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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2004
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from____________ to ____________.
Commission File Number: 1-6249
FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
(Exact name of registrant as specified in its charter)
Ohio 34-6513657
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7 Bulfinch Place - Suite 500
Boston, MA 02114
- ------------------------------- ------------------------------------
(Address of principal executive (Zip Code)
offices)
617-570-4614
----------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Exchange on Which Registered
Common Shares of Beneficial Interest, New York Stock Exchange
$1.00 par value
Series A Cumulative Redeemable Preferred New York Stock Exchange
Shares of Beneficial Interest, $25.00
par value
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for at least the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Exchange Act Rule 12b-2). Yes |_| No |X|
As of March 1, 2005, there were 32,058,913 common shares of beneficial interest
outstanding
At June 30, 2004, the aggregate market value of the common shares of beneficial
interest held by non-affiliates was $65,798,509.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement, to be filed with the
Securities and Exchange Commission within 120 days after the end of the fiscal
year covered by this Form 10-K, with respect to the 2005 Annual Meeting of
Beneficiaries, are incorporated by reference into Part III of this Annual Report
on Form 10-K.
FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
CROSS REFERENCE SHEET PURSUANT TO ITEM G,
GENERAL INSTRUCTIONS TO FORM 10-K
Item of Form 10-K Page
PART I
1. Business 4
2. Properties 21
3. Legal Proceedings 25
4. Submission of Matters to a Vote of Security Holders 25
PART II
5. Market for Trust's Common Equity and Related Stockholder Matters 26
6. Selected Financial Data 27
7. Management's Discussion and Analysis of Financial Condition 29
and Results of Operations
7A. Quantitative and Qualitative Disclosures Regarding Market Risk 37
8. Financial Statements 38
9. Changes in and Disagreements with Accountants on 63
Accounting and Financial Disclosure
9A. Controls and Procedures 63
9B. Other Information 63
PART III
10. Directors and Executive Officers of the Trust 64
11. Executive Compensation 64
12. Security Ownership of Certain Beneficial Owners and Management 64
13. Certain Relationships and Related Transactions 64
14. Principal Accountant Fees and Services 64
PART IV
15. Exhibits and Financial Statement Schedules 65
(a) Financial Statements and Financial Statement Schedules
(b) Exhibits
Signatures 68
Schedule III - - Real Estate and Accumulated Depreciation 69
Exhibit Index 72
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CAUTIONARY STATEMENTS CONCERNING FORWARD-LOOKING STATEMENTS
Any statements in this report, including any statements in the documents that
are incorporated by reference herein that are not strictly historical are
forward-looking statements within the meaning of the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Any such forward-looking
statements contained or incorporated by reference herein should not be relied
upon as predictions of future events. Certain such forward-looking statements
can be identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "will," "should," "seeks," "approximately," "intends,"
"plans," "pro forma," "estimates" or "anticipates" or the negative thereof or
other variations thereof or comparable terminology, or by discussions of
strategy, plans, intentions or anticipated or projected events, results or
conditions. Such forward-looking statements are dependent on assumptions, data
or methods that may be incorrect or imprecise and they may be incapable of being
realized. Such forward-looking statements include statements with respect to:
o the declaration or payment of distributions by us;
o the ownership, management and operation of properties;
o potential acquisitions or dispositions of our properties, assets or
other businesses;
o our policies regarding investments, acquisitions, dispositions,
financings and other matters;
o our qualification as a REIT under the Code and the "grandfathering"
rules under Section 269B of the Code;
o the real estate industry and real estate markets in general;
o the availability of debt and equity financing;
o interest rates;
o general economic conditions;
o supply and customer demand;
o trends affecting us or our assets;
o the effect of acquisitions or dispositions on capitalization and
financial flexibility;
o the anticipated performance of our assets and of acquired properties
and businesses, including, without limitation, statements regarding
anticipated revenues, cash flows, funds from operations, earnings
before interest, depreciation and amortization, property net
operating income, operating or profit margins and sensitivity to
economic downturns or anticipated growth or improvements in any of
the foregoing; and
o our ability, and that of our or assets and acquired properties and
businesses to grow.
Holders of Beneficial Interest in Common Shares are cautioned that, while
forward-looking statements reflect our good faith beliefs, they are not
guarantees of future performance and they involve known and unknown risks and
uncertainties. Actual results may differ materially from those in the
forward-looking statements as a result of various factors. The information
contained or incorporated by reference in this report and any amendment hereof,
including, without limitation, the information set forth in "Risk Factors" below
or in any risk factors in documents that are incorporated by reference in this
report, identifies important factors that could cause such differences. We
undertake no obligation to publicly release the results of any revisions to
these forward-looking statements that may reflect any future events or
circumstances.
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PART I
Item 1. Business.
First Union Real Estate Equity and Mortgage Investments (the "Trust") is an
unincorporated association in the form of a business trust organized in Ohio
under a Declaration of Trust dated August 1, 1961, as amended from time to time
through April 2004 (the "Declaration of Trust"), which has as its stated
principal business activity the ownership and management of, and lending to,
real estate and related investments. At December 31, 2004, the Trust qualified
as a real estate investment trust ("REIT") under Sections 856 through 860 of the
Internal Revenue Code of 1986, as amended (the "Code"). Effective January 1,
2005, the Trust conducts its business through First Union REIT L.P., a Delaware
limited partnership (the "Operating Partnership"). The Trust is the sole general
partner of, and owns directly and indirectly, 100% of the limited partnership
interests in the Operating Partnership. See "Establishment of the Operating
Partnership". In 1971, to encourage efficient operation and management of its
property, and after receiving a ruling from the Internal Revenue Service with
respect to the proposed form of organization and operation, the Trust, caused a
company to be organized pursuant to the laws of the State of Delaware under the
name First Union Management, Inc. ("FUMI"). For financial reporting purposes,
the financial statements of FUMI are combined with those of the Trust.
All references to "We," "Us," and "Company" refer to the Trust, FUMI and their
combined subsidiaries, including the Operating Partnership.
On July 22, 1998, tax legislation was enacted limiting the "grandfathering
rules" applicable to stapled REITS such as the Trust (the "Stapled REIT
Legislation"). As a result, the income and activities of FUMI with respect to
any real property interests acquired by the Trust and FUMI after March 26, 1998,
for which there was no binding written agreement, public announcement or filing
with the Securities and Exchange Commission on or before March 26, 1998, are
attributed to the Trust for purposes of determining whether the Trust qualifies
as a REIT under the Code.
At December 31, 2003, we had reduced our holdings to two real properties (one of
which was sold in 2004) and our interest in VenTek International, Inc.
("VenTek"), which ceased operations in 2004. Since a change in our management
effective January 1, 2004 (see "FUR Investors Transaction" below), we seek to
acquire additional real estate assets. In general, rather than focus on a
particular type of real estate related asset or a specific geographic sector, we
seek to invest in undervalued assets or investments that we believe present an
opportunity to outperform the marketplace, either through time or through an
infusion of capital and improved management. Consequently, with certain
limitations, we will seek to invest or acquire most types of real estate assets
or securities including direct ownership in real property and entities that own
real property, loans secured by real property or entities that own real property
and debt and equity securities of other REITs. In addition, as investments
mature in value to the point where we are unlikely to achieve better than a
market return on their then enhanced value, it is likely we will exit the
investment and seek to redeploy the capital to higher yielding opportunities.
During 2004, we disposed of one asset, our Park Plaza Mall property, ceased
operations of our VenTek business, and acquired a number of additional assets.
As of December 31, 2004, in addition to our cash reserves and government
securities we owned (i) an office building located in Indianapolis, Indiana
commonly referred to as Circle Tower, (ii) 16 triple-net lease properties (see
"Portfolio Acquisition" below), (iii) a 1% general partner interest in 5400
Westheimer Holding L.P. ("5400 Westheimer"), a limited partnership that
indirectly owns an office building in Houston, Texas, (iv) a $7,533,000 loan
receivable due from 5400 Westheimer, which loan and accrued interest was
subsequently satisfied on January 5, 2005 by the payment of $7,040,000 in cash
and the transfer to the Company of an additional 7% limited partnership interest
in 5400 Westheimer, (v) a 50% participation in a first mortgage loan secured by
a property located at 63 West 38th Street, New York, New York, which was
subsequently satisfied on January 18, 2005, (vi) a 25% participation interest in
a loan secured by a first mortgage on a commercial property located in New York
City's Chelsea area, (vii) a first mortgage loan secured by a Wingate Hotel and
the land on which it is situate located in Clearwater Florida, (viii) 8.46% of
the outstanding shares of common stock of Sizeler Property Investors, Inc.
(NYSE:SIZ), and (ix) equity interests in various public and private REITs. In
addition, during 2004, we acquired and disposed of an interest in Atlantic
Realty Trust and acquired a loan receivable due from NorthStar Partnership, L.P.
which was satisfied in August 2004.
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As of December 31, 2004, FUMI's only remaining asset was a profit participation
in Ventek Transit Inc., the entity that acquired the assets of FUMI's subsidiary
VenTek. See "Sale of VenTek" below. VenTek was in the business of manufacturing,
installing and providing maintenance of transit ticket vending equipment.
Establishment of the Operating Partnership
During 2004 it was determined that the establishment of an UPREIT ("Umbrella
Partnership Real Estate Investment Trust") structure could further enhance our
ability to consummate transactions. An UPREIT structure provides for the
establishment of a limited partnership, commonly referred to as the operating
partnership, that is primarily owned by the REIT and which holds the REIT's
assets. The establishment of an operating partnership gives us flexibility when
purchasing real property to pay the purchase price for it in the form of
operating partnership interests, if so elected by the seller, thereby enabling
the seller to defer taxable gain on the sale until such time as the interests in
the operating partnership are liquidated.
Accordingly, effective January 1, 2005, the Trust transferred substantially all
of its assets to the Operating Partnership in exchange for a 99.8% ownership
interest in the common units of the Operating Partnership and a 100% ownership
interest in the preferred units of the Operating Partnership. The remaining 0.2%
of the common units are held by FT-TRS Loan Corp., a wholly-owned subsidiary of
the Trust. As a result, the Trust holds a 100% interest in the Operating
Partnership. The transfer of the assets to the Operating Partnership will not
have any effect on the operations or cash flow of the Trust.
Gotham Transaction
On February 13, 2002, the Trust entered into a definitive Agreement and Plan of
Merger and Contribution, pursuant to which the Trust agreed to merge with and
into Gotham Golf Corp. ("Gotham Golf"), a Delaware corporation controlled by
Gotham Partners, L.P. ("Gotham Partners"), at that time the beneficial owner of
16.8% of the Trust's outstanding common shares of beneficial interest (the
"Common Shares"). The proposed transaction was subject to several conditions,
including the approval of the Trust's common shareholders and the obtaining of
certain third party consents. The Trust's common shareholders approved the
proposed transaction by the requisite majority vote at a November 27, 2002
meeting of shareholders. However, litigation was brought with respect to the
proposed transaction, resulting in the granting of an injunction preventing the
proposed transaction from going forward. On June 25, 2003, the Trust entered
into a Settlement, Termination and Standstill Agreement (the "Agreement") with,
among others, Gotham Partners. The Agreement provided for the termination of the
merger agreement regarding the merger of the Trust with Gotham Golf, the
purchase by the Trust of 5,841,233 Common Shares owned by Gotham Partners and
its affiliates for approximately $11,098,000 and a termination payment to Gotham
Partners of $2,400,000. The Agreement also provided that neither Gotham Partners
nor any affiliate will enter into or agree to enter into any form of business
combination, acquisition or other transaction involving the Trust or any
majority-owned affiliate for a period of five years from the date of the
Agreement. The termination payment was recognized as a general and
administrative expense during the year ended December 31, 2003.
FUR Investors Transaction
On November 26, 2003, the Trust entered into a Stock Purchase Agreement with FUR
Investors, LLC, an entity controlled by and partially owned by the current
executive officers of the Trust. On December 31, 2003, FUR Investors LLC
acquired 5,000,000 Common Shares pursuant to a tender offer at a price of $2.30
per share and purchased pursuant to the terms of the Stock Purchase Agreement an
additional 5,000,000 newly issued Common Shares pursuant to the terms of the
Stock Purchase Agreement for a price of $2.60 per share. As a result of these
purchases, FUR Investors LLC acquired a total of 10,000,000 of the outstanding
Common Shares representing 32.2% of the then total outstanding Common Shares.
Pursuant to the Stock Purchase Agreement, (i) Michael L. Ashner was appointed
the Chief Executive Officer of the Trust, (ii) the Trust entered into the
Advisory Agreement with FUR Advisors, LLC ("FUR Advisors"), (iii) Mr. Ashner
entered into an exclusivity agreement with the Company, and (iv) FUR Investors,
LLC entered into a covenants agreement pursuant to which it agreed not to take
certain action which, among other things, would adversely impact the Trust's
status as a REIT or its listing on the New York Stock Exchange. In addition,
Daniel J. Altobello and Jeffrey Citrin resigned as members of the Board of
Trustees, and three new trustees were appointed to the Board of Trustees.
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In January 2004, the Board of Trustees approved a waiver to the ownership
limitations set forth in the Trust's bylaws to permit Michael L. Ashner, the
Chief Executive Officer of the Trust, to acquire up to 30,000 shares of the
Trust's Preferred Shares so long as the acquisition thereof (i) is not otherwise
in violation of the ownership limitations set forth in the Trust's bylaws whose
purpose is to protect REIT status of the Trust and (ii) does not reduce the
existing viability of the net operating loss benefits available to the Trust.
Sale of Park Plaza Mall
On June 22, 2004, we sold our Park Plaza Mall property located in Little Rock,
Arkansas for a gross sales price of $77,500,000 to a subsidiary of CBL &
Associates Properties, Inc., an unaffiliated third party. In connection with
this transaction, the purchaser assumed the existing indebtedness encumbering
the property of approximately $41,313,000. Accordingly, net proceeds received by
us after giving effect to the loan assumption and closing costs were
approximately $33,480,000. The proceeds were deposited with a qualified
intermediary, and these proceeds were used for the portfolio acquisition (as
described below) in connection with a "like kind" exchange pursuant to Section
1031 of the Code.
Disposition of VenTek
On December 1, 2004, VenTek ceased all of its operations and transferred its
remaining assets to VenTek Transit Inc. ("Transit"), an entity owned by VenTek's
executive employees. Under the agreement, Transit agreed to make a nominal
payment to VenTek and is obligated to pay to VenTek a royalty equal to 5% of its
annual gross revenues for each of the next five years. It is not expected that
such payments will be material to the Trust's operations.
Atlantic Realty Trust
During 2004, we acquired 267,000 shares in Atlantic Realty Trust ("Atlantic
Realty") (NASD:ATLRS) representing 7.5% of the outstanding shares in Atlantic
Realty. On January 12, 2004, we contacted Atlantic Realty to discuss a possible
business combination with Atlantic Realty. Our proposal was ultimately rejected
by Atlantic Realty in May 2004 as Atlantic Realty elected to market its
remaining property for sale. On May 19, 2004, Atlantic Realty paid a dividend of
$3.25 per share to holders of record on May 10, 2004. Following the
distribution, we began selling our shares in Atlantic Realty and, effective
August 3, 2004, we had sold our entire interest in Atlantic Realty and realized
a total gain of $1,089,000.
NorthStar Loan
On March 3, 2004, we acquired from Bank of America, N.A. a loan receivable from
NorthStar Partnership, L.P. ("NorthStar") in the principal amount of
approximately $16,944,000 (the "NorthStar Loan"). The NorthStar Loan was
evidenced by a Credit Agreement, Promissory Note and collateral documents. The
NorthStar Loan was secured by a first priority lien on all or a portion of
NorthStar's interest in Morgans Hotel Group LLC, Emmes & Company LLC and
Presidio Capital Investment Company, LLC as well as certain other assets of
NorthStar. NorthStar prepaid the loan in its entirety on August 4, 2004. Due to
the nature and amount of the NorthStar Loan, in order to comply with the rules
applicable to REITs, portions of the NorthStar Loan were held by FT-TRS Loan
LLC, our taxable REIT subsidiary. Accordingly, we incurred a federal and state
income tax expense of $49,000 during 2004 in connection with this asset. Total
cash received on this loan was $17,814,000 for a yield of 21%.
Portfolio Acquisition
On November 18, 2004, FT-Fin Acquisition LLC ("FT-Fin"), a Delaware limited
liability company wholly-owned by us, acquired from Finova Capital Corporation,
an unaffiliated third party, 16 triple-net leased properties containing
approximately 2,500,000 gross square feet. The aggregate purchase price for the
properties was approximately $92,076,000 including closing adjustments and
inclusive of the assumption of approximately $32,401,000 of existing first
mortgage debt and accrued interest payable on certain of the properties.
Additionally, FT-Fin acquired $1,674,000 of rent receivables and incurred
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$711,000 of debt costs. This acquisition was funded from the proceeds of a
$27,000,000 loan as well as $33,480,000 in net proceeds realized from the sale
of the Park Plaza property in June 2004 which were being held by a qualified
intermediary to enable the Trust to acquire the properties in a tax free
exchange pursuant to Section 1031 of the Code and cash on hand of $1,580,000.
The Trust has allocated the purchase price to real estate and lease intangibles.
See "Item 2. Properties-Net Lease Properties" below for additional information
relating to the properties acquired and the loan obtained.
Circle Tower
During 2004, we completed the acquisition of a 100% interest in the land
underlying our Circle Tower property located in Indianapolis, Indiana for an
aggregate purchase price of $1,493,000. Accordingly, we now hold a 100% interest
in the land, which was partially owned by third parties and ground leased to us,
and the improvements that comprise the Circle Tower property.
Company Assets
Real Estate Assets
See "Item 2. Properties" below.
5400 Westheimer Holding L.P.
On November 22, 2004, we acquired a 1% general partner interest, and a third
party (the "Limited Partner") acquired a 99% limited partnership interest, in
5400 Westheimer Holding L.P. ("5400 Westheimer"). 5400 Westheimer, in turn,
acquired an indirect 100% ownership interest in an entity that holds title to
real property located at 5400 Westheimer Court, Houston, Texas (the "Houston
Property"). In order to facilitate this acquisition, we made a $7,533,000 loan
(the "5400 Loan") to 5400 Westheimer. The 5400 Loan bore interest at 8% per
annum.
Following the acquisition of the Houston Property, 5400 Westheimer made an
offering to the partners of the Limited Partner that enabled them to have their
interest in the Limited Partner redeemed in exchange for a distribution of an
equivalent interest in 5400 Westheimer and a $321,000 capital contribution to
5400 Westheimer. In connection with the offering, we offered to lend to each
participating partner an amount equal to 2/3 of the total capital contribution
required by such partner ($214,000 per investment unit.)
The offering was consummated on January 3, 2005 at which time the 5400 Loan,
including accrued interest, was fully satisfied by the payment of $7,040,000 and
the delivery to us of an additional 7% limited partner interest in 5400
Westheimer, thereby resulting in us holding an aggregate 8% interest in 5400
Westheimer. In addition, partners who participated in the offering and who
acquired an aggregate of 25% interest in 5400 Westheimer elected to obtain loans
from us to satisfy their capital contribution, which loans aggregated $1,338,000
and which are secured by the 25% interest held by such limited partners in 5400
Westheimer. The loans bear interest at 12% per annum and require quarterly
payments of interest only. Aggregate principal payments of $669,000 are required
to be made on each January 5, 2006 and January 5, 2007, the maturity date. If
all of the loans were to default, we would acquire an additional 25% interest in
the Houston Property.
The Houston Property is a nine-story office building containing 614,000 square
feet of net rentable space with a contiguous six level parking structure
containing 1,401 parking spaces, all of which situated on approximately 6.431
acres of land. The Houston Property is leased on a triple-net basis to an
affiliate of Duke Capital LLC pursuant to a lease (the "Houston Lease") that is
scheduled to expire in 2018 subject to early termination in 2016 and serves as a
corporate office for Duke Capital LLC. The Houston Property is encumbered by a
first mortgage loan that consists of three promissory notes, Class A-1, A-2, and
A-3, with an original aggregate principal balance of $78,857,000 and an
outstanding principal balance at December 31, 2004 of $76,343,000. The Class A-1
note bears interest at 5.22%, had a principal balance of $25,000,000, requires
payments of interest only and matures on April 1, 2016. The Class A-2 note bears
interest at 6%, had a principal balance of $8,800,000, requires payments of
interest only and matures on April 1, 2016. The Class A-3 note bears interest at
7.5%, had a principal balance on November 1, 2004 of $42,834,000, requires
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monthly payments approximately equal to the difference between the monthly
payment required under the Houston Lease and the payments required on the Class
A-1 and Class A-2 notes and matures on April 1, 2016 at which time it will be
fully amortized. The debt service payments required on the notes are satisfied
from the payments made by the tenant under the Houston Lease.
The following table sets forth the principal terms of the three notes:
Class A-1 Class A-2 Class A-3 Total
Principal Balance 12/31/04 $25,000,000 $8,800,000 $42,543,000 $76,343,000
Interest Rate 5.22% 6.00% 7.50% n/a
Monthly Payments $108,750 $44,000 (1) (2)
Maturity Date 4/1/16 4/1/16 4/1/16 n/a
Balance at Maturity $25,000,000 $8,800,000 0 $33,800,000
(1) Approximately equal to the difference between the monthly payment required
under the Houston Lease and the payments required on the Class A-1 and
Class A-2 Notes.
