1998) is summarized in the table below.
Mortgage Loans Receivable Years Ended December 31, 1997 1996 Principal
Beginning of year $ 1,520,083 1,547,249 Deductions during year Principal collections (28,094) (27,166) Principal repayment (1,491,989) ---
Balance at end of year --- 1,520,083 Deferred gain --- (259,157)
Balance, net of deferred gain $ --- 1,260,926
5. Cash and Cash Equivalents
At December 31, 1998, cash and cash equivalents consisted of cash of $548 and a money market fund of $3,422,748. At December 31, 1997, cash and cash equivalents consisted of cash of $927 and a money market fund of $1,605,500.
6. Transactions With Affiliates
The Trust has contracted with AEGON USA Realty Advisors, Inc. ("AEGON Realty Advisors") to provide administrative services for a base fee of 5/8% of the average gross real estate investment plus 1/4% of the monthly balance of mortgage loans receivable and an incentive fee of 20% of annual adjusted cash flow from operations in excess of $.72 per share. If the annual adjusted cash flow from operations is less than $.72 per share, then the payment of so much of the base fee is to be deferred so that revised cash flow from operations will be equal to $.72 per share; provided, however, in no event shall the amount deferred exceed 20% of the previously determined base fee. Any deferred fees may be paid in subsequent years (subject to certain limits). Annual adjusted cash flow from operations, as defined for purposes of the incentive fee, includes the net realized gain (or loss) from the disposition of property, adjusted to exclude accumulated depreciation (otherwise stated as gain in excess of cost without reduction for allowable depreciation). The administrative fee is limited to 1 1/2% of average quarterly net invested assets. The administrative agreement is for a one-year term, automatically renewed annually and cancelable by either party upon 90 days written notice. Amounts paid to AEGON Realty Advisors for administrative services were: $204,587 for 1998, $205,714 for 1997, and $202,378 for 1996. No incentive fees were paid in 1998, 1997 or 1996.
AEGON Realty Advisors also provides real estate acquisition and disposition services for the Trust. A negotiated fee of 2% to 4% of the cost is charged for properties acquired. No separate fee is charged for property dispositions. There were no acquisition fees paid in 1998, 1997 or 1996.
AEGON USA Realty Management, Inc. ("AEGON Realty Management"), a wholly-owned subsidiary of AEGON Realty Advisors, provided property management services to the Trust for a fee of 5% of the gross income of each managed property. The property management agreement is for a one-year term, automatically renewed annually and cancelable upon a 30-day written notice from either party. Amounts paid to AEGON Realty Management for property management services were $241,877 for 1998, $221,935 for 1997, and $230,045 for 1996. On December 31, 1998, AEGON Realty Management was merged with and into AEGON Realty Advisors and the property management agreement was assumed by AEGON Realty Advisors.
AEGON Realty Advisors previously provided dividend disbursement, stock certificate preparation, recordkeeping and other shareholder services to the Company for a quarterly fee of $1.25 per shareholder account, $.75 per shareholder account for distributions processed, $.50 per shareholder account for proxy tabulation, and such other compensation for services performed as from time to time agreed to by the parties. The Trust paid AEGON Realty Advisors $21,376, $21,658, and $21,904 in shareholder service fees for 1998, 1997, and 1996, respectively. AEGON Realty Advisors had subcontracted with Boston EquiServe, L.P., a subsidiary of State Street Bank and Trust Company, for delivery of these services. Effective January 1, 1999, the Trust contracted directly with Boston EquiServe, L.P. and terminated the agreement with AEGON Realty Advisors.
On December 31, 1993, the mortgage loan on the Trust's Presidential Drive property was acquired from the lender by AUSA Life Insurance Company, Inc., an affiliate of AEGON Realty Advisors, as part of a large transaction involving the transfer of loans and securities. Interest paid on the mortgage was $74,575 in 1998, $77,779 in 1997, and $80,674 in 1996. In addition, the mortgage on Geneva Square was with PFL Life Insurance Company ("PFL"), an affiliate of AEGON Realty Advisors. Interest paid on the mortgage was $228,562 in 1998, $235,842 in 1997, and $236,477 in 1996. Geneva Square was sold in December 1998.