(2) Approximately equal to the monthly payments required under the Houston
Lease.
After satisfying debt service payments and other expenses, it is expected that
the lease payments due under the Houston Lease will not generate any net cash
flow to 5400 Westheimer.
West Side Loan
On May 19, 2004, we purchased a 25% interest in a loan secured by a first
mortgage on a commercial property located in New York City's Chelsea area (the
"West Side Loan"). The total original outstanding principal balance of the loan
is $10,708,000 of which our share was $2,677,000. The purchase price for the
participation interest was the face amount of our share of the loan. The loan
bears interest at LIBOR plus 9.5% per annum and is scheduled to mature in April
2009. The principal balance outstanding on the loan and interest rate as of
December 31, 2004 were $2,532,000 and 11.8125%, respectively. In November 2004,
the borrower under the West Side Loan failed to make its scheduled debt service
payment. As a result of this default, a forbearance agreement was entered into
with the borrower that provided, in part, that the lender would agree to forbear
from exercising its remedies so long as the borrower makes interest only
payments along with specified payments to reserve accounts through June 30, 2005
and satisfies the loan by June 30, 2005.
West 38th Street Loan
On August 4, 2004, we acquired a 50% interest in a $20,000,000 first mortgage
loan secured by a property located at 63 West 38th Street, New York, New York
(the "West 38th Street Loan"). The loan bears interest at LIBOR plus 400 basis
points (with a minimum rate of 5.42%), has a three year term and requires
payments of interest only. We indirectly obtained $7,000,000 of financing in
connection with this investment that bears interest at LIBOR plus 175 basis
points and requires payments of interest only. The principal balance outstanding
on the loan and interest rate as of December 31, 2004 were $3,000,000 and 6.28%
respectively. This loan was repaid in full on January 18, 2005. Total cash
receipts were $3,165,000, resulting in a yield of 12%.
Clearwater Loan
On November 23, 2004, we acquired a first mortgage loan secured by a Wingate
Hotel and the land on which it is situated located in Clearwater, Florida. The
principal amount of the loan at closing was $2,785,000. The loan bears interest
at 10% per annum, requires monthly payments of $27,179 and is scheduled to
mature on February 15, 2007 at which time the remaining amount due on the loan
is scheduled to be $2,689,000. The outstanding principal balance due on the loan
at December 31, 2004 was $2,782,000.
Sizeler Property Investors, Inc.
Beginning in August 2004, we began acquiring shares of common stock in Sizeler
Property Investors, Inc. ("Sizeler") (NYSE:SIZ), a real estate investment trust
that primarily is in the business of owning and operating income producing
retail shopping centers and apartment communities in the southeastern United
States. As of March 1, 2005, we had acquired a total of 1,310,300 shares of
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common stock of Sizeler which represents approximately 9.9% of all of the
outstanding shares of common stock of Sizeler for an aggregate purchase price of
approximately $12,173,000. On December 21, 2004, we sent a letter to Sizeler
advising Sizeler of our intention to nominate a slate of three directors,
consisting of Michael L. Ashner, Peter Braverman and Steven Zalkind, for
election at Sizeler's 2005 annual meeting of stockholders. On January 19, 2005,
we filed with the Securities and Exchange Commission a preliminary proxy
statement in connection with our intention to nominate a slate of directors at
Sizeler's 2005 annual meeting of stockholders.
Subsequent Events
Chicago Office Properties
On March 16, 2005, we entered into an agreement with Laurence Weiner and Gerald
Nudo, two unaffiliated private individuals, which agreement amended and restated
in its entirety a prior agreement entered into on February 15, 2005. As amended,
the agreement provides as follows: (i) we will make secured mezzanine loans with
respect to 23 properties in an amount equal to 49% of the equity in the
properties, with an option to make an additional advance increasing its funding
to 60% of the equity of the properties; (ii) we will make secured mezzanine
loans with respect to three properties in an amount equal to 60% of the equity
in the properties; (iii) we will have an option to make secured mezzanine loans
with respect to five properties in an amount equal to 49% of the equity in the
properties, with an option to make an additional advance increasing its funding
to 60% of the equity of the properties; and (iv) we will acquire a participating
equity interest in each property owner which will entitle us to share in certain
distributions from capital proceeds in excess of its current return. The loans
will bear interest at 7.65%, require monthly payments of interest only and have
a seven year maturity. The loans may be converted into an equity interest in the
applicable borrower after one year at our request or three years at the option
of the borrower.
Substantially all of the properties are located in the Chicago, Illinois
metropolitan and suburban area. Exclusive of the five option properties, the
properties have an estimated aggregate value of $350,000,000, inclusive of debt.
The aggregate principal amount of the loans to be made by us is expected to be
approximately $80,000,000 which is expected to be provided from reserves. The
transaction is subject to our satisfactory completion of our due diligence
review and customary closing conditions. If consummated, it is expected that the
transaction will close during the second quarter of 2005. There can be no
assurance that this transaction will be consummated or, if consummated, on the
terms presently negotiated.
In addition, the agreement provides for certain obligations on our part as well
as Messrs. Weiner and Nudo to make additional loans to the properties with
respect to costs expected to be incurred at the properties.
Common Share Issuance
On February 17, 2005, we sold to Kimco Realty Corporation 1,000,000 of our
Common Shares for an aggregate purchase price of $4,000,000. The sale of the
shares was made in a private transaction under Regulation D of the Securities
Act of 1933, as amended. We incurred no underwriting costs in connection with
this sale.
Series B-1 Preferred Share Issuance
On February 28, 2005, we sold to a number of institutional investors through a
private offering 3,640,000 shares of ours newly designated B-1 Cumulative
Convertible Redeemable Preferred Shares (the "Series B-1 Shares") for
$91,000,000. We incurred a total of $4,800,000 of underwriting and placement
agent fees to unaffiliated third parties in connection with this issuance. The
Series B-1 Shares will be entitled to cumulative dividends at a minimum rate of
6.5% and will be convertible into common stock at a conversion price of $4.50,
subject to anti-dilution adjustments. If fully converted, the Series B-1 Shares
would represent approximately 38.7% of the outstanding Common Shares. In
addition, the holders of the Series B-1 Shares have the right to elect one
member to our Board of Trustees. In this regard, upon the sale of the Series B-1
Shares, the size of the Board was increased to seven and Mr. Steven Mandis was
appointed as a Trustee.
9
The Series B-1 Shares were sold to seven institutional investors including
Fairholme Ventures II LLC, a company in which Fairholme Capital Management,
L.L.C. is the managing member, entitled to receive management and incentive fees
holds a 7.85% interest. Bruce Berkowitz, one of our Trustee's, is the managing
member of, and with his family the owner of, Fairholme Capital Management,
L.L.C. In addition, Mr. Berkowitz and his family directly own 1.64% of the
interests of Fairholme Ventures II, LLC. Neither Mr. Berkowitz nor Fairholme
Ventures II LLC participated in any of the negotiations with respect to the
Series B-1 Share issuance nor did he vote as a Trustee in connection with the
authorization of the Series B-1 Shares.
Winn-Dixie Bankruptcy
On February 22, 2005, Winn-Dixie Stores, Inc., the tenant at our Jacksonville,
Florida property, filed for protection under Chapter 11 of the United States
Bankruptcy Code. We have not received notification as to whether Winn-Dixie will
assume or reject our lease. If it elects to reject our lease, the lease will be
terminated and we will become responsible for all costs associated with the
property. If the lease is rejected, we will seek to re-tenant or sell the
property. Until such time as Winn-Dixie makes its election, all rents (annually,
approximately $1,500,000) and other payments due under the lease from and after
the date of Winn-Dixie's bankruptcy filing are required to be paid.
Circle Tower Loan
On March 17, 2005, we obtained a $4,600,000 loan from Nomura Credit & Capital,
Inc., an unaffiliated third party lender, whichis secured by our Indianapolis,
Indiana property. The loan bears interest at 5.82%, requires monthly payments of
principal and interest of $54,000 and is schedule to mature on April 11, 2015,
at which time the outstanding principal balance is expected to be approximately
$3,831,000. We received net proceeds from this loan, after satisfying closing
costs, of approximately $4,387,000.
Purchase Contract for Amherst, New York Property
On March 21, 2005, we entered into an agreement to acquire two office building
properties in Amherst, New York with an aggregate square footage of 200,000. The
properties are net leased to and serve as the East Coast Headquarters of Ingram
Micro, Inc. The contract purchase price for the properties is approximately $22
million. The acquisition is subject to our due diligence review. If consummated,
it is expected that the transaction will close during the second quarter of
2005.
Employees
As of December 31, 2004, we had no employees. During 2004, our affairs were
administered by FUR Advisors pursuant to the terms of an Advisory Agreement (the
"Advisory Agreement") dated December 31, 2003 between the Trust and FUR Advisors
which agreement was negotiated and approved by the Board of Trustees of the
Trust prior to the acquisition by FUR Investors of its interest in the Trust.
FUR Advisors is controlled by and partially owned by the executive officers of
the Trust. Pursuant to the terms of the Advisory Agreement, FUR Advisors is
responsible for providing, or arranging for the provision of, asset management
services to the Company and coordinating with the Trust's shareholder transfer
agent and property managers. Pursuant to the terms of the Advisory Agreement,
for providing these services, FUR Advisors is entitled to the following fees:
(i) an asset management fee of 1% of our gross asset value up to $100 million,
..75% of our gross asset value between $100 million and $250 million, .625% of
our gross asset value between $250 million and $500 million and .50% of our
gross asset value in excess of $500 million; (ii) property and construction
management fees at commercially reasonable rates as determined by a majority of
independent Trustees of the Board; (iii) loan servicing fees not exceeding
commercially reasonable rates (approved by a majority of the independent
Trustees) for providing administrative and clerical services with respect to
loans made by us to third parties; and (iv) an incentive fee equal to 20% of all
distributions to holders of Common Shares after December 31, 2003 in excess of
(x) $71.3 million, increased by the net issuance price of all shares issued
after December 31, 2003, and decreased by the redemption price of all shares
redeemed after December 31, 2003, plus (y) a return on the amount, as adjusted,
set forth in (x) equal to 7% per annum compounded annually. In addition, FUR
Advisors is entitled to be reimbursed for up to $100,000 per annum for the costs
associated with the employment of one or more asset managers. During the fourth
quarter 2004, in light of the net-lease nature of the portfolio acquired from
Finova Capital Corporation, FUR Advisors proposed to the Board of Trustees that
the asset management fee be reduced for the portion of the net lease portfolio
that was subject to leverage to .25% of the gross asset value. The Board of
Trustees agreed to the reduction, resulting in a savings to the Company during
the fourth quarter of 2004 of $185,000.
10
The Trust paid fees of $209,000, $521,000 and $498,000 for the years ended
December 31, 2004, 2003 and 2002, respectively, to the Real Estate Systems
Implementations Group, LLC ("RE Systems") for financial reporting and advisory
services. The managing member of this firm assumed the position of Interim Chief
Financial Officer of the Trust on August 18, 2000, and Interim Chief Executive
Officer in January 2003. In addition, he became a Trustee of the Trust in June
2003. He resigned as Interim Chief Executive Officer and Interim Chief Financial
Officer on December 31, 2003 and resigned as Trustee on April 15, 2004.
In December 2003, the then members of the Board of Trustees granted 100,000
options under the Long Term Incentive Performance Plan to a Trustee of the Trust
and the then Interim Chief Executive Officer and Interim Chief Financial
Officer. Each option has an exercise price of $2.23. All the options are
currently exercisable and expire on December 16, 2013.
Competition
Our Circle Tower property competes for tenants with other office buildings in
the Indianapolis area. Competition for tenants has been and continues to be
intense on the basis of rent, location and age of the building. Our net lease
properties will become subject to competition with similar properties in their
respective geographic area at such time as the tenant at each such property
elects not to renew its lease. In addition, we compete with several other
companies, including other REITS, and lending institutions for the acquisition
of additional investments. Some of these competitors have greater resources than
we do, are willing to accept more risk than we are, have different investment
criteria than we do, are more widely known than us, any of which could hinder
our ability to compete successfully for such investments.
Business Segment Data
Our business segment data may be found in footnote 18 to the Combined Financial
Statements in Item 8.
11
RISK FACTORS
You should carefully consider the risks described below. These risks are not the
only ones that the Company may face. Additional risks not presently known to us
or that we currently consider immaterial may also impair our business operations
and hinder our ability to make expected distributions to our holders of
beneficial interests.
This Form 10-K also contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those anticipated
in these forward-looking statements as a result of certain factors, including
the risks described below or elsewhere in this Form 10-K.
Our Economic Performance and the Value of Our Real Estate Assets are Subject to
the Risks Incidental to the Ownership and Operation of Real Estate Properties
Our economic performance, the value of our real estate assets, both those
presently held as well as future investments, and, therefore, the value of your
investment are subject to the risks normally associated with the ownership,
operation and disposal of real estate properties and real estate related assets,
including:
o changes in the general and local economic climate;
o competition from other properties;
o trends in the retail industry, in employment levels and in consumer
spending patterns;
o changes in interest rates and the availability of financing;
o the cyclical nature of the real estate industry and possible
oversupply of, or reduced demand for, space in the markets in which
our properties are located;
o the attractiveness of our properties to tenants and purchasers;
o changes in market rental rates and our ability to rent space on
favorable terms;
o the bankruptcy or insolvency of tenants;
o the need to periodically renovate, repair and re-lease space and the
costs thereof;
o increases in maintenance, insurance and operating costs; and
o civil unrest, acts of terrorism, earthquakes and other natural
disasters or acts of God that may result in uninsured losses.
In addition, applicable federal, state and local regulations, zoning and tax
laws and potential liability under environmental and other laws may affect real
estate values. Further, throughout the period that we own real property,
regardless of whether the property is producing any income, we must make
significant expenditures, including property taxes, maintenance costs, insurance
costs and related charges and debt service. The risks associated with real
estate investments may adversely affect our operating results and financial
position, and therefore the funds available for distribution to you as
dividends.
Ability of FUR Advisors to Operate Properties Directly Affects Our Financial
Condition
The underlying value of our real estate investments, the results of our
operations and our ability to make distributions to our holders of beneficial
interests and to pay amounts due on our indebtedness will depend on FUR Advisors
ability to operate our properties and manage our other investments in a manner
sufficient to maintain or increase revenues and to generate sufficient revenues
in excess of our operating and other expenses.
12
The Loss of FUR Advisors' Key Personnel Could Harm Our Operations and Adversely
Affect the Value of Our Beneficial Interests
We are dependent on the efforts of FUR Advisors and, in particular, Michael L.
Ashner, the Chairman of the Board of Trustees and our Chief Executive Officer,
and Peter Braverman, our President as well as our other Executive Officers.
While we believe that we could find replacements for these key personnel, the
loss of their services could harm our operations and adversely affect the value
of our shares of beneficial interest.
We Face a Number of Significant Issues with Respect to the Properties We Own
Which May Adversely Affect our Financial Performance
Leasing Issues. With respect to our properties, we are subject to the risk that,
upon expiration, leases may not be renewed, the space may not be leased, or the
terms of renewal or leasing (including the cost of required renovations) may be
less favorable than the current lease terms. This risk is substantial with
respect to our net lease properties as single tenants lease 100% of each
property. Leases accounting for approximately 0.3% of the aggregate 2005
annualized base rents from our properties (representing approximately 0.3% of
the net rentable square feet at the properties) expire without penalty or
premium through the end of 2005, and leases accounting for approximately 2.0% of
aggregate 2005 annualized base rent from the properties (representing
approximately 0.8% of the net rentable square feet at the properties) are
scheduled to expire in 2006. Other leases grant their tenants early termination
rights upon payment of a termination penalty. Lease expirations will require us
to locate new tenants and negotiate replacement leases with such tenants. The
costs for tenant improvements, tenant inducements and leasing commissions are
traditionally greater than costs relating to renewal leases. If we are unable to
promptly relet or renew leases for all or a substantial portion of the space
subject to expiring leases, if the rental rates upon such renewal or reletting
are significantly lower than expected or if our reserves for these purposes
prove inadequate, our revenue and net income could be adversely affected.
Bankruptcy of Tenant. Further, a tenant may experience a downturn in its
business, which could result in the tenant's inability to make rental payments
when due. In addition, a tenant may seek the protection of bankruptcy,
insolvency or similar laws, which could result in the rejection and termination
of such tenant's lease and cause a reduction in our cash flows. If this were to
occur at a net leased property, the entire property would become vacant.
We cannot evict a tenant solely because of its bankruptcy. A court, however, may
authorize a tenant to reject and terminate its lease. In such a case, our claim
against the tenant for unpaid, future rent would be subject to a statutory cap
that might be substantially less than the remaining rent owed under the lease.
In any event, it is unlikely that a bankrupt tenant will pay in full the amounts
it owes us under a lease. The loss of rental payments from tenants could
adversely affect our cash flows and operations.
In February 2005, Winn-Dixie Stores, Inc., the tenant at our Jacksonville,
Florida property, filed for protection under Chapter 11 of the United States
Bankruptcy Code. We have not received notification as to whether Winn-Dixie will
assume or reject its lease. If it elects to reject its lease, the lease will be
terminated and we will become responsible for all costs associated with the
property. If the lease is rejected, we will seek to re-tenant or sell the
property. Until such time as Winn-Dixie makes its election, all rents (annually,
approximately $1,500,000) and other payments due under the lease from and after
the date of Winn-Dixie's bankruptcy filing are required to be paid.
Tenant Concentration. Our Circle Tower property does not have any individual
tenant that occupies 10% or more of the space at the property or whose rental
payments account for 10% or more of the rental revenue at the property.
Accordingly, it is unlikely that the financial weakness or relocation of a
single tenant would adversely affect our cash flows. However, in the future it
is possible that a single tenant at the Circle Tower property could occupy a
significant portion of the leasable space or provide a substantial portion of
the properties rental revenue.
With respect to the net lease properties, the leases with Viacom, The Kroger Co.
and Winn-Dixie represent approximately 50%, 22% and 20%, respectively of the
total rentable square footage of the net lease properties. Accordingly, the
financial weakness of any of these tenants could negatively impact our
operations.
13
Competition. We compete with several other properties and companies, including
other REITS, lending institutions and large investors for tenants and the
acquisition of additional properties and related investments. Some of these
competitors have greater resources than we do and we may not be able to compete
successfully with them. No assurances can be given that such competition will
not adversely affect our revenues.
Lease Payments on Our Net Lease Properties Are Subject to the Credit Worthiness
of the Tenants
Pursuant to the terms of the lease agreements with respect to our net lease
properties, the tenant at such property is required to pay all costs associated
with the property including real estate taxes, ground rent, insurance, utilities
and maintenance costs. In addition, the lease payments are designed to be
sufficient to satisfy the debt service requirements on the loans encumbering the
properties. Accordingly, if the tenant were to experience financial difficulty
and default on its lease payments, we would either have to assume such
obligations or risk losing the property through foreclosure. Any such default
would have a negative impact on our revenues.
The Mortgage Loans We Invest In Are Subject to Delinquency, Foreclosure and Loss
Commercial mortgage loans are secured by multifamily or commercial property and
are subject to risks of delinquency and foreclosure, and risks of loss that are
greater than similar risks associated with loans made on the security of
single-family residential property. The ability of a borrower to repay a loan
secured by an income-producing property typically is dependent primarily upon
the successful operation of such property rather than upon the existence of
independent income or assets of the borrower. If the net operating income of the
property is reduced, the borrower's ability to repay the loan may be impaired.
Net operating income of an income-producing property can be affected by, among
other things: tenant mix; success of tenant businesses; property management
decisions; property location and condition; competition from comparable types of
properties; changes in laws that increase operating expense or limit rents that
may be charged; the need to address environmental contamination at the property;
the occurrence of any uninsured casualty at the property; changes in national,
regional or local economic conditions and/or specific industry segments;
declines in regional or local real estate values; declines in regional or local
rental or occupancy rates; increases in interest rates, real estate tax rates
and other operating expenses; changes in governmental rules, regulations and
fiscal policies, including environmental legislation; acts of God; terrorism;
social unrest; and civil disturbances.
In the event of any default under a mortgage loan held directly by us, we will
bear a risk of loss of principal to the extent of any deficiency between the
value of the collateral and the principal and accrued interest of the mortgage
loan, which could have a material adverse effect on our cash flow from
operations. In the event of the bankruptcy of a mortgage loan borrower, the
mortgage loan to such borrower will be deemed to be secured only to the extent
of the value of the underlying collateral at the time of bankruptcy (as
determined by the bankruptcy court), and the lien securing the mortgage loan
will be subject to the avoidance powers of the bankruptcy trustee or
debtor-in-possession to the extent the lien is unenforceable under state law.
Foreclosure of a mortgage loan can be an expensive and lengthy process which
could have a substantial negative affect on our anticipated return on the
foreclosed mortgage loan.
Mezzanine Loans Involve Greater Risks of Loss than Senior Loans Secured by
Income Producing Properties
We may invest in mezzanine loans that take the form of subordinated loans
secured by second mortgages on the underlying property or loans secured by a
pledge of the ownership interests of either the entity owning the property or a
pledge of the ownership interests of the entity that owns the interest in the
entity owning the property. These types of investments involve a higher degree
of risk than long-term senior mortgage lending secured by income producing real
property because the investment may become unsecured as a result of foreclosure
by the senior lender. In the event of a bankruptcy of the entity providing the
pledge of its ownership interests as security, we may not have full recourse to
the assets of such entity, or the assets of the entity may not be sufficient to
satisfy our mezzanine loan. If a borrower defaults on our mezzanine loan or debt
senior to our loan, or in the event of a borrower bankruptcy, our mezzanine loan
will be satisfied only after the senior debt. As a result, we may not recover
some or all of our investment. In addition, mezzanine loans may have higher loan
to value ratios than conventional mortgage loans, resulting in less equity in
the property and increasing the risk of loss of principal.
14
Our Investments in REIT Securities Are Subject to Specific Risks Relating to the
Particular REIT Issuer of the Securities and to the General Risks of Investing
in Subordinated Real Estate Securities
Our investments in REIT securities, such as our investment in Sizeler, involve
special risks. REITs generally are required to substantially invest in real
estate or real estate-related assets and are subject to the inherent risks
associated with real estate-related investments discussed herein. Our
investments in REIT securities are subject to the risks described herein with
respect to an investment in our Common Shares, including (i) risks generally
incident to interests in real property, (ii) risks associated with the failure
to maintain REIT qualification, and (iii) risks that may be presented by the
type and use of a particular commercial property.
Investing in Private Companies Involves a High Degree of Risk
We have ownership interests in, and may acquire additional ownership interests
in, private companies not subject to the reporting requirements of the
Securities and Exchange Commission. Investments in private businesses involve a
higher degree of business and financial risk, which can result in substantial
losses and accordingly should be considered very speculative. There is generally
no publicly available information about these private companies, and we will
rely significantly on the due diligence of FUR Advisors to obtain information in
connection with our investment decisions.
We May Not Be Able to Invest Our Cash Reserves in Suitable Investments
At December 31, 2004, we had $82,559,000 of cash and cash equivalents available
for investment. Our ability to generate increased revenues is dependent upon our
ability to invest these funds in real estate related assets that will ultimately
generate favorable returns.
We May Acquire or Sell Additional Assets or Additional Properties. Our Failure
or Inability to Consummate These Transactions or Manage the Results of These
Transactions Could Adversely Affect Our Operations and Financial Results
We may acquire properties or acquire other real estate companies when we believe
that an acquisition is consistent with our business strategies. We may not,
however, succeed in consummating desired acquisitions. Also, we may not succeed
in leasing newly acquired properties at rents sufficient to cover their costs of
acquisition and operation. Difficulties in integrating acquisitions may prove
costly or time-consuming and could consume too much of management's attention.
We May Not Be Able to Obtain Capital to Make Investments
At such time as we utilize our cash reserves, we will be dependent primarily on
external financing to fund the growth of our business. This is because one of
the requirements of the Code for a REIT is that it distribute 90% of its net
taxable income, excluding net capital gains, to its shareholders. There is a
separate requirement to distribute net capital gains or pay a corporate level
tax. Our access to debt or equity financing depends on the willingness of third
parties to lend or make equity investments and on conditions in the capital
markets generally. We and other companies in the real estate industry have
experienced limited availability of financing from time to time. Although we
believe that we will be able to finance any investments we may wish to make in
the foreseeable future, requisite financing may not be available on acceptable
terms.
Factors That May Cause Us to Lose Our New York Stock Exchange Listing
If we were to fail to qualify as a REIT, we might lose our listing on the New
York Stock Exchange. Whether we would lose our NYSE listing would depend on a
number of factors besides REIT status, including the number of holders of
beneficial interests and amount and composition of our assets. If we were to
lose our NYSE listing, we would likely try to have our Common Shares listed on
another national securities exchange.
We annually make the requisite certifications required by the New York Stock
Exchange. Our certification for 2004 was qualified in that we had not yet
adopted and posted on our website our Corporate Governance Guidelines.
15
New Legislation Could Adversely Affect Our REIT Qualification
New legislation, as well as regulations, administrative interpretations or court
decisions, also could change the tax law with respect to our qualification as a
REIT and the federal income tax consequences of such qualification. The adoption
of any such legislation, regulations, administrative interpretations or court
decisions could have a material adverse affect on our results of operations,
financial condition and could restrict our ability to grow.
Dependence on Qualification As a REIT; Tax and Other Consequences If REIT
Qualification Is Lost
Although we believe that we will remain organized and will continue to operate
so as to qualify as a REIT for federal income tax purposes, we might fail to
remain qualified in this way. Qualification as a REIT for federal income tax
purposes is governed by highly technical and complex provisions of the Code for
which there are only limited judicial or administrative interpretations. Our
qualification as a REIT also depends on various facts and circumstances that are
not entirely within our control. In addition, legislation, new regulations,
administrative interpretations or court decisions might significantly change the
tax laws with respect to the requirements for qualification as a REIT or the
federal income tax consequences of qualification as a REIT.
If, with respect to any taxable year, we fail to maintain our qualification as a
REIT, we could not deduct distributions to our holders of beneficial interests
in computing our taxable income and would have to pay federal income tax on our
taxable income at regular corporate rates. The federal income tax payable would
include any applicable alternative minimum tax. If we had to pay federal income
tax, the amount of money available to distribute to our holders of beneficial
interests would be reduced for the year or years involved, and we would no
longer be required to distribute money to our holders of beneficial interests.
In addition, we would also be disqualified from treatment as a REIT for the four
taxable years following the year during which qualification was lost, unless we
were entitled to relief under the relevant statutory provisions. Although we
currently intend to operate in a manner designed to allow us to qualify as a
REIT, future economic, market, legal, tax or other considerations may cause us
to revoke the REIT election.
In Order to Maintain Our Status As a REIT, We May Be Forced To Borrow Funds
During Unfavorable Market Conditions
To qualify as a REIT, we generally must pay dividends to our holders of
beneficial interests equal to at least 90% of our net taxable income each year,
excluding capital gains. This requirement limits our ability to accumulate
capital. We may not have sufficient cash or other liquid assets to meet REIT
dividend requirements. As a result, we may need to incur debt to fund required
dividends when prevailing market conditions are not favorable. Difficulties in
meeting dividend requirements may arise as a result of:
o differences in timing between when we must recognize income for U.S.
federal income tax purposes and when we actually receive income;
o the effect of non-deductible capital expenditures;
o the creation of reserves; or
o required debt or amortization payments.
If we are unable to borrow funds on favorable terms, our ability to pay
dividends to our holders of beneficial interests may suffer and our ability to
qualify as a REIT may be adversely affected.
16
Adverse Effects of REIT Minimum Dividend Requirements
In order to qualify as a REIT, we are generally required each year to distribute
to our holders of beneficial interests at least 90% of our taxable income,
excluding any net capital gain. We generally are subject to a 4% nondeductible
excise tax on the amount, if any, by which certain distributions paid by us with
respect to any calendar year are less than the sum of:
o 85% of our ordinary income for that year;
o 95% of our capital gain net income for that year; and
o 100% of our undistributed income from prior years.
We intend to comply with the foregoing minimum distribution requirements;
however, due to significant tax basis net operating losses, we can offset
otherwise required distributions with these net operating losses. Accordingly,
distributions on our Common Shares may not be required until such time as our
taxable income exceeds the net operating losses available. Distributions to our
shareholders are determined by our Board of Trustees and depend on a number of
factors, including the amount of cash available for distribution, financial
conditions, results of operations, decision to reinvest funds rather than to
distribute such funds, capital expenditures, annual distribution requirements
under the REIT provisions of the Code and such other factors as the Board of
Trustees deems relevant. For federal income tax purposes, distributions paid to
our holders of beneficial interests may consist of ordinary income, capital
gains, return of capital, or a combination thereof. We provide our holders of
beneficial interests with annual statements as to the taxability of
distributions. During 2004, we were not required to and did not make any
distributions on our Common Shares.
Liquidity of Real Estate
Real estate investments are relatively illiquid. Our ability to vary our real
estate portfolio in response to changes in economic and other conditions will
therefore be limited. If we decide to sell an investment, no assurance can be
given that we will be able to dispose of it in the time period we desire or that
the sales price of any investment will recoup or exceed the amount of our
investment.
Additional Regulations Applicable to Our Properties May Require Substantial
Expenditures to Ensure Compliance, Which Could Adversely Affect Cash Flows and
Operating Results
Our properties are subject to various federal, state and local regulatory
requirements such as local building codes and other similar regulations. If we
fail to comply with these requirements, governmental authorities may impose
fines on us or private litigants may be awarded damages against us.
We believe that our properties are currently in substantial compliance with all
applicable regulatory requirements. New regulations or changes in existing
regulations applicable to our properties, however, may require that we make
substantial expenditures to ensure regulatory compliance, which would adversely
affect cash flows and operating results. With respect to our net lease
properties, this risk is mitigated as the lease agreements for such properties
require the tenant at the property to comply with all applicable regulatory
requirements.
Increases in Property Taxes Could Affect Our Ability to Make Shareholder
Distributions
Our real estate investments are all subject to real property taxes. The real
property taxes on properties which we own may increase or decrease as property
tax rates change and as the value of the properties are assessed or reassessed
by taxing authorities. Increases in property taxes may have an adverse affect on
us and our ability to pay dividends to our holders of beneficial interests and
to pay amounts due on our indebtedness. With respect our net lease properties,
this risk is mitigated as the lease agreements for such properties require the
tenant at the property to pay all property taxes.
17
Environmental Liabilities
The obligation to pay for the cost of complying with existing environmental
laws, ordinances and regulations, as well as the cost of complying with future
legislation, may affect our operating costs. Under various federal, state and
local environmental laws, ordinances and regulations, a current or previous
owner or operator of real property may be liable for the costs of removal or
remediation of hazardous or toxic substances on or under the property.
Environmental laws often impose liability whether or not the owner or operator
knew of, or was responsible for, the presence of such hazardous or toxic
substances and whether or not such substances originated from the property. In
addition, the presence of hazardous or toxic substances, or the failure to
remediate such property properly, may adversely affect our ability to borrow by
using such real property as collateral. We maintain insurance related to
potential environmental issues on our current and previously owned properties.
Certain environmental laws and common law principles could be used to impose
liability for releases of hazardous materials, including asbestos-containing
materials ("ACMs") into the environment. In addition, third parties may seek
recovery from owners or operators of real properties for personal injury
associated with exposure to released ACMs or other hazardous materials.
Environmental laws may also impose restrictions on the use or transfer of
property, and these restrictions may require expenditures. In connection with
the ownership and operation of any of our properties, we and the lessees of
these properties may be liable for any such costs. The cost of defending against
claims of liability or remediating contaminated property and the cost of
complying with environmental laws could materially adversely affect our ability
to pay amounts due on indebtedness and dividends to holders of beneficial
interests. With respect our net lease properties, this risk is mitigated as the
lease agreements for such properties require the tenant to comply with all
environmental laws and indemnify us for any loss relating to environmental
liabilities.
Prior to undertaking major transactions, we hire independent environmental
experts to review specific properties. We have no reason to believe that any
environmental contamination or violation of any applicable law, statute,
regulation or ordinance governing hazardous or toxic substances has occurred or
is occurring, except for the property located in Jacksonville, Florida, which is
triple-net leased to Winn Dixie. Under the terms of its lease, Winn Dixie is
responsible for the remediation of petroleum related contamination encountered
in the ground water during removal of underground storage tanks. We are
monitoring the process of remediation. We will also endeavor to protect the
Company from acquiring contaminated properties or properties with significant
compliance problems by obtaining site assessments and property reports at the
time of acquisition when it deems such investigations to be appropriate. There
is no guarantee, however, that these measures will successfully insulate us from
all such liabilities.
Given the nature of the contamination at the Jacksonville property and the
inclusion of a substantial portion of the costs associated with the remediation
being covered by a State sponsored plan, we do not believe that if Winn-Dixie
were relieved of its obligation in connection with its recent bankruptcy filing
the costs borne by us would be material.
Compliance With the Americans With Disabilities Act of 1990 May Affect
Distributions
Under the Americans with Disabilities Act of 1990 (the "ADA"), all public
accommodations are required to meet certain federal requirements related to
access and use by disabled persons. A determination that we are not in
compliance with the ADA could result in the imposition of fines and/or an award
of damages to private litigants. If we were required to make significant
modifications to comply with the ADA, there could be a material adverse affect
on our ability to pay amounts due on our indebtedness or to pay dividends to our
holders of beneficial interests. With respect our net lease properties, this
risk is mitigated as the lease agreements for such properties require the tenant
at the property to comply with all ADA requirements.
Uninsured and Underinsured Losses
We may not be able to insure our properties against losses of a catastrophic
nature, such as terrorist acts, earthquakes and floods, because such losses are
uninsurable or are not economically insurable. We will use our discretion in
determining amounts, coverage limits and deductibility provisions of insurance,
with a view to maintaining appropriate insurance coverage on our investments at
a reasonable cost and on suitable terms. This may result in insurance coverage
that, in the event of a substantial loss, would not be sufficient to pay the
18
full current market value or current replacement cost of the lost investment and
also may result in certain losses being totally uninsured. Inflation, changes in
building codes, zoning or other land use ordinances, environmental
considerations, lender imposed restrictions and other factors also might make it
not feasible to use insurance proceeds to replace the property after such
property has been damaged or destroyed. Under such circumstances, the insurance
proceeds, if any, received by us might not be adequate to restore the Trust's
economic position with respect to such property. With respect our net lease
properties, under the lease agreements for such properties the tenant is
required to adequately insure the property.
Inability to Refinance
We are subject to the normal risks associated with debt and preferred stock
financings, including the risk that our cash flow will be insufficient to meet
required payments of principal and interest and distributions and the risk that
indebtedness on our properties, or unsecured indebtedness, will not be able to
be renewed, repaid or refinanced when due, or that the terms of any renewal or
refinancing will not be as favorable as the terms of such indebtedness. If we
were unable to refinance the indebtedness on acceptable terms, or at all, we
might be forced to dispose of one or more of our properties on disadvantageous
terms, which might result in losses to us, which losses could have a material
adverse affect on us and our ability to pay dividends to our holders of
beneficial interests and to pay amounts due on our indebtedness. Furthermore, if
a property is mortgaged to secure payment of indebtedness and we are unable to
meet mortgage payments, the mortgagor could foreclose upon the property, appoint
a receiver or obtain an assignment of rents and leases or pursue other remedies,
all with a consequent loss of revenues and asset value to us. Foreclosures could
also create taxable income without accompanying cash proceeds, thereby hindering
our ability to meet the REIT distribution requirements of the Code.
We Leverage Our Portfolio, Which May Adversely Affect Our Return on Our
Investments and May Reduce Cash Available for Distribution
We seek to leverage our portfolio through borrowings. Our return on investments
and cash available for distribution to holders of beneficial interests may be
reduced to the extent that changes in market conditions cause the cost of our
financing to increase relative to the income that can be derived from the
assets. Our debt service payments reduce the net income available for
distributions to holders of beneficial interests. We may not be able to meet our
debt service obligations and, to the extent that we cannot, we risk the loss of
some or all of our assets to foreclosure or forced sale to satisfy our debt
obligations. A decrease in the value of the assets may lead to a requirement
that we repay certain borrowings. We may not have the funds available to satisfy
such repayments.
Rising Interest Rates
We have incurred and may in the future incur indebtedness that bears interest at
variable rates. Accordingly, increases in interest rates would increase our
interest costs to the extent that the related indebtedness was not protected by
interest rate protection arrangements, which could have a material adverse
effect on us and our ability to pay dividends to our holders of beneficial
interests and to pay amounts due on our indebtedness or cause us to be in
default under certain debt instruments. In addition, an increase in market
interest rates may encourage holders to sell their Common Shares and reinvest
the proceeds in higher yielding securities, which could adversely affect the
market price for the Common Shares.
Results of Operations May Be Adversely Affected by Factors Beyond Our Control
Results of operations of our properties and other investments may be adversely
affected by, among other things:
o changes in national economic conditions, changes in local market
conditions due to changes in general or local economic conditions
and neighborhood characteristics;
o changes in interest rates and in the availability, cost and terms of
financing;
o the impact of present or future environmental legislation and
compliance with environmental laws and other regulatory
requirements;
o the ongoing need for capital improvements, particularly in older
structures;
19
o changes in real estate tax rates and assessments and other operating
expenses;
o adverse changes in governmental rules and fiscal policies;
o adverse changes in zoning and other land use laws; and
o acts of terrorism, earthquakes and other natural disasters (which
may result in uninsured losses) and other factors which are beyond
our control.
Ownership Limitations in Our Bylaws May Adversely Affect the Market Price of the
Common Shares
Our bylaws contain an ownership limitation that is designed to prohibit any
transfer that would result in our being "closely-held" within the meaning of
Section 856(h) of the Code. This ownership limitation, which may be waived by
our Board of Trustees, generally prohibits ownership, directly or indirectly, by
any single stockholder of more than 9.8% of the Common Shares.
Primarily to facilitate the maintenance of our qualification as a REIT, our
bylaws generally prohibit ownership, directly or indirectly, by any single
holder of more than 9.8% of the Common Shares. Our Board of Trustees may modify
or waive the application of this ownership limit with respect to one or more
persons if the Board of Trustees determines that ownership in excess of this
limit will not jeopardize our status as a REIT. In this regard, waivers have
been granted to (i) FUR Investors which can hold up to 33%, (ii) Kensington
Investment Group, Inc. which can hold the number of shares it held prior to the
stock repurchase in connection with the Gotham transaction, and (iii) certain of
the holders of the Series B-1 Cumulative Convertible Redeemable Preferred Shares
of Beneficial Interest, in each case provided that our REIT status will not be
jeopardized and we will not be deemed to be closely-held. The ownership limit,
however, may nevertheless have the effect of inhibiting or impeding a change of
control over us or a tender offer for our Common Shares.
Limits on Changes of Control May Discourage Takeover Attempts that May Be
Beneficial to Holders of Common Shares
Provisions of our Declaration of Trust and bylaws, as well as provisions of the
Code and Ohio law, may:
o delay or prevent our change of control or a tender offer for the
Common Shares, even if those actions might be beneficial to holders
of Common Shares; and
o limit the opportunity for holders of beneficial interest to receive
a potential premium for their shares of Common Shares over
then-prevailing market prices.
Our Declaration of Trust authorizes the Board of Trustees to issue preferred
shares of beneficial interest in series and to establish the rights and
preferences of any series of preferred interests so issued. The issuance of
preferred interests could also have the effect of delaying or preventing our
change in control.
Where Can You Find More Information About Us?
We are subject to the informational requirements of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), which means that we file periodic
reports, including reports on Forms 10-K and 10-Q, and other information with
the Securities and Exchange Commission ("SEC"). As well, we distribute proxy
statements annually and file those reports with the SEC. You can read and copy
these reports, statements and other information at the public reference
facilities maintained by the SEC at Room 1024, 450 Fifth Street, NW, Washington,
D.C. 20549. You may obtain copies of this material for a fee by writing to the
Public Reference Section of the SEC at 450 Fifth Street, NW, Washington, D.C.
20549. You may obtain information about the operation of the Public Reference
Room by calling the SEC at 1-800-SEC-0330. You can also access some of this
information electronically by means of the SEC's website on the Internet at
http://www.sec.gov, which contains reports, proxy and information statements and
other information that we have filed electronically with the SEC. In addition,
you may inspect reports and other information concerning the Company at the
offices of the New York Stock Exchange, which are located at 11 Wall Street, New
York, New York 10005 and can be contacted at 212-656-3000.
20
Copies of our annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and amendments to those reports, as well as Reports
on Forms 3, 4 and 5 regarding officers, trustees or our 10% beneficial owners,
filed or furnished pursuant to Section 13(a), 15(d) or 16(a) of the Securities
Exchange Act of 1934 are available free of charge through our website
(www.firstunion-reit.netas soon as reasonably practicable after it is
electronically filed with, or furnished to, the Securities and Exchange
Commission. We also have made available on our website copies of our Audit
Committee Charter, Compensation Committee Charter, Nominating and Corporate
Governance Committee Charter, Code of Business Conduct and Ethics and Corporate
Governance Guidelines. In the event of any changes to these charters or the code
or guidelines, changed copies will also be made available on our website.
ITEM 2. PROPERTIES.