On March 1, 1999, the mortgage loans on Mendenhall Commons and North Park Plaza matured. The Trust obtained financing from Monumental Life Insurance Company ("Monumental"), an affiliate of AEGON Realty Advisors, for these properties. (See Note 7.)
AEGON Realty Advisors is an indirect wholly-owned subsidiary of AEGON USA, Inc. which, through other wholly-owned subsidiaries, beneficially owns approximately 31% of the outstanding shares of the Trust at December 31, 1998.
7. Mortgage Loans Payable
Mortgage loan obligations, secured by the real estate owned, carry annual interest rates ranging from 9.25% to 10.5%.
On February 1, 1999, the Trust prepaid the mortgage loan on Presidential Drive Business Park. The prepayment amount, including a 1% prepayment fee to the lender, was $713,548. The annual debt service on this mortgage was $107,604, including interest at 10.25%. On February 5, 1999, the Trust prepaid the mortgage loan on First Tuesday Mall. The prepayment amount, including a 1% prepayment fee to the lender, was $468,281. The annual debt service on this mortgage was $115,128, including interest at 9.25%. These prepayment fees will be recorded in 1999's results of operations.
On March 1, 1999, the mortgage loans on Mendenhall Commons and North Park Plaza matured, requiring principal repayments of $3,930,120 and $3,944,537, respectively. On March 15, 1999, the Trust refinanced these mortgage loans with Monumental. The loan amount for Mendenhall is $3,925,000 with monthly debt service of $30,430. The loan amount for North Park is $3,940,000 with monthly debt service of $30,547. Debt service on both loans include principal amortization over twenty years and interest at an initial rate of 7%, which will be adjusted quarterly based on three month LIBOR plus 2%. The loans mature in one year and may be prepaid at any time without penalty. Information regarding each mortgage is presented in the Schedule of Mortgage Loans on Real Estate below.
Carrying Face Amount Amount of Property Description of Mortgage Mortgage at at Acquisition Dec. 31, 1998 Managed Kingsley Square $ 700,000 $ 198,728 Orange Park, FL (two loans) 1,500,000 230,799
First Tuesday 1,120,000 469,618 *** Carrollton, GA
Mendenhall Commons 4,300,000 3,935,041 **** Memphis, TN
North Park Plaza 4,300,000 3,949,314 **** Phoenix, AZ
Presidential Drive 968,935 709,391 ** Atlanta, GA 12,888,935 9,492,891
Net Leased Yamaha Warehouse 1,500,000 1,405,042 Cudahy, WI
$14,388,935 $10,897,933
** The loan was prepaid on February 1, 1999. *** The loan was prepaid on February 5, 1999. **** The loan was refinanced on March 15, 1999.
The activity in mortgage loans payable for the three years ended December 31, 1998 is summarized in the table below.