At December 31, 2004, we held an interest in an office building located in
Indianapolis, Indiana, and 16 triple-net lease properties (the "Net Lease
Properties") consisting of twelve retail buildings, two office buildings, one
mixed-use property and one warehouse building. The following table sets forth
certain information relating to our properties at December 31, 2004:
Ownership of Land (Fee/Land
Property Type/Location Tenant Square Feet(1) Estate/Ground Lease) (2)
- ---------------------- ------ -------------- ------------------------
Mixed Use:
Churchill, PA Viacom, Inc. 1,008,000 Ground Lease
Office:
Plantation, FL BellSouth Communications, Inc. 133,000 Land Estate
Orlando, FL Siemens Real Estate, Inc. 256,000 Ground Lease
Indianapolis, IN Multiple tenants 110,000 Fee (4)
Retail:
Athens, GA The Kroger Co. 52,000 Land Estate
Atlanta, GA The Kroger Co. 61,000 Ground Lease
Louisville, KY The Kroger Co. 47,000 Land Estate
Lafayette, LA The Kroger Co. 46,000 Ground Lease
St Louis, MO The Kroger Co. 46,000 Land Estate
Biloxi, MS The Kroger Co. 51,000 Land Estate
Greensboro, NC The Kroger Co. 47,000 Ground Lease
Knoxville, TN The Kroger Co. 43,000 Land Estate
Memphis, TN The Kroger Co. 47,000 Land Estate
Denton, TX The Kroger Co. 48,000 Land Estate
Seabrook, TX The Kroger Co. 53,000 Land Estate
Sherman, TX (3) The Kroger Co. 46,000 Land Estate
Warehouse:
Jacksonville, FL Winn-Dixie Stores, Inc. 549,000 Fee
(1) The square footage shown represents net rentable area.
(2) Ground lease means that we lease the land on which the improvements are
situate for a fixed period of time. Land estate means that we hold title
to the land for a set period of time and then ownership of the land
reverts to a remainderman at which time we have the right to lease the
land. Fee means that we own fee title to the land. See "The Net Lease
Properties" below for information relating to our ground lease and land
estate interests.
(3) The tenant for the Sherman, Texas property has exercised its purchase
option under the lease pursuant to which it will acquire the property
effective May 1, 2005 for a sale price of $2,018,000.
(4) During 2004, we acquired the remaining ownership in the land. We currently
own 100% of the land.
21
See "Item 7. Management's Discussion and Analysis and Results of Operations" for
information relating to capital improvements at our properties.
Circle Tower, Indianapolis, Indiana
The following table lists the occupancy rates average and effective rental rate
per square foot at the end of each of the last three years for the Indianapolis,
Indiana property.
2004 2003 2002
---- ---- ----
Occupancy 86% 89% 81%
Average Effective Rental Rate(1) $14.50 $14.25 $13.80
(1) Average Effective Rental Rate is equal to the annual base rent divided by
the occupied square feet at December 31.
The following chart sets forth certain information concerning lease expirations
(assuming no renewals) for the Indianapolis, Indiana property as of December 31,
2004:
Number of Aggregate sq. ft.
Tenants whose Covered by 2005 Rental for Percentage of Total
Leases Expire Expiring Leases Leases Expiring Annualized Rental
------------- --------------- --------------- -----------------
2005 9 7,641 $ 49,787 4.2%
2006 11 21,033 $306,495 25.6%
2007 7 7,735 $111,648 9.3%
2008 2 5,458 $ 85,059 7.1%
2009 3 9,935 $149,947 12.5%
2010 3 9,747 $179,159 14.9%
2011-2014 -- -- -- --
2015-Beyond 4 22,204 $316,953 26.4%
The Indianapolis, Indiana property is presently unencumbered by debt.
The realty tax rate and annual realty tax for the Indianapolis, Indiana property
were $3.5514 and $82,398, respectively.
The Net Lease Properties
Pursuant to the terms of the lease agreements with respect to the Net Lease
Properties, the tenant at each property is required to pay all costs associated
with the property including property taxes, ground rent, maintenance costs and
insurance.
The following table sets forth the terms and rental rates for each property:
Property Location Initial Term Expiration Date Initial Term Annual Rent Renewal Terms
- ----------------- ---------------------------- ------------------------ -------------
Plantation, FL 3/29/2010 $3,158,220 Five 5-year
Athens, GA 10/31/2010 $ 220,327 Six 5-year
Atlanta, GA 10/31/2010 $ 259,308 One 6-yr/Two 5-year
Louisville, KY 10/31/2010 $ 197,447 Six 5-year
Lafayette, LA 10/31/2010 $ 178,804 One 7-year/Six 5-year
22
Property Location Initial Term Expiration Date Initial Term Annual Rent Renewal Terms
- ----------------- ---------------------------- ------------------------ -------------
St Louis, MO 10/31/2010 $ 233,038 Six 5-year
Biloxi, MS 10/31/2010 $ 219,480 Six 5-year
Greensboro, NC 10/31/2010 $ 202,532 One 7-year/Five 5-year
Knoxville, TN 10/31/2010 $ 214,395 Six 5-year
Memphis, TN 10/31/2010 $ 220,327 Six 5-year
Denton, TX 10/31/2010 $ 220,327 Six 5-year
Seabrook, TX 10/31/2010 $ 211,854 Six 5-year
Sherman, TX 10/31/2010 $ 203,379 Six 5-year
Orlando, FL 12/31/2010 $4,083,974 Six 5-year
Churchill, PA 12/31/2010 $2,786,151 Six 5-year
Jacksonville, FL 07/01/2011 $1,463,688 One 10-year/Four 5-year
The following table sets forth the terms of the land estates:
Land Estate Lease Term Options Upon
Property Location Expiration Expiration of Land Estate Lease Term Rents Per Annum
- ----------------- ---------- ------------------------- --------------------------
Plantation, FL 02/28/2010 Thirteen 5-yr $261,919 thru 6th term and then fair
market value
Athens, GA 10/31/2010 Fourteen 5-yr $18,600
Louisville, KY 10/31/2010 Fourteen 5-yr $35,400
St Louis, MO 10/31/2010 Fourteen 5-yr $61,400
Biloxi, MS 10/31/2010 Fourteen 5-yr $54,000
Knoxville, TN 10/31/2010 Fourteen 5-yr $97,200
Memphis, TN 10/31/2010 Fourteen 5-yr $60,360
Denton, TX 10/31/2010 Fourteen 5-yr $86,880
Seabrook, TX 10/31/2010 Fourteen 5-yr $58,560
Sherman, TX 10/31/2010 Fourteen 5-yr $80,160
The following table sets forth the terms of the ground leases:
Property Location Current Term Expiration Renewal Terms Lease Term Rents Per Annum (1)
- ----------------- ----------------------- ------------- ------------------------------
Atlanta, GA 09/30/2006 Four 5-yr $30,000 plus 1/2 of 1% of sales greater than $27,805,800
Lafayette, LA 4/30/2008 Eight 5-yr $176,244 increased by 5% for each successive renewal term
Greensboro, NC 12/31/2007 Four 5-yr & Fifteen 1-yr $59,315 increased by approx. $12,000 for each
successive renewal period plus 1% of sales over $35 M
Orlando, FL 12/31/2010 Six 5-yr $2 thru the current term and fair market value thereafter
Churchill, PA 12/31/2010 Six 5-yr $2 thru the current term and fair market value thereafter
(1) The improvements lease requires the tenant to perform all covenants under
the ground lease including the payment of ground rent.
23
The Orlando, Florida and Churchill, Pennsylvania properties secure the Keybank
Loan (as defined below). The following table sets for the terms of the first
mortgages for each of the other properties.
Principal Balance 2005 Debt Prepayment
Property Location at 12/31/04 Maturity Interest Rate Service Terms
- ----------------- ----------- -------- ------------- ------- -----
Plantation, FL $12,624,000 3/29/2010 6.45% $2,762,944 Make Whole Premium
Kroger Properties(1) $12,137,000 11/1/2010 6.71% $2,473,927 Make Whole Premium
Jacksonville, FL(2) $ 7,402,000 7/1/2011 7.5%(2) $1,425,804 No Voluntary Prepayment
(1) Each of the properties leased to Kroger are encumbered by one loan that is
secured by all of the Kroger properties. Balance includes $957,000 debt
associated with the Sherman, Texas property, which is scheduled to be sold
on May 1, 2005.
(2) Debt balance reflects a $600,000 mark-to-market value adjustment to adjust
the interest to approximate market at 7.5% from contractual rates of 9.95%
to 11.05%.
On November 18, 2004, FT-Fin obtained a loan from Keybank National Association
and Newstar CP Funding LLC and other lenders party thereto in the original
principal amount of $27,000,000 (the "Keybank Loan"). On December 8, 2004,
FT-Fin exercised its right to draw an additional $26,000,000 on the Keybank
Loan, thereby increasing the principal amount of the loan to $53,000,000. The
Keybank Loan bears interest at LIBOR plus 450 basis points (which equated to a
rate of 6.89% as of December 31, 2004), has a three-year term, subject to two
one-year extensions which may be exercised upon payment of .25% fee. As a result
of FT-Fin entering into an interest rate swap agreement, FT-Fin effectively
fixed the interest on $40,000,000 at 8.55% per annum. The Keybank Loan is
secured by a first mortgage on the Orlando, Florida and Churchill, Pennsylvania
properties and a pledge of all of the membership interests in FT-Fin.
The loan requires monthly payments of interest only and amortization payments
for each semiannual period ending on June 30 and December 31 during the term
based on a 50% of the excess cash flow (as defined) after first mortgage debt
and interest on this loan.
The loan is prepayable at any time without premium or penalty.
In connection with the loan, the Trust was required to provide standard
hazardous substance and non-recourse carve-out guarantees to the lenders.
24
ITEM 3. LEGAL PROCEEDINGS
Peach Tree Mall Litigation
The Trust, as one plaintiff in a consolidated action composed of numerous
businesses and individuals, has pursued legal action against the State of
California associated with the 1986 flood of Sutter Buttes Center, formerly
Peach Tree Mall. On March 4, 2005, the court approved the settlement of this
matter pursuant to which the State of California has agreed to pay to us
$11,000,000. Payment of the settlement remains subject to legislative
appropriation. It is expected that the appropriation for this settlement will be
incorporated in the State of California's budget for its 2005-2006 fiscal year
at which time we will recognize the settlement as income. In connection with the
settlement, the parties will exchange mutual releases.
Indemnity to Imperial Parking Limited
In 1999, Newcourt Financial Ltd. ("Newcourt") brought a claim in Ontario, Canada
against FUMI and Imperial Parking Limited, a then subsidiary of FUMI, alleging a
breach of a contract between FUMI and Newcourt's predecessors-in-interest,
Oracle Credit Corporation and Oracle Corporation Canada, Inc. The Trust's
affiliate and Imperial Parking Limited brought a separate action in British
Columbia, Canada against Newcourt, Oracle Credit Corporation and Oracle
Corporation Canada claiming, among other things, that the contract at issue was
not properly authorized by the Trust's Board of Trustees and the Imperial
Parking Limited's Board of Directors. On March 27, 2000, in connection with the
spin-off of Imperial Parking Corp. of Canada ("Imperial Parking") (the successor
in interest to Imperial Parking Limited) to the Trust's shareholders, the Trust
gave an indemnity to Imperial Parking Corporation in respect to damages arising
from the outstanding actions.
On March 1, 2005 we settled all claims involved in this matter by paying
$800,000 to Newcourt which was fully reserved at December 31, 2004.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
25
PART II
ITEM 5. MARKET FOR TRUST'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
MARKET PRICE AND DIVIDEND RECORD
Dividends
High Low Declared
---- --- --------
2004 Quarters Ended
December 31 $4.29 $3.06 $ --
September 30 $3.31 $2.85 --
June 30 $3.46 $2.66 --
March 31 $3.80 $2.16 --
---------
Total $ --
=========
2003 Quarters Ended
December 31 $2.32 $1.76 $ --
September 30 1.89 1.72 --
June 30 1.89 1.65 --
March 31 1.78 1.47 --
---------
Total $ --
=========
Our shares are traded on the New York Stock Exchange (Ticker Symbol: FUR). As of
December 31, 2004, there were 1,863 record holders of the Common Shares. We
estimate the total number of beneficial owners at approximately 4,200.
During 2004, we were not required to make any minimum distributions on our
Common Shares in order to maintain our REIT status.
26
ITEM 6. SELECTED FINANCIAL DATA.
These Selected Financial Data should be read in conjunction with the Combined
Financial Statements and Notes thereto.
(in thousands, except per-share data and footnotes)
For the Years Ended December 31
-------------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Operating Results
Revenues $ 8,325 $ 2,427 $ 3,204 $ 31,391 $ 67,265
========= ========= ========= ========= =========
Income (loss) from continuing operations $ 1,936 $ (6,575) $ (5,397) $ (14,618) $ (35,847)
Gain on sale -- -- -- 30,096 76,114
Income from discontinued operations (1) 1 ,249 619 365 -- --
Gain on disposal of discontinued
operations 19,267 54 -- -- --
--------- --------- --------- --------- ---------
Net income (loss) 22,452 (5,902) (5,032) 15,478 40,267
Preferred dividend (2,064) (2,064) (2,067) (2,068) (2,450)
--------- --------- --------- --------- ---------
Net income (loss) applicable to Common
Shares of Beneficial Interest $ 20,388 $ (7,966) $ (7,099) $ 13,410 $ 37,817
========= ========= ========= ========= =========
Dividends declared for Common Shares
of Beneficial Interest $ -- $ -- $ 6,962 $ -- $ 6,583
========= ========= ========= ========= =========
Per Common Share of Beneficial Interest,
basic
Income (loss) from continuing operations,
basic $ -- $ (0.28) $ (0.21) $ 0.37 $ 0.92
Income from discontinued operations,
basic(1) 0.66 0.02 0.01 -- --
--------- --------- --------- --------- ---------
Net income (loss) applicable to Common
Shares of Beneficial Interest, basic $ 0.66 $ (0.26) $ (0.20) $ 0.37 $ 0.92
========= ========= ========= ========= =========
Loss per Common Share of Beneficial
Interest, diluted $ -- $ (0.28) $ (0.21) $ 0.37 $ 0.85
Income from discontinued operations,
diluted 0.66 0.02 0.01 -- --
--------- --------- --------- --------- ---------
Net income (loss) applicable to Common
Shares of Beneficial Interest, diluted $ 0.66 $ (0.26) $ (0.20) $ 0.37 $ 0.85
========= ========= ========= ========= =========
Dividends declared per Common Share of
Beneficial Interest $ -- $ -- $ 0.20 $ -- $ 1.124
========= ========= ========= ========= =========
27
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Financial Position at Year End
Total assets $ 289,968 $ 146,838 $ 171,825 $ 185,669 $ 462,598
Long-term obligations (2) 160,965 41,457 54,319 54,616 171,310
Total equity 120,142 96,720 108,107 122,168 120,383
(1) The results of Imperial Parking Limited, VenTek, Park Plaza and the
Sherman, Texas property have been classified as discontinued operations
for 2002, 2003 and 2004.
(2) Included in long-term obligations are senior notes, mortgage loans and
loans payable.
28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Overview
Rather than focus on a particular type of real estate asset or a specific
geographic sector, our investments will be based, at least for the foreseeable
future, on our assessment that a potential investment is significantly
undervalued or presents an opportunity to outperform the marketplace.
Additionally, we will make investments in assets believed to be underperforming
and in which we believe, through an infusion of capital and improved management,
an appropriate return on investment can be realized. Consequently, with certain
limitations, we will seek to invest in or acquire most types of real estate
assets or securities. Moreover, except as limited by the restrictions placed on
us in order to meet our requirements to maintain REIT status, our investment
decisions will not be materially affected by the nature of an investment or
where that investment falls in an entity's capital structure. We will acquire
entities that own real estate, invest directly in the equity of a real estate
asset exclusively or through a venture, acquire preferred equity, mezzanine debt
or first mortgage debt of a real estate asset to the extent we believe the
ownership of the underlying real estate would be consistent with our investment
strategy. In general, it is not expected that we will invest in an entity in
which we do not own 100% of the equity unless we control, have the means to
acquire control of the investment or have a mechanism in place to exit the
investment for a price consistent with fair value. In order to fund future
acquisitions, we will utilize our cash reserves, obtain debt financing and/or
sell additional equity.
In view of the foregoing, our near-term investment strategy will be to identify
and invest in discrete real estate investments consistent with the foregoing
criteria. As appropriate investment opportunities arise, we will aggressively
pursue such opportunities. For the long-term, as investments mature in value to
the point where we are unlikely to achieve better than a market return on their
then enhanced value, it is likely we will exit the investment and seek to
redeploy the capital to higher yielding opportunities. Accordingly, our
Statements of Operations and Comprehensive Income include both income from
continuing operations and discontinued operations.
Investments and dispositions made by us during the year ended December 31, 2004
included the following:
Atlantic Realty
During 2004, we acquired 267,000 shares in Atlantic Realty Trust ("Atlantic
Realty") (NASD:ATLRS) representing 7.5% of the outstanding shares in Atlantic
Realty. On January 12, 2004, we contacted Atlantic Realty to discuss a possible
business combination with Atlantic Realty. Our proposal was ultimately rejected
by Atlantic Realty in May 2004 as Atlantic Realty elected to market its
remaining property for sale. On May 19, 2004, Atlantic Realty paid a dividend of
$3.25 per share to holders of record on May 10, 2004. Following the
distribution, we began selling our shares in Atlantic Realty and, effective
August 3, 2004, we had sold our entire interest in Atlantic Realty and realized
a total gain of $1,089,000.
NorthStar Loan
On March 3, 2004, we acquired from Bank of America, N.A. a loan receivable from
NorthStar Partnership, L.P. ("NorthStar") in the principal amount of
approximately $16,944,000 (the "NorthStar Loan"). The NorthStar Loan was
evidenced by a Credit Agreement, Promissory Note and collateral documents. The
NorthStar Loan was secured by a first priority lien on all or a portion of
NorthStar's interest in Morgans Hotel Group LLC, Emmes & Company LLC and
Presidio Capital Investment Company, LLC as well as certain other assets of
NorthStar. NorthStar prepaid the loan in its entirety on August 4, 2004. Due to
the nature and amount of the NorthStar Loan, in order to comply with the rules
applicable to REITs, portions of the NorthStar Loan were held by FT-TRS Loan
LLC, our taxable REIT subsidiary. Accordingly, we incurred a federal and state
income tax expense of $49,000 during 2004 in connection with this asset.
29
West Side Loan
On May 19, 2004, we purchased a 25% interest in a loan, secured by a first
mortgage on a commercial property located in New York City's Chelsea area (the
"West Side Loan"). The total outstanding principal balance of the loan is
$10,708,000 of which our share was $2,677,000. The purchase price for the
participation interest was the face amount of our share of the loan. The loan
bears interest at LIBOR plus 9.5% per annum and is scheduled to mature in April
2009. The principal balance outstanding on the loan and interest rate as of
December 31, 2004 were $2,532,000 and 11.8125%, respectively. In November 2004,
the borrower under the West Side Loan failed to make its scheduled debt service
payment. As a result of this default, a forbearance agreement was entered into
with the borrower that provided, in part, that the lender would agree to forbear
from exercising its remedies so long as the borrower makes interest only
payments along with specified payments to reserve accounts through June 30, 2005
and satisfies the loan by June 30, 2005.
Park Plaza Mall
On June 22, 2004, we sold Park Plaza Mall property located in Little Rock,
Arkansas for a gross sales price of $77,500,000 to a subsidiary of CBL &
Associates Properties, Inc., an unaffiliated third party. In connection with
this transaction, the purchaser assumed the existing indebtedness encumbering
the property of approximately $41,313,000. Accordingly, net proceeds to us after
giving effect to the loan assumption and closing costs were approximately
$33,480,000. We deposited the proceeds with a qualified intermediary, and these
proceeds were used for the portfolio acquisition (as described below) in
connection with a "like kind" exchange pursuant to Section 1031 of the Code. We
recognized a gain on sale of $19,267,000 for financial reporting purposes.
Sizeler Property Investors, Inc.
Beginning in August 2004, we began acquiring shares of common stock in Sizeler
Property Investors, Inc. ("Sizeler") (NYSE:SIZ), a real estate investment trust
that primarily is in the business of owning and operating income producing
retail shopping centers and apartment communities in the southeastern United
States. As of March 1, 2005, we had acquired a total of 1,310,300 shares of
common stock of Sizeler which represents approximately 9.9% of all of the
outstanding shares of common stock of Sizeler for an aggregate purchase price of
approximately $12,173,000. On December 21, 2004, we sent a letter to Sizeler
advising Sizeler of our intention to nominate a slate of three directors,
consisting of Michael L. Ashner, Peter Braverman and Steven Zalkind, for
election at Sizeler's 2005 annual meeting of stockholders. On January 19, 2005,
we filed with the Securities and Exchange Commission a preliminary proxy
statement in connection with our intention to nominate a slate of directors at
Sizeler's 2005 annual meeting of stockholders.
West 38th Street Loan
On August 4, 2004, we acquired a 50% interest in a $20,000,000 first mortgage
loan secured by a property located at 63 West 38th Street, New York, New York
("West 38th Street Loan"). The loan bears interest at LIBOR plus 400 basis
points (with a minimum rate of 5.42%), has a three-year term and requires
payments of interest only. We indirectly obtained $7,000,000 of financing in
connection with this investment that bears interest at LIBOR plus 175 basis
points and requires payments of interest only. The principal balance outstanding
on the loan and the interest rate as of December 31, 2004 were $3,000,000 and
6.28%, respectively. This loan was repaid in full on January 18, 2005.
Clearwater Loan
On November 23, 2004, we acquired a first mortgage loan secured by a Wingate
Hotel and the land on which it is situated located in Clearwater, Florida. The
principal amount of the loan at closing was $2,785,000. The loan bears interest
at 10% per annum, requires monthly payments of $27,179 and is scheduled to
mature on February 15, 2007 at which time the remaining amount due on the loan
is scheduled to be $2,689,000. The outstanding principal balance due on the loan
at December 31, 2004 was $2,782,000.
30
Disposition of VenTek
On December 31, 2004, VenTek ceased all of its operations and transferred its
remaining assets to VenTek Transit, Inc. ("Transit"), an entity owned by
VenTek's executive employees. Under the agreement, Transit agreed to make a
nominal payment to VenTek and is obligated to pay to VenTek a royalty equal to
5% of its annual gross revenues for each of the next five years. It is not
expected that such payments will be material to our operations.
Portfolio Acquisition
On November 18, 2004, FT-Fin Acquisition LLC ("FT-Fin"), a Delaware limited
liability company wholly-owned by us, acquired from Finova Capital Corporation,
an unaffiliated third party, 16 triple-net leased properties containing
approximately 2,500,000 gross square feet. The aggregate purchase price for the
properties was approximately $92,076,000 including closing adjustments and
inclusive of the assumption of approximately $32,401,000 of existing first
mortgage debt and accrued interest payable on certain of the properties.
Additionally, FT-Fin acquired $1,674,000 of rent receivables and incurred
$711,000 of debt costs. This acquisition was funded from the proceeds of a
$27,000,000 loan as well as $33,480,000 in net proceeds realized from the sale
of the Park Plaza property in June 2004 which were being held by a qualified
intermediary to enable the Trust to acquire the properties in a tax-free
exchange pursuant to Section 1031 of the Code and cash on hand of $1,580,000.
The Trust has allocated the purchase price to real estate and lease intangibles.
Circle Tower
During 2004, we completed the acquisition of a 100% interest in the land
underlying our Circle Tower property located in Indianapolis, Indiana for an
aggregate purchase price of $1,493,000. Accordingly, we now hold a 100% interest
in the land, which was partially owned by third parties and ground leased to us,
and the improvements that comprise the Circle Tower property.
5400 Westheimer Holding L.P.
On November 22, 2004, we acquired a 1% general partner interest, and a third
party (the "Limited Partner") acquired a 99% limited partnership interest, in
5400 Westheimer Holding L.P. ("5400 Westheimer"). 5400 Westheimer, in turn,
acquired an indirect 100% ownership interest in an entity that holds title to
real property located at 5400 Westheimer Court, Houston, Texas (the "Houston
Property"). In order to facilitate this acquisition, we made a $7,533,000 loan
(the "5400 Loan") to 5400 Westheimer. The 5400 Loan bore interest at 8% per
annum.
Following the acquisition of the Houston Property, 5400 Westheimer made an
offering to the partners of the Limited Partner that enabled them to have their
interest in the Limited Partner redeemed in exchange for a distribution of an
equivalent interest in 5400 Westheimer and a $321,000 capital contribution to
5400 Westheimer. In connection with the offering, we offered to lend to each
participating partner an amount equal to 2/3 of the total capital contribution
required by such partner ($214,000 per investment unit.)
The offering was consummated on January 3, 2005 at which time the 5400 Loan,
including accrued interest, was fully satisfied by the payment of $7,040,000 and
the delivery to us of an additional 7% limited partner interest in 5400
Westheimer, thereby resulting in us holding an aggregate 8% interest in 5400
Westheimer. In addition, partners who participated in the offering and who
acquired an aggregate of 25% interest in 5400 Westheimer elected to obtain loans
to satisfy their capital contribution, which loans aggregated $1,338,000 and
which are secured by the 25% interest held by such limited partners in 5400
Westheimer. The loans bear interest at 12% per annum and require quarterly
payments of interest only. Aggregate principal payments of $669,000 are required
to be made on each January 5, 2006 and January 5, 2007, the maturity date. If
all of the loans were to default, we would acquire an additional 25% interest in
the Houston Property.
For financial reporting purposes, the Houston Property is classified as of
December 31, 2004 as real estate held for syndication and reflects 100% of 5400
Westheimer's assets and liabilities.
31
Liquidity and Capital Resources
General
We declared a dividend of $516,000 ($0.525 per share) to Series A Cumulative
Preferred Shareholders (the "Preferred Shareholders") in the fourth quarter of
2004. The dividend was paid January 31, 2005 to shareholders of record at the
close of business on December 31, 2004. In addition, we paid a dividend of
$516,000 ($0.525 per share) to the Preferred Shareholders in each of the first,
second and third quarters. During 2004, the Trust was not required to make any
distributions to its common shareholders to maintain its REIT status.
At December 31, 2004, we had $82,559,000 in cash and cash equivalents, which
consisted of $3,799,000 in cash and $78,760,000 in cash equivalents with
maturities of less than 90 days. U.S. Treasury Bills and Federal Home Loan Bank
Discount Notes are classified as cash equivalents. The average yield for the
year ended December 31, 2004 was 1.44%. As a result of the issuance of Common
Shares and Series B-1 Cumulative Convertible Redeemable Preferred Shares of
Beneficial Interest in 2005, we have approximately $90,200,000 in additional
funds available for investments.
The level of liquidity based upon cash and cash equivalents experienced a
$67,635,000 increase at December 31, 2004 as compared to December 31, 2003. The
increase was due to net cash provided by operating activities of $3,987,000,
cash provided by investing activities of $14,133,000 and cash provided by
financing activities of $49,515,000. Cash provided by investing activities
consisted of $68,900,000 of proceeds from investments held to maturity,
$11,806,000 of proceeds from real estate security sales, $16,150,000 of
collection of loans receivable, $33,635,000 of proceeds from the sale of real
estate, $2,818,000 from the release of restricted cash and $15,000 from the sale
of VenTek equipment. Cash used in investing activities consisted of $61,916,000
for purchased real estate, $23,094,000 of purchases of real estate securities
held for sale, $24,540,000 of purchases of loans, $7,613,000 of investments in
real estate held for syndication, $1,493,000 of land acquisition costs at Circle
Tower, and $535,000 of capital improvements.
Cash provided by financing activities consisted of $53,000,000 of new loan
proceeds partially offset by $2,064,000 of preferred dividend payments,
$1,196,000 of debt issuance costs, $205,000 of mortgage loans repayment and
$20,000 for the repayment of loans payable.
A summary of our contractual obligations is as follows (in thousands):
Payments Due by Period
----------------------------------------------------------------------
Contractual Obligations Total Less than 1 Year 2-3 Years 4-5 Years After 5 Years
- ----------------------- ----- ---------------- --------- --------- -------------
Mortgage Loan Payable $84,206 $ 5,827 $61,479 $11,253 $ 5,647
Ground Lease Obligations (1) -- -- -- -- --
Advisors' Fee (2) -- (3) 2,317 4,634 4,634 -- (3)
------- ------- ------- ------- -------
$84,206 $ 8,144 $66,113 $15,887 $ 5,647
======= ======= ======= ======= =======
Commitments (4) -- -- -- -- --
Liabilities of Real Estate Held for
Syndication (5) $76,762 $76,762 $ -- $ -- $ --
======= ======= ======= ======= =======
(1) The underlying lease agreements require the tenant pay the ground rent
expense.
(2) Based upon the terms of the Advisory Agreement and assets in place at
March 1, 2005, with no effect given to the incentive fee.
(3) No amounts have been included due to the automatic annual renewal
provisions of the Advisory Agreement.
(4) Excludes pending acquisitions that are subject to due diligence.
(5) Represents the debt encumbering the Houston Property. Effective January 3,
2005, upon completion of an offering, substantially all of our commitment
obligations related to this asset were relieved.
32
We carry comprehensive liability and all risk property insurance (i) fire; (ii)
flood; (iii) extended coverage; (iv) "acts of terrorism," as defined in the
Terrorism Risk Insurance Act of 2002, and (v) rental loss insurance with respect
to our assets. In addition, under the terms of the triple-net tenant leases, the
tenant is obligated to maintain adequate insurance coverage.
Our debt instruments, consisting of mortgage loans secured by our properties
(which are generally non-recourse to us) contain customary covenants requiring
us to maintain insurance. Although we believe that we have adequate insurance
coverage under these agreements, we may not be able to obtain an equivalent
amount of coverage at reasonable costs in the future. Further, if lenders insist
on greater coverage than we are able to obtain, it could adversely affect our
ability to finance and/or refinance our properties and expand our portfolio.
Results of Operations - 2004 Versus 2003
Income (Loss) from Continuing Operations
We operate in three business segments: (i) ownership of real estate operating
properties, (ii) ownership of loans receivable and (iii) ownership and trading
of real estate securities. (See Business Segments - Footnote 18 to the financial
statements located in Item 8.) The income from continuing operations increased
by $8,511,000 to $1,936,000 for the year ended December 31, 2004 from a loss of
$6,575,000 for the year ended December 31, 2003. As more fully described below,
this increase is attributable to an increase in total revenues of $3,491,000, an
increase in other income of $2,407,000 and a decrease in total expenses of
$2,613,000.
Rents
Rental income increased by $1,801,000 or approximately 113% to $3,390,000 for
the year ended December 31, 2004 from $1,589,000 for the year ended December 31,
2003. The increase was primarily due to the acquisition of the net lease
properties by our operating properties business segment which contributed
$1,720,000 of revenue and an increase in revenues at Circle Tower of $81,000.
Interest and Dividends
Interest income increased by $1,690,000 or approximately 201% to $2,528,000 for
the year ended December 31, 2004 from $838,000 for the year ended December 31,
2003. The increase was the result of income from loans acquired during 2004 of
$1,373,000 in our loan business segment, dividends on real estate securities of
$139,000 in our real estate securities business segment, higher amounts invested
in government securities and higher interest rates on the invested cash
balances.
Property Operating
Property operating expenses decreased by $63,000 or approximately 7% to $786,000
for the year ended December 31, 2004 from $849,000 for the year ended December
31, 2003. The decrease was due to a decrease in professional fees of $55,000
associated with real estate tax appeals in 2003.
Real Estate Taxes
The $102,000 increase in real estate tax expense resulted from a refund received
in 2003 for taxes previously paid by us with respect to the Mountaineer Mall.
Exclusive of this refund, real estate tax expense remained constant.
Depreciation and Amortization
Depreciation and amortization expense increased by $281,000 or approximately 62%
to $735,000 for the year ended December 31, 2004 compared to $454,000 for the
year ended December 31, 2003. The increase was due to the newly acquired net
lease properties.
33
Interest Expense
Interest expense decreased by $164,000 or 19% to $698,000 for the year ended
December 31, 2004 compared to $862,000 for the year ended December 31, 2003. The
decrease was due primarily to the savings of $835,000 in interest expense as a
result of the repayment in full of the senior notes on October 1, 2003,
partially offset by interest expense of $686,000 on new borrowings in November
and December 2004.
General and Administrative Expenses
General and administrative expenses decreased by $2,769,000 or approximately 40%
to $4,104,000 for the year ended December 31, 2004 from $6,873,000 for the year
ended December 31, 2003. The primary cause of this decrease was the 2003
expenses related to the Gotham transaction of $2,856,000 and a $700,000 expense
in 2003 related to contingency reserves. Additional savings in legal, accounting
and other professional fees of $868,000 were offset by an increase in management
fees of $1,431,000.
Insurance Recoveries
Insurance recoveries amounted to $1,254,000 for the year ended December 31,
2004. The insurance proceeds were recovered under the director's and officer's
policy for reimbursement of legal fees expended in connection with the preferred
shareholder litigation. We received $696,000 during 2004 and have included
$558,000 in accounts receivable and prepaids at December 31, 2004.
Gain on Sale of Securities Available for Sale
The gain on sale of securities available for sale consists primarily of the gain
on sale of Atlantic Realty stock.
Discontinued Operations
During 2004, we sold the Park Plaza Mall and VenTek for a combined sales price
of $77,515,000. We recognized a net gain on disposal of these properties of
$19,267,000. The sale and operations of these assets have been recorded as
discontinued operations in accordance with the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets."
Results of Operations - 2003 Versus 2002
Income (Loss) from Continuing Operations
The loss from continuing operations increased by $1,178,000 to $6,575,000 for
the year ended December 31, 2003 from $5,397,000 for the year ended December 31,
2002. As more fully described below, this increase is attributable to a decrease
in total revenues of $777,000 and an increase in total expenses of $401,000.
Rents
Rental income increased by $44,000 or approximately 3% to $1,589,000 for the
year ended December 31, 2003 from $1,545,000 for the year ended December 31,
2002. The increase was primarily due to occupancy rates increased to 89% from
81% and rental rates increased to $14.25 from $13.80 per square foot at Circle
Tower.
Interest and Dividends
Interest income decreased by $821,000 or approximately 49% to $838,000 for the
year ended December 31, 2003 from $1,659,000 for the year ended December 31,
2002. The decrease was the result of lower amounts invested and lower interest
rates between the periods on the invested cash balances.
34
Property Operating
Property operating expenses decreased by $156,000 or approximately 16% to
$849,000 for the year ended December 31, 2003 from $1,005,000 for the year ended
December 31, 2002. The decrease was primarily due to the inclusion in 2002 of a
$209,000 one-time maintenance charge.
Real Estate Taxes
Real estate taxes decreased by $114,000 due to a refund of taxes paid in a
previous year.
Depreciation and Amortization
Depreciation and amortization expense increased by $50,000 or approximately 12%
to $454,000 for the year ended December 31, 2003 compared to $404,000 for the
year ended December 31, 2002. The increase was due to an increase in building
improvements.
Interest Expense
Interest expense decreased by $532,000 or approximately 38% to $862,000 for the
year ended December 31, 2003 compared to $1,394,000 for the year ended December
31, 2002. The decrease was due to the repayment in full of the senior notes on
October 1, 2003.
General and Administrative Expenses
General and administrative expenses increased by $1,153,000 or approximately 20%
to $6,873,000 for the year ended December 31, 2003 compared to $5,720,000 for
the year ended December 31, 2002. Included in general and administrative
expenses for the years ended December 31, 2003 and 2002 are approximately
$2,856,000 and $2,577,000, respectively, of transaction costs related to the
Gotham proposal. Such costs for 2003 included the $2,400,000 termination fee
paid to Gotham Partners. During the years ended December 31, 2003 and 2002,
$449,000 and $800,000, respectively, of costs related to the shareholder
lawsuits were included in general and administrative expense. Also included in
general and administrative expenses were $394,000 and $789,000 in 2003 and 2002,
respectively, to a firm that was providing management services to VenTek. During
the year ended December 31, 2003, we accrued for financial reporting purposes a
$700,000 contingency. In addition, there was an increase in insurance premiums
of $260,000, trustee fees of $100,000 and legal fees of $138,000.
Discontinued Operations
The operations of the Park Plaza property and VenTek were sold or ceased in 2004
and have been recorded as discontinued operations in accordance with the
provisions of SFAS No. 144. During 2003, VenTek's parking equipment business was
sold. A net gain on disposal of these properties of $54,000 was recognized.
Application of Critical Accounting Policies
Our most critical accounting policy relates to the evaluation of the carrying
value of real estate. We evaluate the need for an impairment loss on real estate
assets when indicators of impairment are present and the undiscounted cash flows
are not sufficient to recover the asset's carrying amount. The impairment loss
is measured by comparing the fair value of the asset to its carrying amount.
In addition, the Trust's loans are periodically evaluated for possible
impairment to establish a loan loss reserve, if necessary. If a loan is
experiencing difficulties, we work with the borrower to try to resolve the
issues, which could include extending the loan term, making additional advances,
or reducing required payments. If, in our judgment, it is determined that it is
probable we will not receive all contractually required payments when they are
due, the loan would be deemed impaired, and a loan loss reserve established. As
of December 31, 2004, we have determined that no loan loss reserve is necessary.
35
Finally, estimates are used when accounting for the allowance for contingent
liabilities, among others. These estimates are susceptible to change and actual
results could differ from these estimates.
Recently Issued Accounting Standards
There are no accounting standards or interpretations that have been issued but
not yet adopted by the Trust that we expect will have a material impact on the
financial statements.
36
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK
Interest Rate Risk
We have exposure to fluctuations in market interest rates. Market interest rates
are highly sensitive to many factors beyond our control. Various financial
vehicles exist which would allow management to mitigate the impact of interest
rate fluctuations on our cash flows and earnings.
At December 31, 2004, we had one loan payable that had a variable interest rate.
The loan payable had an outstanding balance of $53,000,000 at December 31, 2004,
was obtained in November 2004 and has a three-year term. Interest on the
outstanding balance accrues at the LIBOR rate plus 450 basis points. As of
December 31, 2004, we have an interest rate swap with a $40,000,000 notional
amount that effectively converted the interest rate on that portion of principal
from a floating LIBOR plus 4.5% (6.89% at December 31, 2004) to a fixed rate of
8.55%.
The following table shows what the effect of a change in the LIBOR rate will
have on annual interest expense.
Change in LIBOR
----------------------------------------
1% 2% 3%
-- -- --
Additional interest expense $130,000 $260,000 $390,000
The fair value of the Trust's debt, based on discounted cash flows at current
market conditions and interest rates, approximates the aggregate carrying value
of the debt at December 31, 2004.
37
ITEM 8. FINANCIAL STATEMENTS
Page
----
Reports of Independent Registered Public Accounting Firms..................39&40
Combined Balance Sheets as of December 31, 2004 and 2003......................41
Combined Statements of Operations and Comprehensive Income
for the Years Ended December 31, 2004, 2003 and 2002...................42
Combined Statements of Shareholders' Equity
for the Years Ended December 31, 2004, 2003 and 2002...................43
Combined Statements of Cash Flows
for the Years Ended December 31, 2004, 2003 and 2002...................44
Notes to Combined Financial Statements.....................................45-63
38
Report of Independent Registered Public Accounting Firm
To the Board of Trustees and Shareholders of
First Union Real Estate Equity and Mortgage Investments:
We have audited the accompanying combined balance sheet of First Union Real
Estate Equity and Mortgage Investments and First Union Management, Inc. and
subsidiaries (the "Company") as of December 31, 2004, and the related combined
statements of operations and comprehensive income, shareholders' equity, and
cash flows for the year then ended. Our audit also included the 2004 information
included in the financial statement schedule listed in the Index at Item 15.
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements and financial statement schedule based on
our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the combined financial position of First Union Real Estate Equity and
Mortgage Investments and First Union Management, Inc. and subsidiaries at
December 31, 2004, and the combined results of their operations and their
combined cash flows for the year ended December 31, 2004, in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, the 2004 information included in the financial statement
schedule, when considered in relation to the basic 2004 combined financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
DELOITTE & TOUCHE LLP
Boston, MA
March 16, 2005
39
Report of Independent Registered Public Accounting Firm
The Board of Trustees and Shareholders
First Union Real Estate Equity and Mortgage Investments:
We have audited the accompanying combined balance sheet of First Union Real
Estate Equity and Mortgage Investments and First Union Management, Inc. and
subsidiaries (the "Company") as of December 31, 2003, and the related combined
statements of operations and comprehensive income, shareholders' equity, and
cash flows for each of the years in the two-year period ended December 31, 2003.
These combined financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these combined
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 combined financial statements referred to above present
fairly, in all material respects, the combined financial position of First Union
Real Estate Equity and Mortgage Investments and First Union Management, Inc. and
subsidiaries as of December 31, 2003, and the results of their operations and
their cash flows for each of the years in the two-year period ended December 31,
2003, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
New York, New York
March 4, 2004, except for the effects of the
discontinued operations described in notes 2,
8, and 18 which are as of March 16, 2005
40
FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
COMBINED BALANCE SHEETS
(In thousands, except per-share data)
December 31,
2004 2003
--------- ---------
ASSETS
Investments in real estate, at cost
Land $ 3,929 $ 6,086
Buildings and improvements 87,599 65,897
--------- ---------
91,528 71,983
Less - accumulated depreciation (4,750) (14,102)
--------- ---------
Investments in real estate, net 86,778 57,881
Real estate held for sale 1,379 --
Real estate held for syndication 84,375 --
Cash and cash equivalents 82,559 14,924
Restricted cash -- 2,818
Loans receivable 8,390 --
Accounts receivable and prepayments, net of allowance
of $57 and $223, respectively 3,391 1,291
Investments held to maturity -- 68,900
Real estate securities available for sale 14,734 86
Lease intangibles, net 7,205 --
Inventory, net of reserve -- 591
Unamortized debt issue costs, net 1,157 214
Other -- 133
--------- ---------
TOTAL ASSETS $ 289,968 $ 146,838
========= =========
LIABILITIES
Mortgage loans payable $ 84,206 $ 41,457
Liabilities of real estate held for syndication 76,762 --
Loan payable 44 64
Accounts payable and accrued liabilities 5,615 7,654
Dividends payable 516 516
Deferred items 68 427
Liabilities of real estate held for sale and discontinued operations 2,615 --
--------- ---------
Total liabilities 169,826 50,118
--------- ---------
SHAREHOLDERS' EQUITY
Convertible Preferred Shares of Beneficial Interest, $25 per share
liquidation preference, 2,300,000 shares authorized, 983,082
outstanding 23,131 23,131
Shares of Beneficial Interest, $1 par, unlimited authorized, 31,058,913
outstanding 31,059 31,059
Additional paid-in capital 207,968 207,968
Accumulated other comprehensive income 3,034 --
Accumulated distributions in excess of net income (145,050) (165,438)
--------- ---------
Total shareholders' equity 120,142 96,720
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 289,968 $ 146,838
========= =========
See Notes to Combined Financial Statements.