Mortgage Loans Payable
Years Ended December 31, 1998 1997 1996
Principal Beginning of year $14,140,584 14,819,479 15,271,385 Deductions during year Principal payments (438,861) (484,914) (451,906) Prepayments and maturities (2,803,790) (193,981) ---
Balance at end of year $10,897,933 14,140,584 14,819,479
Scheduled monthly payments will substantially amortize the principal balances of the mortgage loans over their respective terms with the exception of balloon payments at maturity. Amortized payments on the outstanding balances due in the next five years, including balloon repayments at maturity, prior to the 1999 transactions discussed above, are summarized as follows:
Amortized Payments Year Payments at Maturity
1999 $345,637 $7,874,657 2000 291,617 --- 2001 207,007 1,366,721 2002 150,324 --- 2003 163,148 ---
8. Leased Assets
The Trust is lessor of various properties as described in Note 3. Certain properties are leased to tenants under long-term, non- cancelable operating lease agreements. Future minimum lease rentals to be received under the terms of these lease agreements are as follows:
Year Amount
1999 $ 3,570,408 2000 3,027,040 2001 2,509,523 2002 2,137,304 2003 1,998,654 2004-2018 13,990,315
Contingent rentals included in income received in connection with operating leases were $136,446, $134,343, and $101,446 for the years ended December 31, 1998, 1997 and 1996, respectively. Such rentals are based principally on tenant sales in excess of stipulated minimums. In 1998 and 1997 the Trust derived 10% or more of its revenue from the Kroger Company at Mendenhall Commons and from Safeway at North Park Plaza. The revenue from these tenants was $644,083 and $625,034 in 1998, and $587,097 and $581,028 in 1997, respectively. In 1996 the Trust derived 10% or more of its revenue from the Kroger Company. The revenue from this tenant for 1996 was $646,844.
In August 1994, Publix Supermarkets exercised an option to extend their lease for 34,400 square feet at Kingsley Square. The lease extension, effective February 11, 1995, has a term of five years and requires the Trust to contribute up to $250,000 toward remodeling costs at the Publix store. Since Publix has not yet remodeled their store and because they have given written notice of their intent to close the store in 1999, it is unlikely this amount will be paid. Accordingly, this amount has not been recorded in the financial statements.
9. Federal Income Taxes
The Trust conducts its operations so as to qualify as a real estate investment trust under the Internal Revenue Code which requires, among other things, that at least 95% of the Trust's taxable income be distributed to shareholders. The Trust has historically distributed all of its taxable income. Distributions made in 1998, plus a portion of the Trust's first distribution in 1999, were used to meet the Internal Revenue Code distribution requirements for 1998. Accordingly, no provision has been made for federal income taxes since the Trust did not have taxable income after the deductions allowed for distributions to shareholders.
Certain property acquisitions have resulted in the basis of those properties being determined differently for financial accounting purposes than for income tax purposes. The differing methods of determination of basis in these transactions has resulted in the tax basis of certain properties being higher or lower than the financial basis. At December 31, 1998 the tax basis of real estate was $133,710 in excess of the financial basis.
10. Legal Proceedings
The Trust is not a party to any pending legal proceedings which, in the opinion of management, are material to the Trust's financial position.
11. Selected Quarterly Financial Data (Unaudited)
Report of Independent Auditors
The Board of Trustees and Shareholders USP Real Estate Investment Trust
We have audited the accompanying balance sheets of USP Real Estate Investment Trust as of December 31, 1998 and 1997, and the related statements of earnings, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements 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 USP Real Estate Investment Trust at December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Des Moines, Iowa February 23, 1999
Item 9.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Part III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
Information About Directors (referred to herein as "Trustees")
Certain information about the nominees for Trustee appears below. (See "Item 13. Certain Relationships and Related Transactions" for a description of the Trust's relationship with AEGON USA Realty Advisors, Inc. and other subsidiaries of AEGON USA, Inc.) On January 22, 1999, at a meeting of the USP Board of Trustees, Richard M. Osborne was elected to serve as a Trustee. Gary A. Downing, a Trustee and member of the Audit Committee, has decided not to stand for re-election at the Annual Meeting.
PATRICK E. FALCONIO, age 57, has served as a Trustee and Chairman of the Board since 1988. He retired on February 1, 1999 as an Executive Vice President of AEGON USA, Inc. (insurance and financial services), Cedar Rapids, Iowa, where he had been employed since 1987. He was also a Director of AEGON USA Realty Advisors, Inc. and various other subsidiaries of AEGON USA, Inc. until his retirement.
EDWIN L. INGRAHAM, age 72, has served as a Trustee of the Trust since 1984, and as Vice Chairman of the Board of Trustees since 1990. He retired in 1988 as Executive Vice President, Treasurer and Chief Investment Officer of AEGON USA, Inc., where he had been employed since 1982. Mr. Ingraham is a member of the Audit Committee.
SAMUEL L. KAPLAN, age 62, has served as a Trustee of the Trust since 1983. He has been engaged in the practice of law in Minneapolis, Minnesota as a member of the firm of Kaplan, Strangis and Kaplan, P.A. since 1978. Mr. Kaplan is a member of the Audit Committee.
RICHARD M. OSBORNE, age 53, has served as a Trustee of the Trust since January 1999. He is President and Chief Executive Officer of OsAir, Inc., a company he founded in 1963. OsAir, Inc. is a manufacturer of industrial gases for pipeline delivery and a real property developer. Mr. Osborne is the sole Manager of Turkey Vulture Fund XIII, Ltd. which acquires, holds, sells or otherwise invests in all types of securities and other instruments. Mr. Osborne is a Director and Chairman of the Board of Meridian Point Realty Trust '83, a publicly-held real estate investment trust, a Director of Central Reserve Life Corporation, a publicly-held insurance holding company, a Director and Chairman of the Board of Pacific Gateway Properties, Inc., a publicly-held real estate company and a Director and Vice Chairman of the Board of GLB Bancorp, Inc., a bank holding company.
Information About Executive Officers
Certain information about the executive officers of the Trust who are not also nominees appears below. The term of office of each executive officer will expire at the Annual Meeting of the Board of Trustees, which will follow the Annual Meeting of Shareholders. (See "Item 13. Certain Relationships and Related Transactions" for a description of the Trust's relationship with AEGON USA Realty Advisors, Inc. and other subsidiaries of AEGON USA, Inc.)
DAVID L. BLANKENSHIP, age 48, has served as President of the Trust since 1985. He has been employed by AEGON USA, Inc. since 1977 in various administrative and management positions related to real estate investment activities and is Chairman of the Board and President of AEGON USA Realty Advisors, Inc.
MAUREEN DEWALD, age 48, has served as Vice President of the Trust since 1986 and Secretary since 1985. She has been employed by AEGON USA, Inc. since 1983 as an attorney for real estate investment activities and is Senior Vice President, Secretary and General Counsel of AEGON USA Realty Advisors, Inc.
ALAN F. FLETCHER, age 49, has served as Treasurer of the Trust since 1986, as Vice President since 1985, as Assistant Secretary since 1982 and as principal financial officer since 1981. He has been employed by AEGON USA, Inc. since 1981 in various financial and administrative positions related to investment activities and is Senior Vice President and Chief Financial Officer of AEGON USA Realty Advisors, Inc.
ROGER L. SCHULZ, age 37, has served as Controller and Assistant Secretary of the Trust since 1995. He has been employed by AEGON USA, Inc. since 1985 in various accounting and financial reporting positions related to real estate investment activities and is Manager - Financial Reporting for AEGON USA Realty Advisors, Inc.
Item 11.
Item 11. Executive Compensation
During 1998, each Trustee, with the exception of Mr. Falconio, received an annual fee of $6,000 plus $750 for each regular or special meeting attended, as well as $400 per day for inspecting properties owned by the Trust and $400 for attendance at each committee meeting as a member, unless held in conjunction with a meeting of the Board of Trustees. Mr. Falconio has waived all fees for his services as a Trustee so long as he continues to be affiliated as an officer or director of AEGON USA, Inc. (see "Item 10. Directors and Executive Officers of the Registrant"). Total fees paid to all Trustees as a group were $27,000 for 1998.
The executive officers of the Trust receive no cash or deferred compensation in their capacities as such.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Security Ownership of Certain Beneficial Owners
The following table sets forth information with respect to each person and group (as that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934) known by the Trust to be the beneficial owner of more than five percent (5%) of the outstanding shares of the Trust as of March 5, 1999.