41
FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
COMBINED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(In thousands, except per -share data)
Years Ended December 31,
--------------------------------------
2004 2003 2002
-------- -------- --------
Revenues
Rents $ 3,390 $ 1,589 $ 1,545
Interest and dividends 2,528 838 1,659
-------- -------- --------
5,918 2,427 3,204
-------- -------- --------
Expenses
Property operating 786 849 1,005
Real estate taxes 66 (36) 78
Depreciation and amortization 735 454 404
Interest 698 862 1,394
General and administrative 4,104 6,873 5,720
-------- -------- --------
6,389 9,002 8,601
-------- -------- --------
Other income
Insurance recoveries 1,254 -- --
Gain on sale of securities available-for-sale 1,153 -- --
-------- -------- --------
2,407 -- --
-------- -------- --------
Income (loss) from continuing operations 1,936 (6,575) (5,397)
-------- -------- --------
Discontinued operations:
Income from discontinued operations 1,249 619 365
Gain on sale of discontinued operations 19,267 54 --
-------- -------- --------
Income from discontinued operations 20,516 673 365
-------- -------- --------
Net income (loss) 22,452 (5,902) (5,032)
Preferred dividend (2,064) (2,064) (2,067)
-------- -------- --------
Net income (loss) applicable to Common Shares
of Beneficial Interest $ 20,388 $ (7,966) $ (7,099)
======== ======== ========
Other comprehensive income
Net income (loss) $ 22,452 $ (5,902) $ (5,032)
Unrealized gain on available-for-sale securities 3,359 -- --
Unrealized loss on interest rate derivative (325) -- --
-------- -------- --------
Comprehensive income (loss) $ 25,486 $ (5,902) $ (5,032)
======== ======== ========
Per share data - Basic:
Loss from continuing operations, net of preferred dividend $ -- $ (0.28) $ (0.21)
Income from discontinued operations 0.66 0.02 0.01
-------- -------- --------
Net income (loss) applicable to Common Shares
of Beneficial Interest $ 0.66 $ (0.26) $ (0.20)
======== ======== ========
Diluted:
Income (loss) from continuing operations, net
of preferred dividend $ -- $ (0.28) $ (0.21)
Income from discontinued operations 0.66 0.02 0.01
-------- -------- --------
Net income (loss) applicable to Common Shares
of Beneficial Interest $ 0.66 $ (0.26) $ (0.20)
======== ======== ========
Basic Weighted-Average Common Shares 31,059 30,885 34,807
======== ======== ========
Diluted Weighted-Average Common Shares 31,059 30,885 34,807
======== ======== ========
See Notes to Combined Financial Statements.
42
FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(In thousands, except per-share amounts)
Preferred Shares of Shares of Beneficial Accumulated Accumulated
Beneficial Interest Interest Additional Distributions Other
Paid-In in Excess of Comprehensive
Shares Amount Shares Amount Capital Net Income Income Total
--------- --------- --------- --------- ---------- ------------- ------------- ---------
Balance, January 1, 2002 985 $ 23,171 34,806 $ 34,806 $ 207,602 $(143,411) $ -- $ 122,168
Net loss before preferred
dividend -- -- -- -- -- (5,032) -- (5,032)
Dividends paid on shares --
of beneficial interest
($0.20 per share) -- -- -- -- -- (6,962) -- (6,962)
Dividends paid or accrued
on preferred shares
($2.10 per share) -- -- -- -- -- (2,067) -- (2,067)
Conversion of preferred
shares (2) (40) 8 8 32 -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Balance, December 31, 2002 983 23,131 34,814 34,814 207,634 (157,472) -- 108,107
Net loss before preferred
dividend -- -- -- -- -- (5,902) -- (5,902)
Dividends paid or accrued
on preferred shares
($2.10 per share) -- -- -- -- -- (2,064) -- (2,064)
Shares issued -- -- 5,000 5,000 8,000 -- -- 13,000
Shares repurchased -- -- (8,755) (8,755) (7,666) -- -- (16,421)
--------- --------- --------- --------- --------- --------- --------- ---------
Balance, December 31, 2003 983 23,131 31,059 31,059 207,968 (165,438) -- 96,720
Net income before
preferred dividend -- -- -- -- -- 22,452 -- 22,452
Dividends paid or accrued
on preferred shares
($2.10 per share) -- -- -- -- -- (2,064) -- (2,064)
Unrealized gain on real
estate securities
available for sale -- -- -- -- -- -- 3,359 3,359
Unrealized loss on interest
rate derivative -- -- -- -- -- -- (325) (325)
--------- --------- --------- --------- --------- --------- --------- ---------
Balance, December 31, 2004 983 $ 23,131 31,059 $ 31,059 $ 207,968 $(145,050) $ 3,034 $ 120,142
========= ========= ========= ========= ========= ========= ========= =========
See Notes to Combined Financial Statements.
43
FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
COMBINED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
-----------------------------------------------
2004 2003 2002
----------- ----------- -----------
Cash flows from operating activities
Net income (loss) 22,452 $ (5,902) $ (5,032)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities
Depreciation and amortization 1,636 2,161 2,077
Amortization of lease intangibles 153 -- --
Impairment charge 90 -- --
Gain on disposal of real estate (19,267) (54) --
Straight-lining of rental income (780) -- --
(Decrease) increase in deferred items (359) (44) 55
Net changes in other operating assets and liabilities 62 92 2,050
----------- ----------- -----------
Net cash provided by (used in) operating activities 3,987 (3,747) (850)
----------- ----------- -----------
Cash flows from investing activities
Proceeds from sale of real estate 33,635 -- --
Investments in real estate (63,944) (1,061) (697)
Purchase of real estate held for syndication (7,613) -- --
Net proceeds from sale of parking business and other assets 15 60 --
Purchase of investments held to maturity -- (1,362,734) (1,662,806)
Purchase of real estate securities available for sale (23,094) (86) --
Proceeds from maturity of investments held to maturity 68,900 1,397,808 1,674,837
Proceeds from real estate securities available for sale 11,806 -- --
Decrease (increase) in restricted cash 2,818 (850) 147
Purchase of loans receivable (24,540) -- --
Collection of loans receivable 16,150 -- --
----------- ----------- -----------
Net cash provided by investing activities 14,133 33,137 11,481
----------- ----------- -----------
Cash flows from financing activities
Decrease in loans payable (20) (16) (16)
Proceeds from mortgage loan payable 53,000 -- --
Debt issuance costs (1,196) -- --
Principal payments of mortgage loans (205) (324) (297)
Payment of senior notes -- (12,538) --
Issuance of Shares of Beneficial Interest -- 13,000 --
Repurchase of Shares of Beneficial Interest -- (16,421) --
Dividends paid on Shares of Beneficial Interest -- -- (6,962)
Dividends paid on Preferred Shares of Beneficial Interest (2,064) (2,064) (2,068)
----------- ----------- -----------
Net cash provided by (used in) financing activities 49,515 (18,363) (9,343)
----------- ----------- -----------
Net increase in cash and cash equivalents 67,635 11,027 1,288
Cash and cash equivalents at beginning of year 14,924 3,897 2,609
----------- ----------- -----------
Cash and cash equivalents at end of year $ 82,559 $ 14,924 $ 3,897
=========== =========== ===========
Supplemental Disclosure of Cash Flow Information
Interest paid $ 2,043 $ 4,829 $ 5,102
=========== =========== ===========
Taxes paid $ 55 $ -- $ --
=========== =========== ===========
Supplemental Disclosure of Non Cash Investing and Financing Activities
Dividends accrued on Preferred Shares of Beneficial Interest $ 516 $ 516 $ 516
Loan receivable in connection with the sale of parking business -- (133) --
Transfer of inventory in connection with the sale of parking business -- 158 --
Net transfer of receivables and payables in connection with the
sale of parking business -- 19 --
Mortgage loan and interest payable assumed in acqusition 32,401 -- --
Mortgage loan assumed by purchaser of property (41,313) -- --
Liabilities of real estate held for syndication assumed in acquisition 76,762 -- --
----------- ----------- -----------
$ 68,366 $ 560 $ 516
=========== =========== ===========
See Notes to Combined Financial Statements.
44
NOTES TO COMBINED FINANCIAL STATEMENTS
1. Business
First Union Real Estate Equity and Mortgage Investments is an unincorporated
association in the form of a business trust organized in Ohio under a
Declaration of Trust dated August 1, 1961, as amended from time to time through
April 2004 (the "Declaration of Trust"), which has as its stated principal
business activity from the ownership and management of, and lending to, real
estate and related investments.
The accompanying financial statements represent the combined results of the
registrant, First Union Real Estate Equity and Mortgage Investments (the
"Trust"), and First Union Management, Inc. ("FUMI"). Under a trust agreement,
all of the outstanding shares of stock of FUMI are held for the benefit of the
shareholders of the Trust. Accordingly, the financial statements of FUMI and the
Trust have been combined, and the combined entity is herein after referred to as
the "Trust".
Effective January 1, 2005, the Trust conducts its business through First Union
REIT L.P., a Delaware limited partnership (the "Operating Partnership"). The
Trust is the sole general partner of, and owns directly and indirectly, 100% of
the limited partnership interest in the Operating Partnership. The transfer of
interest of the Trust's assets and liabilities to the Operating Partnership had
no effect on the Trust's financial statements.
2. Summary of Significant Accounting Policies
Consolidation and Basis of Presentation
The combined financial statements include the Trust, FUMI and their wholly-owned
subsidiaries. All inter-company accounts and transactions have been eliminated
in consolidation.
The combined financial statements are prepared on the accrual basis of
accounting in accordance with accounting principles generally accepted in the
United States of America ("GAAP"). The preparation of financial statements in
conformity with GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses and
the disclosure of contingent assets and liabilities. Such estimates that are
particularly susceptible to change relate to management's estimate of the
impairment of real estate. In addition, estimates are used when accounting for
the allowance for doubtful accounts and asset valuation for tax compliance.
Actual results could differ from these estimates.
Reclassifications
Certain prior year balances have been reclassified in order to conform to the
current year presentation.
Investments in Real Estate
Real estate assets are stated at cost. Expenditures for repairs and maintenance
are expensed as incurred. Significant renovations that extend the useful life of
the properties are capitalized. Depreciation for financial reporting purposes is
computed using the straight-line method. Buildings are depreciated over their
estimated useful lives of 10 to 40 years, based on the property's age, overall
physical condition, type of construction materials and intended use.
Improvements to the buildings are depreciated over the remaining useful life of
the building at the time the improvement is completed. Tenant alterations are
depreciated over the life of the lease of the tenant. The Trust annually reviews
its portfolio of properties for any impairment losses. The Trust records
impairment losses when indicators of impairment are present and the undiscounted
cash flows are not sufficient to recover the asset's carrying amount. The
impairment loss is measured by comparing the fair value of the asset to its
carrying amount.
45
Upon acquisitions of real estate, the Trust assesses the fair value of acquired
assets (including land, buildings, tenant improvements and identified
intangibles such as above and below market leases and acquired in-place leases
in accordance with SFAS Nos. 141 and 142) and acquired liabilities, and
allocates the purchase price based on these assessments. The Trust assesses fair
value based on estimated cash flow projections that utilize appropriate discount
and capitalization rates and available market information. Estimates of future
cash flows are based on a number of factors including the historical operating
results, known trends, and market/economic conditions that may affect the
property.
Real Estate Held for Syndication
Real estate acquired for the purpose of selling limited partnership interests
sponsored by the Trust is classified as real estate held for syndication.
Cash and Cash Equivalents
Cash and cash equivalents include checking and money market accounts and at
December 31, 2004 highly liquid investments purchased with maturities of three
months or less.
Restricted Cash
Restricted cash represents cash in escrow accounts and deposits securing a
letter of credit.
Loans Receivable
The Trust's policy is to record loans receivable at cost. The Trust evaluates
the collectibility of both interest and principal of each of its loans, if
circumstances warrant, to determine whether it is impaired. A loan is considered
to be impaired when, based on current information and events, it is probable
that the Trust will be unable to collect all amounts due according to the
existing contractual terms. When a loan is considered to be impaired, the amount
of the loss accrual is calculated by comparing the recorded investment to either
the value determined by discounting the expected future cash flows at the loan's
effective interest rate or to the value of the collateral if the loan is
collateral dependent. The interest rate on the loans receivable ranges from
5.42% to 11.81%. Interest income is recognized on an accrual basis.
Accounts Receivable
Accounts receivable are recorded at the invoiced amount and do not bear
interest. The allowance for doubtful accounts is the Trust's best estimate of
the amount of probable credit losses in the Trust's existing accounts
receivable. The Trust reviews its allowance for doubtful accounts monthly. Past
due balances over 90 days and over a specified amount are reviewed individually
for collectibility. Account balances are charged off against the allowance after
all means of collection have been exhausted and the potential for recovery is
considered remote. The Trust does not have any off-balance-sheet credit exposure
related to its tenants.
Investments - Held to Maturity
Investments as of December 31, 2003 include U.S. Government Treasury Bills and
Federal Home Loan Bank Discount Notes in the amount of $48,900,000. The U.S.
Treasury Bills and Federal Home Loan Bank Discount Notes are classified as
held-to-maturity securities and are recorded at cost. At December 31, 2003, the
Trust owned $20,000,000 in interest-bearing commercial paper which is classified
as held to maturity. These securities matured in January 2004.
Real Estate Securities Available for Sale
The Trust classifies investments in real estate equity securities with readily
determinable fair values on the balance sheet as available-for-sale, based on
the Trust's intent with respect to those securities. Accordingly, the Trust
records these investments at fair value, and unrealized gains and losses are
recognized through shareholders' equity, as a component of other comprehensive
income. Realized gains and losses and changes for other-than-temporary
impairments are included in net income. Sales of securities are recorded on the
trade date and gains or losses are determined on the specific identification
method.
46
Lease Intangibles
Upon acquisition of real estate, the Trust records intangible assets and
liabilities acquired at their fair market value. The Trust amortizes identified
intangible assets and liabilities over the period which the assets are expected
to contribute to future cash flows of the property acquired over the terms of
the applicable leases.
Unamortized Debt Issue Costs
Direct financing costs are deferred and amortized over the terms of the related
agreements as a component of interest expense.
Fair Value of Financial Instruments
Financial instruments include cash and cash equivalents, accounts receivable,
investments, accounts payable and long-term debt. The fair value of the cash and
cash equivalents, accounts receivable, investments in government securities and
commercial paper and accounts payable approximate their current carrying amounts
due to their short-term nature. The fair value of the Trust's mortgage loans
payable and loan payable approximate their current carrying amounts at December
31, 2004.
The Trust accounts for an interest rate swap agreement under SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. At inception, the
Trust designated this swap as a cash flow hedge on the variable interest
payments of its floating rate financing. Accordingly, the Trust records the swap
at fair market value, and records changes in market value in other comprehensive
income to the extent the hedge is effective. The hedge has been effective
through December 31, 2004. The Trust records the net amounts receivable or
payable under the swap agreement as a component of interest expense.
Revenue Recognition
The Trust accounts for its leases with tenants as operating leases with rental
revenue recognized on a straight-line basis over the lease term. Tenant leases
that are not triple-net leases generally provide for (i) billings of fixed
minimum rental and (ii) billings of certain operating costs. The Trust accrues
the recovery of operating costs based on actual costs incurred. These amounts
are included in accounts receivable at December 31, 2004.
Deferred revenue is derived primarily from revenue received in advance of its
due date.
Income Taxes
The Trust has qualified as a REIT under the Internal Revenue Code (the "Code").
A REIT is generally not subject to federal income tax on that portion of its
REIT taxable income ("Taxable Income") which is distributed to its shareholders
provided that at least 90% of Taxable Income is distributed and provided that
such income meets certain other conditions.
The Trust's taxable subsidiaries recognize current income taxes during the
period in which transactions enter into the determination of taxable income,
with deferred income taxes provided for temporary differences between the
carrying values of assets and liabilities for financial reporting purposes and
such values as determined by income tax laws. Changes in deferred income taxes
attributable to these temporary differences are included in the determination of
income. A valuation allowance has been provided for the entire amount of
deferred tax assets, which consists of FUMI's capital loss carryforwards, due to
the uncertainty of realization of those deferred tax assets.
47
Earnings Per Share
The Trust has calculated earnings per share in accordance with SFAS No.128,
"Earnings Per Share." SFAS No.128 requires that common share equivalents be
excluded from the weighted-average shares outstanding for the calculation of
basic earnings per share. The reconciliation of shares outstanding for the basic
and diluted earnings per share calculation is as follows (in thousands, except
per-share data):
2004 2003 2002
-------- -------- --------
Basic
Income (loss) from continuing operations $ 1,936 $ (6,575) $ (5,397)
Preferred dividend (2,064) (2,064) (2,067)
-------- -------- --------
Loss from continuing operations, net of
preferred dividend (128) (8,639) (7,464)
Income from discontinued
operations 20,516 673 365
-------- -------- --------
Net income (loss) applicable to Common
Shares of Beneficial Interest $ 20,388 $ (7,966) $ (7,099)
======== ======== ========
Basic weighted-average Common Shares 31,059 30,885 34,807
======== ======== ========
Income (loss) from continuing operations,
net of preferred dividend $ (0.00) $ (0.28) $ (0.21)
Income from discontinued
operations 0.66 0.02 0.01
-------- -------- --------
Net income (loss) per Common Share of
Beneficial Interest $ 0.66 $ (0.26) $ (0.20)
======== ======== ========
Diluted
Income (loss) from continuing operations $ 1,936 $ (6,575) $ (5,397)
Preferred dividend (2,064) (2,064) (2,067)
-------- -------- --------
Loss from continuing operations, net of
preferred dividend (128) (8,639) (7,464)
Income from discontinued
operations 20,516 673 365
-------- -------- --------
Net income (loss) applicable to Common
Shares of Beneficial Interest $ 20,388 $ (7,966) $ (7,099)
======== ======== ========
Basic weighted-average Common Shares 31,059 30,885 34,807
Convertible Preferred Shares -- -- --
Stock Options -- -- --
-------- -------- --------
Diluted weighted-average Common
Shares 31,059 30,885 34,807
======== ======== ========
Income (loss) from continuing operations,
net of preferred dividend $ (0.00) $ (0.28) $ (0.21)
Income from discontinued
operations 0.66 0.02 0.01
-------- -------- --------
Net income (loss) per Common Share of
Beneficial Interest $ 0.66 $ (0.26) $ (0.20)
======== ======== ========
48
The preferred shares, warrants and options to purchase shares of beneficial
interest are anti-dilutive and are not included in the weighted-average shares
outstanding for the dilutive earnings per share for 2004, 2003 and 2002.
Share Options
The Trust has accounted for stock option awards in accordance with APB No. 25
and has adopted the disclosure-only provisions of SFAS No.123, "Accounting for
Stock-Based Compensation". Consequently, compensation cost has not been
recognized for the share option plans except for the options granted in 1999
which had an exercise price that was less than the grant date per share market
price. If compensation expense for the Trust's two share option plans had been
recorded based on the fair value at the grant date for awards in previous years,
consistent with SFAS No.123, the Trust's net income would be adjusted as follows
(amounts in thousands, except per-share data):
2004 2003 2002
---- ---- ----
Net income (loss) applicable to shares of beneficial
interest, as reported $ 20,388 $ (7,966) $ (7,099)
Effect of stock options as calculated -- (126) --
---------- ---------- ----------
Net income (loss) as adjusted $ 20,388 $ (8,092) $ (7,099)
========== ========== ==========
Per share
Basic:
Net income (loss) applicable to shares of beneficial
interest, as reported $ 0.66 $ (0.26) $ (0.20)
Effect of stock options as calculated -- -- --
---------- ---------- ----------
Net income (loss), as adjusted $ 0.66 $ (0.26) $ (0.20)
========== ========== ==========
Diluted:
Net income (loss) applicable to shares of beneficial
interest, as reported $ 0.62 $ (0.26) $ (0.20)
Effect of stock options as calculated -- -- --
---------- ---------- ----------
Net income (loss), as adjusted $ 0.62 $ (0.26) $ (0.20)
========== ========== ==========
Recently Issued Accounting Standards
In December 2004, the FASB issued SFAS No.123 (R), "Share-Based Payment", which
replaces SFAS No.123 and which the Trust is required to adopt by the third
quarter of 2005. The Trust will adopt SFAS No.123 (R) effective January 1, 2005.
The adoption of this standard will not have a material impact on the Trust's
financial statements.
In December of 2004, the FASB issued SFAS No.153, "Exchange of Nonmonetary
Assets - An Amendment of APB Opinion 29". The amendments made by SFAS No.153 are
based on the principle that exchanges of nonmonetary assets should be measured
based on the fair value of the assets exchanged. Further, the amendments
eliminate the narrow exception for nonmonetary exchanges of similar productive
assets and replace it with a broader exception of exchanges of nonmonetary
assets that do not have commercial substance. SFAS No.153 is effective for
nonmonetary asset exchanges occurring in fiscal periods beginning June 15, 2005.
The Trust does not believe the adoption of SFAS No.153 on June 15, 2005 will
have a material impact on the Trust's combined financial statements.