Name and Address Amount and Nature Percent of Beneficial Owner of Beneficial Ownership of Class
AEGON USA, Inc. (1) 1,197,260 30.86% 4333 Edgewood Road N.E. Cedar Rapids, Iowa 52499
Turkey Vulture Fund XIII, Ltd. (2) 551,081 14.20% c/o Kohrman Jackson & Krantz P.L.L. 1375 East 9th Street Cleveland, Ohio 44114
(1) AEGON USA, Inc. is an indirect, wholly-owned subsidiary of AEGON N.V., a holding company organized under the laws of The Netherlands which is controlled by Vereninging AEGON, an association organized under the laws of The Netherlands. AEGON USA, Inc. has sole voting and investment powers with respect to the above Shares.
(2) Turkey Vulture Fund XIII, Ltd. (the "Fund") is an Ohio limited liability company, of which Richard M. Osborne is the sole Manager. As sole Manager of the Fund, Mr. Osborne may be deemed to beneficially own all of the Shares of beneficial interest of USP owned by the Fund. Mr. Osborne also has sole power to vote, or to direct the voting of, and the sole power to dispose or to direct the disposition of, any Shares owned by the Fund.
Security Ownership of Management
The following table sets forth the number of Shares of the Trust beneficially owned as of March 5, 1999 by each Trustee, nominee, and officer and by all Trustees, nominees and officers as a group (9 persons). Except as otherwise indicated by footnote, the individuals have direct ownership of, and sole voting and investment power with respect to, any Shares beneficially owned by them. Under rules adopted by the Securities and Exchange Commission, transactions in Shares of the Trust are reportable by Trustees and officers on specified forms, and the Trust is required to disclose any known delinquent filings. A report on Form 5 was filed late for Mr. Downing, reporting 36 Shares acquired through the Trust's distribution reinvestment plan.
Name of Amount and Nature Percent Beneficial Owner of Beneficial Ownership of Class
Gary A. Downing(1) 577 * Patrick E. Falconio(2) 2,000 * Edwin L. Ingraham 1,500 * Samuel L. Kaplan(3) 10,000 * Richard M. Osborne(4) 551,081 14.20% David L. Blankenship(5) 1,199,078 30.90% Maureen DeWald 0 * Alan F. Fletcher(6) 2,200 * Roger L. Schulz 100 * Trustees, nominees and officers as a group 1,766,536 45.53%
(1) Mr. Downing is the beneficial owner of 577 Shares held in an individual retirement account. (2) Mr. Falconio may be deemed to be the beneficial owner of 2,000 Shares owned by his wife. (3) Mr. Kaplan is the direct owner of 8,500 Shares and may be deemed to be the beneficial owner of 1,500 Shares held in a profit sharing trust for his account. (4) Mr. Osborne may be deemed to be the beneficial owner of 551,081 Shares beneficially owned by Turkey Vulture Fund, XIII, Ltd., an Ohio limited liability company, of which Mr. Osborne is the sole Manager. (5) Mr. Blankenship may be deemed to be the beneficial owner of 1,197,260 Shares beneficially owned by AEGON USA, Inc. with respect to which he shares voting and investment powers (see "Principal Shareholders" and "Information About Executive Officers"). Mr. Blankenship disclaims beneficial ownership of such Shares. He may also be deemed to be the beneficial owner of 1,818 Shares held in custodial accounts for his children. (6) Mr. Fletcher is the direct owner of 600 Shares and is the beneficial owner of 1,600 Shares held in an individual retirement account.
*Such holdings represent less than one percent of the outstanding Shares.
Item 13.
Item 13. Certain Relationships and Related Transactions.
The Trust has no employees and has contracted with various subsidiaries of AEGON USA, Inc. (see "Principal Shareholders") to provide administrative, advisory, acquisition, divestiture, property management and shareholder services. A description of the relationships between AEGON USA, Inc. and its various subsidiaries and of such subsidiaries' agreements with the Trust follows. The description of the agreements which follows is qualified in its entirety by reference to the terms and provisions of such agreements. (See "Item 12. Security Ownership of Certain Beneficial Owners and Management" for a description of the relationship between AEGON USA, Inc. and AEGON N.V.)
Administrative, Advisory and Acquisition Services
AEGON USA Realty Advisors, Inc. ("AEGON Advisors"), is a wholly- owned subsidiary of AEGON USA, Inc. AEGON Advisors provides administrative, advisory, acquisition and divestiture services to the Trust pursuant to an Administrative Agreement. The term of the Administrative Agreement is for one (1) year and is automatically renewable each year for an additional year subject to the right of either party to cancel the Agreement upon 90 days written notice. The performance of AEGON Advisors' duties and obligations under the Administrative Agreement has been guaranteed by AEGON USA, Inc.
Under the Administrative Agreement, AEGON Advisors (a) provides clerical, administrative and data processing services, office space, equipment and other general office services necessary for the Trust's day-to-day operations, (b) provides legal, tax and accounting services to maintain all necessary books and records of the Trust and to ensure Trust compliance with all applicable federal, state and local laws, regulatory reporting requirements and tax codes, (c) arranges financing for the Trust, including but not limited to mortgage financing for property acquisition, (d) obtains property management services for the Trust's properties and supervises the activities of persons performing such services, (e) provides monthly reports summarizing the results of operations and financial conditions of the Trust, (f) prepares and files all reports to shareholders and regulatory authorities on behalf of the Trust, (h) prepares and files all tax returns of the Trust and (i) provides the Trust with property acquisition and divestiture services.
AEGON Advisors receives fees for its administrative and advisory services as follows: (a) a base fee, payable monthly, equal to 5/8% per annum of the average monthly gross real estate investments of the Trust plus 1/4% per annum of the monthly outstanding principal balance of mortgage loans receivable; and (b) an incentive fee, payable annually, equal to 20% of the annual adjusted cash flow from operations in excess of $.72 per share. If the annual adjusted cash flow from operations is less than $.72 per share, then the payment of so much of the base fee is to be deferred so that revised cash flow from operations will be equal to $.72 per share; provided, however, in no event shall the amount deferred exceed 20% of the previously determined base fee. Any deferred fees may be paid in a subsequent year, up to a maximum of 30% of that year's revised cash flow from operations in excess of $.72 per share. Annual adjusted cash flow from operations, as defined for purposes of the incentive fee, includes the net realized gain (or loss) from the disposition of property, adjusted to exclude accumulated depreciation (otherwise stated as gain in excess of cost without reduction for allowable depreciation). Notwithstanding the foregoing, the combined base and incentive fees cannot exceed the amount permitted by the limitation on operating expenses as provided in the Trust's Declaration of Trust, which limitation is essentially 1 1/2% of the Trust's average quarterly invested assets, net of depreciation. In addition, AEGON Advisors is to be paid a separately negotiated fee of not less than 2% nor more than 4% of the cost of each property acquired by the Trust as compensation for acquisition services furnished by it to the Trust. Administrative fees paid to AEGON Advisors for 1998 were $204,587. No acquisition fees were paid in 1998.
Management Services
AEGON Advisors provides management services to the Trust pursuant to a Property Management Agreement. The term of the Agreement is for one (1) year and is automatically renewable each year for an additional year subject to the right of either party to cancel the Agreement upon 30 days written notice. Under the Management Agreement, AEGON Advisors is obligated to (a) procure tenants and execute leases with respect to Trust properties which are not leased under net lease arrangements (the "Managed Properties"), (b) maintain and repair (at the Trust's expense) the Managed Properties, (c) maintain complete and accurate books and records of the operations of the Managed Properties, (d) maintain the Managed Properties in accordance with applicable government rules and regulations, licensing requirements and building codes, (e) collect all rents and (f) carry (at the Trust's expense) general liability, accident, fire and other property damage insurance. For these services, AEGON Advisors receives 5% of the gross income derived from the operation of the Managed Properties. Management fees paid to AEGON Advisors for 1998 were $241,877. These services were previously provided by AEGON USA Realty Management, Inc., a wholly-owned subsidiary of AEGON Advisors, which was merged into AEGON Advisors in December 1998.