3. The FUR Investors Transaction
On November 26, 2003, the Trust entered into a Stock Purchase Agreement with FUR
Investors, LLC, an entity controlled by and partially owned by the current
executive officers of the Trust. On December 31, 2003, FUR Investors LLC
acquired 5,000,000 Common Shares from the Trust's shareholders pursuant to a
tender offer at a price of $2.30 per share and purchased pursuant to the terms
of the Stock Purchase Agreement an additional 5,000,000 newly issued Common
Shares pursuant to the terms of the Stock Purchase Agreement for a price of $2.6
per share. As a result of these purchases, FUR Investors LLC acquired a total of
10,000,000 of the outstanding Common Shares, representing 32.2% of the then
total outstanding Common Shares.
49
Pursuant to the Stock Purchase Agreement, (i) Michael L. Ashner was appointed
the Chief Executive Officer of the Trust, (ii) the Trust entered into the
Advisory Agreement, (iii) Mr. Ashner entered into an exclusivity agreement, and
(iv) FUR Investors, LLC entered into a covenant agreement pursuant to which it
agreed not to take certain action which, among other things, would adversely
impact the Trust's status as a REIT or its listing on the New York Stock
Exchange. In addition, Daniel J. Altobello and Jeffrey Citrin resigned as
members of the Board of Trustees, and three new trustees were appointed to the
Board of Trustees.
In January 2004, the Board of Trustees approved a waiver to the ownership
limitations set forth in the Trust's bylaws to permit Michael L. Ashner, the
Chief Executive Officer of the Trust, to acquire up to 30,000 shares of the
Trust's Preferred Shares so long as the acquisition thereof (i) is not otherwise
in violation of the ownership limitations set forth in the Trust's bylaws whose
purpose is to protect REIT status of the Trust and (ii) does not reduce the
existing viability of the net operating loss benefits available to the Trust.
4. Loans Receivable
As of December 31, 2004, loans receivable are collateralized by equity interests
in the owner of the underlying property and consist of the following (in
thousands):
Outstanding
Principal Accrued Carrying
Property Location Balance Interest Amount Interest Rate Maturity
- -------- -------- ------- -------- ------ ------------- --------
Wingate Inn Clearwater, FL $ 2,789 $ 12 $ 2,801 10% February 2007
6.28%
63 West 38th St New York, NY 3,000 33 3,033 (LIBOR +4%) August 2007
536 West 28th St. 11.8125%
New York, NY 2,530 26 2,556 (LIBOR +9.5%) April 2009
------- ------- -------
$ 8,319 $ 71 $ 8,390
======= ======= =======
As of December 31, 2004, activity related to mortgage loans is as follows (in
thousands):
Balance at the beginning of the year $ --
Advances made 24,540
Repayments (16,150)
--------
Balance at the end of year $ 8,390
========
50
5. Real Estate Securities Available for Sale
The detail of real estate securities held for sale as of December 31, 2004 is as
follows (in thousands):
Unrealized
Date Cost at Gain (Loss) at Balance at
Name Purchased December 31, 2004 December 31, 2004 December 31, 2004
---- --------- ----------------- ----------------- -----------------
Sizeler Property Investor, Inc. Various $ 9,964 $ 3,225 $ 13,189
Five other real estate
securities Various 1,411 134 1,545
-------- -------- --------
$ 11,375 $ 3,359 $ 14,734
======== ======== ========
6. Termination of Proposed Transaction with Gotham Partners
On February 13, 2002, the Trust entered into a definitive Agreement and Plan of
Merger and Contribution, pursuant to which the Trust agreed to merge with and
into Gotham Golf Corp. ("Gotham Golf"), a Delaware corporation controlled by
Gotham Partners, L.P. ("Gotham Partners"), at that time the beneficial owner of
16.8% of the Trust's outstanding common shares of beneficial interest (the
"Common Shares"). The proposed transaction was subject to several conditions,
including the approval of the Trust's common shareholders and the obtaining of
certain third- party consents. The Trust's common shareholders approved the
proposed transaction by the requisite majority vote at a November 27, 2002
meeting of shareholders. However, litigation was brought with respect to the
proposed transaction, resulting in the granting of an injunction preventing the
proposed transaction from going forward. On June 25, 2003 the Trust entered into
a Settlement, Termination and Standstill Agreement (the "Agreement") with, among
others, Gotham Partners. The Agreement provided for the termination of the
merger agreement regarding the merger of the Trust with Gotham Golf, the
purchase by the Trust of 5,841,233 Common Shares owned by Gotham Partners and
its affiliates for approximately $11,100,000 and a termination payment to Gotham
Partners of $2,400,000. The Agreement also provides that neither Gotham Partners
nor any affiliate will enter into or agree to enter into any form of business
combination, acquisition or other transaction involving the Trust or any
majority-owned affiliate for a period of five years from the date of the
Agreement. The termination payment was recognized as a general and
administrative expense during the year ended December 31, 2003.
7. Acquisitions
On November 18, 2004, FT-Fin Acquisition LLC ("FT-Fin"), a Delaware limited
liability company wholly-owned by the Trust, acquired from Finova Capital
Corporation, an unaffiliated third party, 16 triple-net leased properties
containing approximately 2.5 million gross square feet. The aggregate purchase
price for the properties was approximately $92,076,000 including closing
adjustments and inclusive of the assumption of approximately $32,401,000 of
existing first mortgage debt and accrued interest payable on certain of the
properties. Additionally, FT-Fin acquired $1,674,000 of rent receivables and
incurred $711,000 of debt costs. This acquisition was funded from the proceeds
of a $27,000,000 loan as well as $33,480,000 in net proceeds realized from the
sale of the Park Plaza property in June 2004 which were being held by a
qualified intermediary to enable the Trust to acquire the properties in a
tax-free exchange pursuant to Section 1031 of the Internal Revenue Code of 1986,
as amended (the "Code") and cash on hand of $1,580,000. The Trust has allocated
the purchase price to real estate and lease intangibles.
On November 22, 2004, the Trust acquired a 1% general partner interest, and a
third party (the "Limited Partner) acquired a 99% limited partnership interest,
in 5400 Westheimer Holding L.P. ("5400 Westheimer"). 5400 Westheimer, in turn,
acquired an indirect 100% ownership interest in an entity that holds title to an
office building located at 5400 Westheimer Court, Houston, Texas (the "Houston
Property"). In order to facilitate this acquisition, the Trust made a $7,533,000
loan (the "5400 Loan") to 5400 Westheimer. The 5400 Loan bore interest at 8% per
annum. Following the acquisition of the Houston Property, 5400 Westheimer made
an offering to the partners of the Limited Partner that enabled them to have
their interest in Limited Partner redeemed in exchange for a distribution of an
equivalent interest in 5400 Westheimer and a $321,000 capital contribution per
investment unit to 5400 Westheimer. In connection with the offering, the Trust
offered to lend to each participating partner an amount equal to 2/3 of the
total capital contribution required by such partner ($214,000 per investment
unit.)
51
The offering was consummated on January 3, 2005 at which time the 5400 Loan,
including accrued interest, was fully satisfied by the payment of $7,040,000 and
the delivery to the Trust of an additional 7% limited partner interest in 5400
Westheimer, thereby resulting in the Trust holding an aggregate 8% interest in
5400 Westheimer. In addition, partners who participated in the offering and who
acquired an aggregate of 25% interest in 5400 Westheimer elected to obtain loans
from the Trust to satisfy their capital contributions, which loans aggregated
$1,338,000 and which are secured by the 25% interest held by such limited
partners in 5400 Westheimer. The loans bear interest at 12% per annum and
require quarterly payments of interest only. Aggregate principal payments of
$669,000 are required to be made on each January 5, 2006 and January 5, 2007,
the maturity date. If all of the loans were to default, the Trust would acquire
an additional 25% interest in the Houston Property.
8. Discontinued Operations
On August 1, 2003, VenTek International, Inc. ("VenTek"), an entity owned by
FUMI, sold substantially all the assets of its parking ticketing equipment
business to an unrelated third party for approximately $394,000. VenTek received
approximately $60,000 in cash, a note receivable for approximately $91,000 and
transferred approximately $243,000 in liabilities. The Trust recognized a gain
for financial reporting purposes of $54,000.
On December 1, 2004, VenTek ceased all of its operations and transferred its
remaining assets to VenTek Transit, Inc. ("Transit"), an entity owned by
VenTek's employees. Under the agreement, Transit agreed to make a nominal
payment to VenTek and is obligated to pay to VenTek a royalty equal to 5% of its
annual gross revenues for each of the next five years. It is not expected that
such payments will be material to the Trust's operations.
On June 22, 2004, the Trust sold the Park Plaza Mall property located in Little
Rock, Arkansas for a gross sales price of $77,500,000 to a subsidiary of CBL &
Associates Properties, Inc., an unaffiliated third party. In connection with
this transaction, the purchaser assumed the existing indebtedness encumbering
the property of approximately $41,313,000. Accordingly, net proceeds received by
the Trust after giving effect to the loan assumption and closing costs were
approximately $33,480,000. The Trust deposited the proceeds with a qualified
intermediary, and these proceeds were used for the portfolio acquisition (as
described in Note 5) in connection with a "like kind" exchange pursuant to
Section 1031 of the Code. The Trust recognized a gain for financial reporting
purposes of $19,267,000.
A tenant at one of the Trust's properties has exercised its purchase option
under the lease pursuant to which it will acquire the property effective May 1,
2005 for a gross sale price of approximately $2,018,000. This sale will result
in a gain for financial reporting purposes of approximately $639,000.
SFAS No. 144 requires discontinued operations presentation for disposals of a
"component" of an entity. In addition, the Trust reclassified its combined
statement of operations and comprehensive income to reflect income and expenses
for properties which became held for sale subsequent to December 31, 2003 as
discontinued operations. In addition, the Trust has reclassified its combined
balance sheet at December 31, 2004 to reflect assets and liabilities related to
such properties as real estate held for sale and liabilities of real estate held
for sale and discontinued operations.
52
At December 31, 2004, real estate held for sale consists of the Sherman, Texas
property, which is triple-net leased to the Kroger Co. and scheduled to be sold
on May 1, 2005. Other assets related to discontinued operations are summarized
as follows (in thousands):
2004 2003
------- -------
Investment in Real Estate $ -- $55,928
Accounts receivables and prepaids -- 525
Inventory -- 591
Unamortized debt issue costs, net -- 214
Other -- 133
------- -------
$ -- $57,391
======= =======
Liabilities of discontinued operations at December 31, 2004 and 2003 are
summarized as follows (in thousands):
2004 2003
------- -------
Mortgage loans payable $ 956 $41,457
Deferred items -- 402
Accounts payable and accrued expenses 1,659 3,132
------- -------
$ 2,615 $44,991
======= =======
The combined results related to discontinued operations for the years ended
December 31, 2004, 2003 and 2002 are as follows (in thousands):
2004 2003 2002
------- ------- -------
Total revenues $ 9,276 $14,219 $15,497
Total expenses 8,027 13,600 15,132
------- ------- -------
Income from discontinued operations $ 1,249 $ 619 $ 365
======= ======= =======
9. Mortgage Loans Payable
The Trust had outstanding mortgage loans payable of $84,206,000 at December 31,
2004. The mortgage loan payments of principal and interest are generally due
either monthly, quarterly or semi-annually. All the mortgage loans payable are
collateralized by the Trust's real estate. The Trust's mortgage loan payable at
December 31, 2003 was collateralized by the Park Plaza Mall and was assumed by
the buyer in 2004 upon the sale of the property.
The Trust's mortgage loans payable at December 31, 2004 are summarized as
follows ( in thousands):
Mortgage loan payable bearing interest of 6.45%,
maturing on March 29, 2010 $12,624
Mortgage loan payable bearing interest of 7.5%,
maturing on July 1, 2011 7,402
Mortgage loan payable bearing interest of 6.71%,
maturing on November 1, 2010 11,180
Mortgage loan payable bearing interest of LIBOR
plus 4.5%, maturing on November 18, 2007 53,000 (1)
-------
$84,206
=======
(1) The mortgage loan payable bears interest at LIBOR plus 450 basis points.
As a result of the Trust entering into an interest rate swap agreement in
the notional amount of $40,000,000, the Trust has effectively converted
the interest rate from a floating rate to a fixed rate of 8.55%. The
remaining principal amount of $13,000,000 remains variable at LIBOR plus
4.5% (which equated to a rate of 6.89% at December 31, 2004).
53
As of December 31, 2004, the principal repayments required for the next five
years and thereafter are as follows (in thousands):
2005 $ 5,827
2006 6,167
2007 55,312
2008 5,438
2009 5,815
Thereafter 5,647
-------
Total $84,206
=======
10. Insurance Recoveries
Insurance recoveries of $1,254,000 represent proceeds recovered under the
directors' and officers' policy for reimbursement of legal fees expended in
connection with a prior preferred shareholder litigation. The Trust received
$696,000 during 2004 and the remainder is included in accounts receivable and
prepaids.
11. Senior Notes
The Trust had approximately $12,500,000 of 8-7/8% Senior Notes outstanding at
December 31, 2003. The Senior Notes were paid on October 1, 2003.
12. Convertible Preferred Shares of Beneficial Interest
In October 1996, the Trust issued $57,500,000 of Series A cumulative convertible
redeemable preferred shares of beneficial interest ("Series A Preferred
Shares"). The 2,300,000 Series A Preferred Shares were issued at a par value of
$25 per share and are each currently convertible into 4.92 Common Shares. The
distributions on the Series A Preferred Shares are cumulative and equal to the
greater of $2.10 per share (equivalent to 8.4% of the liquidation preference per
annum) or the cash distributions on the Common Shares of beneficial interest
into which the Series A Preferred Shares are convertible (determined on each of
the quarterly distribution payment dates for the Series A Preferred Shares). The
Series A Preferred Shares may not be redeemed for cash. The Series A Preferred
Shares are redeemable at the option of the Trust at the conversion rate of one
Series A Preferred Share for 4.92 Common Shares. The Trust may exercise its
option only if for 20 trading days within any period of 30 consecutive trading
days, the closing price of the Common Shares of beneficial interest on the New
York Stock Exchange equals or exceeds the conversion price of $5.0824 per Common
Share.
In December 2002, a total of 1,718 shares of Series A Preferred Shares were
converted to 8,449 Common Shares.
13. Warrants to Purchase Shares of Beneficial Interest
In November 1998, the Trust issued 500,000 warrants that allow a third party to
purchase 500,000 Common Shares at $10 per share. The current exercise price of
the warrants is $8.37 per Common Share. The warrants expire in November 2008.
The Trust issued the warrants as part of the consideration for various services
provided to the Trust.
14. Share Repurchase
The Board of Trustees of the Trust authorized a share repurchase program in July
2003. The plan allows the Trust to purchase up to $10,000,000 of its Common and
Preferred Shares in the market or through private transactions. Through December
31, 2004, the Trust repurchased and retired 2,914,215 Common Shares under this
plan for approximately $5,300,000. See Note 4 for additional repurchases of
Common Shares in connection with the settlement of the Gotham transaction.
54
15. Share Options
The Trust has the following share option plans for key personnel and Trustees:
Long-Term Incentive Ownership Plan
This plan, adopted in 1994 and amended in 1999, reserved 3,507,196 shares for
the granting of incentive and non-statutory share options and restricted shares.
Options granted in 1999 expired unexercised in 2001.
The activity of this plan is summarized for the years ended December 31 in the
following table:
2004 Weighted 2003 Weighted 2002 Weighted
Shares Average Shares Average Shares Average
--------------------------------------------------------------------------------
Share options granted -- -- 100,000 $2.23 -- --
Share options cancelled -- -- -- -- -- --
Share options expired -- -- -- -- -- --
Restricted shares granted -- -- -- -- -- --
Restricted shares cancelled -- -- -- -- -- --
Additional shares reserved -- -- -- -- -- --
Available share options
and restricted shares 3,407,196 -- 3,407,196 -- 3,507,196 --
In December 2003, the then members of the Board of Trustees granted 100,000
options under the Long Term Incentive Performance Plan to a Trustee of the Trust
and the then Interim Chief Executive Officer and Interim Chief Financial
Officer. See Note 18. Each option has an exercise price of $2.23. 50,000 of the
options are exercisable from and after June 16, 2004 and 50,000 are exercisable
from and after December 16, 2004 and expire on December 16, 2013. None of the
options have been exercised, cancelled or repaid. The fair value of the option
grant was estimated on the date of the grant utilizing the Black-Scholes option
valuation model with the following assumptions: expected life - 10 years;
risk-free interest rate - 5%; volatility - .35. Utilizing the assumptions, the
fair value of the options granted at the date of the grant was $126,000.
Trustee Share Option Plan
In 1999, the shareholders approved a share option plan for members of the Board
of Trustees. This plan provides compensation in the form of Common Shares and
options to acquire Common Shares for certain eligible Trustees who were not
employees of the Trust. A total of 500,000 Common Shares were authorized under
this plan.
The eligible Trustees serving on the Board in May 1999 were granted the lesser
of 2,500 shares or the number of shares having a market price of $12,500 as of
the grant date. Seven Trustees each received 2,500 shares; two Trustees later
resigned in 1999 and forfeited their shares. The remaining shares vested and
became non-forfeitable in December 2000.
Each eligible Trustee who invests a minimum of $5,000 in shares in a Service
Year, as defined in the plan, will receive options, commencing in the year 2000,
to purchase four times the number of shares that he has purchased. Shares
purchased in excess of $25,000 in a Service Year will not be taken into account
for option grants. The option prices will be the greater of fair market value on
the date of grant or $6.50 for half of the options, and the greater of fair
market value or $8.50 for the other half of the options. The option prices will
be increased by 10% per annum beginning May 2000 and decreased by dividend
distributions on Common Shares made after November 1998. The options vest and
become exercisable one year after being granted. Each of the current eligible
Trustees has waived his right to receive options under this plan for purchases
made in 2004.
55
At December 31, 2003, there were 8,000 exercisable options outstanding which had
a weighted-average exercise price of $8.49 and a two-year remaining life. At
December 31, 2004, the 8,000 options outstanding had a weighted-average unit
price of $8.49 and a one-year remaining life.
16. Federal Income Taxes
The Trust has made no provision for regular current or deferred federal and
state income taxes on the basis that it operates in a manner intended to enable
it to continue to qualify as a real estate investment trust ("REIT") under
Sections 856-860 of the Code. In order to qualify as a REIT, the Trust is
generally required each year to distribute to its shareholders at least 90% of
its taxable income (excluding any net capital gain). The Trust intends to comply
with the foregoing minimum distributions requirements. As of December 31, 2004,
the Trust has net operating loss carryforwards of $47,300,000 which will expire
from 2019 through 2023. In connection with the February 28, 2005 issuance of the
Series B-1 Cumulative Convertible Redeemable Preferred Shares of Beneficial
Interest (see Note 23), the Trust's net operating loss carryforwards will be
subject to annual limitations pursuant to Section 382 of the Code. The Trust
also has capital loss carryforwards of $12,300,000 as of December 31, 2004 which
will expire from 2006 through 2007. The Trust treats certain items of income and
expense differently in determining net income reported for financial and tax
purposes. Such items resulted in a net decrease in income for tax reporting
purposes of approximately $19,700,000 in 2004, a net increase of $1,800,000 in
2003 and a net decrease of $3,600,000 in 2002.
The Trust owns stock in a corporation that has elected to be treated for federal
income tax purposes as a taxable REIT subsidiary ("TRS"). To continue to qualify
as a REIT, the value of the TRS stock cannot exceed 20% of the value of the
Trust's total assets; at December 31, 2004 the TRS did not exceed 20% of the
value of the Trust's total assets. A TRS is taxable on its net income at regular
corporate tax rates. Current income taxes are recognized during the period in
which transactions enter into the determination of financial statement income,
with deferred income taxes being provided for temporary differences between the
carrying values of assets and liabilities for financial reporting purposes and
such values as determined by income tax laws. Changes in deferred income taxes
attributable to these temporary differences are included in the determination of
income. A valuation allowance has been provided for the entire amount of
deferred tax assets, which consists of FUMI's net operating loss carryforwards,
due to the uncertainty of realization of the deferred tax assets. FUMI has net
operating loss carryforwards of $10,100,000 which will expire from 2009 through
2023. The Trust is currently exploring a business combination with FUMI which
would enable the Trust to utilize all or a portion of these loss carryforwards.
The Trust and FUMI do not file consolidated tax returns.
As of December 31, 2004, net investment in real estate for tax reporting
purposes after accumulated depreciation was approximately $74,810,000 as
compared to financial reporting purposes of approximately $86,778,000.