Shareholder Services
AEGON Advisors provides shareholder services to the Trust pursuant to a Shareholder Services Agreement (the "Agreement"). Under the Agreement, AEGON Advisors is obligated to provide dividend disbursement, stock certificate preparation, recordkeeping and other shareholder services for which AEGON Advisors receives the following fees: a quarterly fee of $1.25 per shareholder account based on the number of shareholder accounts (minimum $1,000 per quarter), a fee of $.75 per shareholder account for each dividend processed, a fee of $.50 per shareholder account for proxy tabulation, and such other compensation as from time to time agreed upon by the Trust and AEGON Advisors. Shareholder service fees paid to AEGON Advisors for 1998 were $21,376. AEGON Advisors has subcontracted for stock transfer and dividend disbursement services with Boston EquiServe, L.P., a subsidiary of State Street Bank and Trust Company. Effective January 1, 1999, the Trust contracted directly with Boston EquiServe, L.P. and terminated the agreement with AEGON Advisors.
Other
On December 31, 1993, the mortgage loan on the Trust's Presidential Drive property was acquired from the lender by AUSA Life Insurance Company, Inc., a wholly-owned subsidiary of AEGON USA, Inc., as part of a large transaction involving the transfer of loans and securities. The terms of the mortgage loan remained the same. On February 1, 1999, the Trust prepaid the mortgage loan on Presidential Drive Business Park. The prepayment amount, including a 1% prepayment fee of $7,065 to the lender, was $713,548. In February 1994, the Trust refinanced the existing mortgage loan on its Geneva Square property with a new mortgage loan from PFL Life Insurance Company ("PFL"), a wholly-owned subsidiary of AEGON USA, Inc. This $3,000,000 loan was obtained by the Trust on commercially competitive terms at a fixed interest rate of 8% and a 1% origination fee ($30,000) was paid to PFL in connection with the loan. The loan matured on March 1, 1996, and the Trust exercised an option to extend the loan for eight years at 8.30% based on commercially competitive terms offered for comparable loans by PFL. On December 22, 1998, the Trust sold Geneva Square and the mortgage balance of $2,803,790 was repaid. On March 1, 1999, the mortgage loans on Mendenhall Commons and North Park Plaza matured, requiring principal repayment. On March 15, 1999, the Trust refinanced these mortgage loans with Monumental Life Insurance Company, a wholly- owned subsidiary of AEGON USA, Inc. The new loans are for a period of one year, carry an initial interest rate of 7%, and may be prepaid at any time without penalty. The maximum principal amount of the Presidential Drive and Geneva Square mortgage indebtedness outstanding during 1998 was $3,570,474. The Trust paid $57,293 in principal and $303,137 in interest on such mortgage indebtedness for 1998.
Part IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) List of Documents
The following financial statements are included in Item 8:
1. Financial Statements.
Balance Sheets, December 31, 1998 and 1997. Statements of Earnings, Years Ended December 31, 1998, 1997, and 1996. Statements of Cash Flows, Years Ended December 31, 1998, 1997, and 1996. Statements of Shareholders' Equity, Years Ended December 31, 1998, 1997, and 1996. Notes to Financial Statements. Report of Independent Auditors.
2. Financial Statement Schedules.
Financial Statement Schedules. (Included in Notes to Financial Statements)
(III) Schedule of Real Estate and Accumulated Depreciation. Note 3 (IV) Schedule of Mortgage Loans on Real Estate. Note 7
All other schedules have been omitted because they are not required, or because the required information, where material, is included in the financial statements or accompanying notes.
3. Exhibits.
(3) Second Amended and Restated Declaration of Trust currently in effect, dated October 5, 1972, as amended December 18, 1972, March 3, 1975 and April 23, 1984, incorporated herein by reference to Item 14(a)3, Exhibit (3) of Form 10-K for the year ended December 31, 1984.
(3.1) By-Laws currently in effect, dated November 19, 1997.
(4) Articles II and III of the Second Amended and Restated Declaration of Trust currently in effect, dated October 5, 1972, as amended December 18, 1972, March 3, 1975 and April 23, 1984, incorporated herein by reference to Item 14(a)3, Exhibit (3) of Form 10-K for the year ended December 31, 1984.
(10) Administrative Agreement currently in effect, dated January 1, 1984, incorporated herein by reference to Item 5, Exhibit (28) of Form 8-K dated January 1, 1984.
(10.1) Property Management Agreement currently in effect, dated July 1, 1981, as amended November 4, 1982, incorporated herein by reference to Item 14(a)3, Exhibit (10) of Form 10-K for the year ended December 31, 1982.
(10.2) Shareholder Services Agreement, currently in effect, dated January 1, 1991, as amended January 1, 1992 and assigned January 28, 1992, incorporated herein by reference to Item 14(a)3, Exhibit (10.2) of Form 10-K for the year ended December 31, 1991.
(b) No reports on Form 8-K were filed during the fourth quarter of 1998.
(c) The required exhibits applicable to this section are listed in Item 14(a)3.
(d) There are no required financial statement schedules applicable to this section.
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.
USP REAL ESTATE INVESTMENT TRUST
/s/ Patrick E. Falconio /s/ Alan F. Fletcher Patrick E. Falconio Alan F. Fletcher Chairman of the Board Vice President and Treasurer (principal executive officer) (principal financial officer)
/s/ Roger L. Schulz Roger L. Schulz Controller (principal accounting officer)
March 26, 1999
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 as of the date indicated.
/s/ Gary A. Downing /s/ Samuel L. Kaplan Gary A. Downing Samuel L. Kaplan Trustee Trustee
/s/ Patrick E. Falconio /s/ Richard M. Osborne Patrick E. Falconio Richard M. Osborne Trustee Trustee
/s/ Edwin L. Ingraham Edwin L. Ingraham Trustee
March 26, 1999
EXHIBIT INDEX
Exhibit Item Title or Description
(3) Second Amended and Restated Declaration of Trust currently in effect, dated October 5, 1972, as amended December 18, 1972, March 3, 1975 and April 23, 1984, incorporated herein by reference to Item 14(a)3, Exhibit (3) of Form 10-K for the year ended December 31, 1984.
(3.1) By-Laws currently in effect, dated November 19, 1997.
(4) Articles II and III of the Second Amended and Restated Declaration of Trust currently in effect, dated October 5, 1972, as amended December 18, 1972, March 3, 1975 and April 23, 1984, incorporated herein by reference to Item 14(a)3, Exhibit (3) of Form 10-K for the year ended December 31, 1984.
(10) Administrative Agreement currently in effect, dated January 1, 1984, incorporated herein by reference to Item 5, Exhibit (28) of Form 8-K dated January 1, 1984.
(10.1) Property Management Agreement currently in effect, dated July 1, 1981, as amended November 4, 1982, incorporated herein by reference to Item 14(a)3, Exhibit (10) of Form 10-K for the year ended December 31, 1982.
(10.2) Shareholder Services Agreement dated January 1, 1991, as amended January 1, 1992 and assigned January 28, 1992, incorporated herein by reference to Item 14(a)3, Exhibit (10.2) of Form 10-K for the year ended December 31, 1991.
All Exhibit Items are omitted from this report, but a copy will be furnished upon payment of $33.00, representing a charge of fifty cents ($.50) per page, accompanying a written request to Roger L. Schulz, Controller, USP Real Estate Investment Trust, 4333 Edgewood Road N.E., Cedar Rapids, IA 52499.