The 2004, 2003 and 2002 cash dividends per Series A Preferred Share for
individual shareholders' income tax purposes was as follows:
Capital Gains
-------------------------------
Unrecaptured
Ordinary Section 1250 Nontaxable Total
Dividends 20% Rate Gain (25% Rate) Distributions Dividends Paid
--------- -------- --------------- ------------- --------------
2004 $2.10 $ -- $ -- $ -- $2.10
2003 -- -- -- 2.10 2.10
2002 -- -- -- 2.10 2.10
56
The 2004, 2003 and 2002 cash dividends per Common Share of Beneficial Interest
for individual shareholder's income tax purposes was as follows:
Capital Gains
-------------------------------
Unrecaptured
Ordinary Section 1250 Nontaxable Total
Dividends 20% Rate Gain (25% Rate) Distributions Dividends Paid
--------- -------- --------------- ------------- --------------
2004 $ -- $ -- $ -- $ -- $ --
2003 -- -- -- -- --
2002 -- -- -- 0.20 0.20
17. Legal Proceedings
Peach Tree Mall Litigation
The Trust, as one plaintiff in a consolidated action composed of numerous
businesses and individuals, has pursued legal action against the State of
California associated with the 1986 flood of Sutter Buttes Center, formerly
Peach Tree Mall. On March 4, 2005, the court approved the settlement of this
matter pursuant to which the State of California has agreed to pay the Trust
$11,000,000. Payment of the settlement remains subject to legislative
appropriation. It is expected that the funding for this settlement will be
incorporated in the State of California's budget for its 2005-2006 fiscal year
at which time the Trust will recognize the settlement as income. In connection
with the settlement, the parties will exchange mutual releases.
Indemnity to Imperial Parking Limited
In 1999, Newcourt Financial Ltd. ("Newcourt") brought a claim in Ontario, Canada
against FUMI and Imperial Parking Limited, then a subsidiary of FUMI, alleging a
breach of a contract between FUMI and Newcourt's predecessors-in-interest,
Oracle Credit Corporation and Oracle Corporation Canada, Inc. The Trust's
affiliate and Imperial Parking Limited brought a separate action in British
Columbia, Canada against Newcourt, Oracle Credit Corporation and Oracle
Corporation Canada claiming, among other things, that the contract at issue was
not properly authorized by the Trust's Board of Trustees and the Imperial
Parking Limited's Board of Directors. On March 27, 2000, in connection with the
spin-off of Imperial Parking Corp. of Canada ("Imperial Parking") (the successor
in interest to Imperial Parking Limited) to the Trust's shareholders, the Trust
gave an indemnity to Imperial Parking Corporation in respect to damages arising
from the outstanding actions.
On March 1, 2005, the Trust settled all claims involved in this matter by paying
$800,000 to Newcourt which was fully reserved at December 31, 2004.
18. Business Segments
At December 31, 2004, the Trust operates in three business segments: (i)
ownership of real estate operating properties (the "Operating Properties"), (ii)
ownership of loans receivable ("Loans") and (iii) ownership and trading of real
estate securities ("Real Estate Securities"). One component of management's
performance evaluation is based upon net operating income. With respect to
Operating Properties, net operating income is property rent less property
operating expense, and real estate taxes. The Trust's other assets ("Other")
consist primarily of cash and cash equivalents, investments held to maturity,
deferred issue costs for loans payable and real estate held for syndication. All
intercompany transactions between segments have been eliminated. Revenues and
expenses from discontinued operations have been excluded from the segment
presentation (see table of business segments). At
57
December 31, 2003, the Trust had operations in two business segments, operating
properties and transit ticket manufacturing, one of which was discontinued in
2004.
Business Segments (in thousands)
2004 2003 2002
-------- -------- --------
Rents and Other
Operating Properties $ 3,390 $ 1,478 $ 1,379
Loans 1,373 -- --
Real Estate Securities 1,443 -- --
-------- -------- --------
6,206 1,478 1,379
-------- -------- --------
Less - Operating Expenses
Operating Properties 786 734 719
-------- -------- --------
786 734 719
-------- -------- --------
Less - Real Estate Taxes
Operating Properties 66 90 90
-------- -------- --------
66 90 90
-------- -------- --------
Net Operating Income
Operating Properties 2,138 654 570
Loans 1,373 -- --
Real Estate Securities 1,443 -- --
-------- -------- --------
4,954 654 570
-------- -------- --------
Less - Depreciation and Amortization 735 454 404
Less - Interest Expense 698 862 1,394
Corporate Income (Expense)
Interest and dividends 1,969 838 1,659
General and administrative (4,104) (6,873) (5,720)
Other income (expense) 150 122 (108)
-------- -------- --------
Income (loss) from continuing operations $ 1,936 $ (6,575) $ (5,397)
======== ======== ========
Income from discontinued operations 1,249 619 365
Gain on sale of discontinued operations 19,267 54 --
-------- -------- --------
Income from discontinued operations (1) 20,516 673 365
-------- -------- --------
Net income (loss) $ 22,452 $ (5,902) $ (5,032)
======== ======== ========
Capital Expenditures
Operating Properties $ 2,018 $ 134 $ 314
-------- -------- --------
$ 2,018 $ 134 $ 314
======== ======== ========
58
2004 2003 2002
-------- -------- --------
Identifiable Assets
Operating Properties $ 95,540 $ 59,684 $ 60,832
VenTek -- 1,110 2,131
Loans 8,390 -- --
Real Estate Securities 14,734 -- --
Other 171,304 86,044 108,862
-------- -------- --------
Total Assets $289,968 $146,838 $171,825
======== ======== ========
(1) The results of VenTek, the Park Plaza property and the Sherman, Texas
property have been classified as discontinued operations.
19. Minimum Rents
Future minimum lease payments scheduled to be received under noncancellable
operating leases are as follows (amounts in thousands):
2005 $15,171
2006 14,805
2007 14,632
2008 14,459
2009 14,559
Thereafter 19,895
-------
$93,521
=======
The Trust has three tenants that occupy 50%, 22% and 20% of its rentable square
footage at its properties and three tenants that contributed 26%, 17% and 11% of
the base rental revenue of the Trust, respectively, for the year ended December
31, 2004.
20. Related-Party Transactions
The Trust paid fees of $209,000, $521,000 and $498,000 for the years ended
December 31, 2004, 2003 and 2002, respectively, to the Real Estate Systems
Implementations Group, LLC ("RE Systems") for financial reporting and advisory
services. The managing member of this firm assumed the position of Interim Chief
Financial Officer of the Trust on August 18, 2000, and Interim Chief Executive
Officer in January 2003. In addition, he became a Trustee of the Trust in June
2003. He resigned as Interim Chief Executive Officer and Interim Chief Financial
Officer on December 31, 2003 and resigned as trustee on April 15, 2004.
Radiant Partners, LLC ("Radiant") provided asset management services to the
Trust's remaining real estate assets. For the years ended December 31, 2004,
2003 and 2002, the Trust paid fees to Radiant of $150,000, $300,000 and
$300,000, respectively. The principals of Radiant were formerly executive
officers of the Trust. Effective February 4, 2004, the Trust entered into a
termination agreement with Radiant pursuant to which Radiant ceased providing
asset management services, but provided transition services through April 30,
2004.
The affairs of the Trust and its subsidiaries are administered by FUR Advisors
pursuant to the terms of an Advisory Agreement (the "Advisory Agreement") dated
December 31, 2003 between the Trust and FUR Advisors, which agreement was
negotiated and approved by the Board of Trustees of the Trust prior to the
acquisition by FUR Investors, LLC of its interest in the Trust. FUR Advisors is
controlled by and partially owned by the executive officers of the Trust.
Pursuant to the terms of the Advisory Agreement, FUR Advisors is responsible for
providing, or arranging for the provision of, asset management services to the
Trust and coordinating with the Trust's property managers and shareholder
transfer agent. Pursuant to the terms of the Advisory Agreement, for providing
these services, FUR Advisors is entitled to the following fees: (i) an asset
59
management fee of 1% of the gross asset value of the Trust up to $100 million,
..75% of the gross asset value of the Trust between $100 million and $250
million, .625% of the gross asset value of the Trust between $250 million and
$500 million and .50% of the gross asset value of the Trust in excess of $500
million; (ii) property and construction management fees at commercially
reasonable rates as determined by the independent Trustees of the Board; (iii)
loan servicing fees not exceeding commercially reasonable rates (approved by a
majority of the independent Trustees) for providing administrative and clerical
services with respect to loans made by the Trust to third parties; and (iv) an
incentive fee equal to 20% of all distributions to holders of common shares
after December 31, 2003 in excess of (x) $71.3 million, increased by the net
issuance price of all shares issued after December 31, 2003, and decreased by
the redemption price of all shares redeemed after December 31, 2003, plus (y) a
return on the amount, as adjusted, set forth in (x) equal to 7% per annum
compounded annually. In addition, FUR Advisors is entitled to be reimbursed for
up to $100,000 per annum for the costs associated with the employment of one or
more asset managers. During the fourth quarter 2004, in light of the net-lease
nature of the portfolio acquired from Finova Capital Corporation, FUR Advisors
proposed to the Board of Trustees that the asset management fee be reduced for
the portion of the net lease portfolio that was subject to leverage to .25% of
the gross asset value. The Board of Trustees agreed to the reduction.
Effective February 1, 2004, Kestrel Management L.P., an affiliate of FUR
Advisors and the Trust's executive officers, assumed property management
responsibilities for Circle Tower. Pursuant to the terms of the property
management agreement, Kestrel Management receives a fee equal to 3% of the
monthly revenues of Circle Tower, which amount is less than the amount paid to
the prior property management company.
The following table sets forth the fees and reimbursements paid by the Trust for
the year ended December 31, 2004 to FUR Advisors and Kestrel Management L.P. (in
thousands):
Asset Management Fee (1) $1,420
Loan Servicing Fee (1) 9
Property Management (2) 42
Reimbursement (1) 100
(1) FUR Advisors
(2) Kestrel Management L.P.
21. Contingencies
Revenue Canada has made inquiries of Imperial Parking Corp. of Canada ("Imperial
Parking") relating to deductions taken by Imperial Parking at the time it was
owned by FUMI. It is possible that if these deductions are ultimately disallowed
that Imperial Parking could make a claim for indemnification on any amounts owed
to Revenue Canada. Although FUMI is required to indemnify Imperial Parking for
certain damages, it is not possible to determine at this time if FUMI would be
required to indemnify Imperial Parking for these damages. As a result, the Trust
has reserved certain amounts for expenses related to this matter which it
believes it will incur.
60
22. Quarterly Results of Operations (unaudited)
The following is an unaudited condensed summary of the combined results of
operations by quarter for the years ended December 31, 2004 and 2003. In the
opinion of the Trust and FUMI, all adjustments (consisting of normal recurring
accruals) necessary to present fairly such interim combined results in
conformity with accounting principles generally accepted in the United States of
America have been included.
Quarters Ended
-----------------------------------------------------------
March 31 June 30 September 30 December 31
---------- ---------- ------------ -----------
(In thousands, except per-share data and footnote)
2004
Revenues $ 594 $ 1,089 $ 1,349 $ 2,886
========== ========== ========== =======
Net income (loss) $ (205) $ 20,446 $ 1,718 $ 493
========== ========== ========== =======
Net income (loss) applicable to Common Shares of
Beneficial Interest $ (721) $ 19,930 $ 1,202 $ (23)
========== ========== ========== =======
Per share
Net income (loss) applicable to Common Shares of
Beneficial Interest, basic $ (0.02) $ 0.64 $ 0.04 $ 0.00
========== ========== ========== =======
Net income (loss) applicable to Common Shares of
Beneficial Interest, diluted $ (0.02) $ 0.64 $ 0.04 $ 0.00
========== ========== ========== =======
2003
Revenues $ 599 $ 713 $ 552 $ 563
========== ========== ========== =======
Net loss $ (1,032) $ (3,122)(1) $ (729) $(1,019)
========== ========== ========== =======
Net loss applicable to Common Shares of Beneficial
Interest $ (1,548) $ (3,638) $ (1,245) $(1,535)
========== ========== ========== =======
Per share
Net loss applicable to Common Shares of Beneficial
Interest, basic $ (0.04) $ (0.11) $ (0.04) $ (0.06)
========== ========== ========== =======
Net loss applicable to Common Shares of Beneficial
Interest, diluted $ (0.04) $ (0.11) $ (0.04) $ (0.06)
========== ========== ========== =======
(1) Includes the $2,400,000 termination fee paid in connection with the Gotham
transaction.
23. Subsequent Events
Chicago Office Properties
On March 16, 2005, the Trust entered into an agreement with two unaffiliated
private individuals, which agreement amended and restated in its entirety a
prior agreement entered into on February 15, 2005. As amended, the agreement
provides as follows: (i) the Trust will make secured mezzanine loans with
respect to 23 properties in an amount equal to 49% of the equity in the
properties, with an option to make an additional advance increasing its funding
to 60% of the equity of the properties; (ii) the Trust will make secured
mezzanine loans with respect to three properties in an amount equal to 60% of
the equity in the properties; (iii) the Trust will have an option to make
secured mezzanine loans with respect to five properties in an amount equal to
49% of the equity in the properties, with an option to make an additional
advance increasing its funding to 60% of the equity of the properties; and (iv)
61
the Trust will acquire a participating equity interest in each property owner
which will entitle us to share in certain distributions from capital proceeds in
excess of its current return. The loans will bear interest at 7.65%, require
monthly payments of interest only and have a seven-year maturity. The loans may
be converted into an equity interest in the applicable borrower after one year
at the Trust's request or three years at the option of the borrower.
Substantially all of the properties are located in the Chicago, Illinois
metropolitan and suburban area. The aggregate principal amount of the loans to
be made by us is expected to be approximately $80,000,000 which is expected to
be provided from the Trust's reserves. The transaction is subject to the Trust's
satisfactory completion of its due diligence review and customary closing
conditions. If consummated, it is expected that the transaction will close
during the second quarter of 2005. There can be no assurance that this
transaction will be consummated or, if consummated, on the terms presently
negotiated.
Common Share Issuance
On February 17, 2005, the Trust sold to Kimco Realty Corporation 1,000,000 of
its Common Shares for an aggregate purchase price of $4,000,000. The sale of the
shares was made in a private transaction under Regulation D of the Securities
Act of 1933, as amended. The Trust incurred no underwriting costs in connection
with this sale.
Series B-1 Preferred Share Issuance
On February 28, 2005, the Trust sold to a number of institutional investors,
through a private offering, 3,640,000 shares of its newly designated B-1
Cumulative Convertible Redeemable Preferred Shares (the "Series B-1 Shares") for
$91,000,000 in gross proceeds. The Trust incurred a total of $4,800,000 of
underwriting and placement agent fees to unaffiliated third parties in
connection with this issuance. The Series B-1 Shares will be entitled to
cumulative dividends at a minimum rate of 6.5% and will be convertible into
common stock at a conversion price of $4.50, subject to anti-dilution
adjustments. If fully converted, the Series B-1 Shares would represent
approximately 38.7% of the outstanding Common Shares (based on the number of
Common Shares outstanding at February 28, 2005).
Winn-Dixie Bankruptcy
On February 22, 2005, Winn-Dixie Stores, Inc., the tenant at the Trust's
Jacksonville, Florida property, filed for protection under Chapter 11 of the
United States Bankruptcy Code. The Trust has not received notification as to
whether Winn-Dixie will assume or reject its lease. If it elects to reject its
lease, the lease will be terminated and the Trust will become responsible for
all costs associated with the property. If the lease is rejected, the Trust will
seek to re-tenant or sell the property. Until such time as Winn-Dixie makes its
election, all rents (annually, approximately $1,500,000) and other payments due
under the lease from and after the date of Winn-Dixie's bankruptcy filing are
required to be paid.
Circle Tower Loan
On March 17, 2005, the Trust obtained a $4,600,000 loan from Nomura Credit &
Capital, Inc., an unaffiliated third-party lender, which is secured by the
Trust's Indianapolis, Indiana property. The loan bears interest at 5.82%,
requires monthly payments of principal and interest of $54,000 and is scheduled
to mature on April 11, 2015, at which time the outstanding principal balance is
expected to be approximately $3,831,000. The Trust received net proceeds from
this loan, after satisfying closing costs, of approximately $4,387,000.
Purchase Contract for Amherst, New York Property
On March 21, 2005, the Trust entered into an agreement to acquire two office
building properties in Amherst, New York with an aggregate of 200,000 square
feet. The properties are net leased to, and serve as the East Coast Headquarters
of, Ingram Micro, Inc. The contract purchase price for the properties is
approximately $22 million. The acquisition is subject to the Trust's due
diligence review. If consummated, it is expected that the transaction will close
during the second quarter of 2005.
62
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
During our fiscal year ended December 31, 2004 and through the date of this
report, there were no disagreements with Deloitte & Touche LLP on any matter of
accounting principle or practice, financial statement disclosure, or auditing
scope or procedure which disagreements if not resolved to Deloitte & Touche
LLP's satisfaction, as applicable, would have caused them to make reference to
the subject matter in connection with their report on our financial statements
for such year.
During our fiscal year ended December 31, 2003 and through the date of this
report, there were no disagreements with KPMG LLP on any matter of accounting
principle or practice, financial statement disclosure, or auditing scope or
procedure which disagreements, if not resolved to KPMG LLP's satisfaction, would
have caused them to make reference to the subject matter in connection with
their report on our financial statements for such year.
ITEM 9A. CONTROLS AND PROCEDURES
As of the end of the period covered by this annual report on Form 10-K, an
evaluation was carried out under the supervision and with the participation of
our management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of our disclosure controls and procedures (as such
term is defined in Rule 13a-15 (e) under the Securities Exchange Act of 1934).
Based on that evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that, as of the end of such period, our disclosure
controls and procedures were effective as of the end of the period covered by
this report. In addition, no change in our internal control over financial
reporting (as defined in Rule 13a- 15 (f) under the Securities Exchange Act of
1934) occurred during the fourth quarter of our fiscal year ended December 31,
2004 that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
All information that we were required to report in a Current Report on Form 8-K
during the fourth quarter of 2004 was reported in a Current Report on Form 8-K.
63
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE TRUST.
(a) Directors.
"Election of Trustees" presented in our 2005 Proxy Statement to be filed
is incorporated herein by reference.
(b) Executive Officers.
"Executive Officers" as presented in our 2005 Proxy Statement to be filed
is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
"Compensation of Trustees" and "Executive Compensation", presented in our
2005 Proxy Statement to be filed are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
"Security Ownership of Trustees, Officers and Others" presented in our
2005 Proxy Statement to be filed is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
"Certain Transactions and Relationships" presented in our 2005 Proxy
Statement to be filed is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
"Principal Accountant Fees and Services" presented in our 2005 Proxy
Statement to be filed is incorporated herein by reference.
64
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Financial Statements and Financial Statement Schedules.
(1) Financial Statements:
Reports of Independent Registered Public Accounting Firms on pages
39 & 40 of Item 8.
Combined Balance Sheets - December 31, 2004 and 2003 on page 41 of
Item 8.
Combined Statements of Operations and Comprehensive Income - For the
Years Ended December 31, 2004, 2003 and 2002 on page 42 of Item 8.
Combined Statements of Shareholders' Equity - For the Years Ended
December 31, 2004, 2003 and 2002 on page 43 of Item 8.
Combined Statements of Cash Flows - For the Years Ended December 31,
2004, 2003 and 2002 on page 44 of Item 8.
Notes to Combined Financial Statements on pages 45 through 63 of
Item 8.
(2) Financial Statement Schedules:
Report of Independent Registered Public Accounting Firm on Financial
Statement Schedules.
Schedule III - Real Estate and Accumulated Depreciation.
All Schedules, other than III, are omitted, as the information is
not required or is otherwise furnished.
(b) Exhibits.
Exhibit Description Page Number
- ------- ----------- -----------
3.1 Bylaws of Trust as amended (a)
3.2 Certificate of Amendment to Amended and Restated Declaration of Trust as of March 6, 2001 (b)
3.3 Amendments to Amended and Restated Declaration of Trust dated April 15, 2004 (f)
3.4 By-Law Amendments (p)
4.1 Form of certificate for Shares of Beneficial Interest (c)
4.2 Certificate of Designations relating to Trust's Series A Cumulative Redeemable (d)
Preferred Shares of Beneficial Interest
4.3 Warrant to purchase 500,000 shares of Beneficial Interest of Trust (a)
4.4 Agreement of Limited Partnership of First Union REIT L.P., dated as of January 1, 2005 (k)
65
4.5 Certificate of Designations relating to Trust's Series B-1 Cumulative Convertible
Redeemable Preferred Shares of Beneficial Interest (p)
10.1 1999 Trustee Share Option Plan (e)
10.2 1999 Long Term Incentive Performance Plan (e)
10.3 Indemnification Agreement with Neil Koenig, dated as of April 29, 2002 (g)
10.4 Stock Purchase Agreement between First Union Real Estate Equity and Mortgage (h)
Investments and FUR Investors, LLC, dated as of November 26, 2003 ("Stock Purchase
Agreement"), including Annex A thereto, being the list of Conditions to the Offer.
10.5 Guaranty of Michael L. Ashner, Guarantor, dated November 26, 2003, in favor of First (h)
Union Real Estate Equity and Mortgage Investments, Guarantee, in the form provided
as Annex F to the Stock Purchase Agreement.
10.6 Advisory Agreement between First Union Real Estate Equity and Mortgage Investments (h)
and FUR Advisors, LLC.
10.7 Exclusivity Services Agreement between First Union Real Estate Equity and Mortgage (h)
Investments and Michael L. Ashner.
10.8 Covenant Agreement between First Union Real Estate Equity and Mortgage Investments (h)
and FUR Investors, LLC.
10.9 Loan Agreement, dated November 18, 2004, among FT-Fin Acquisition LLC, Keybank (j)
National Association, Newstar CP Funding LLC, Keybank National Association, as agent
for itself and such other lending institutions, and Keybanc Capital Markets, as the
Arranger
10.10 Form of Mortgage, dated November 18, 2004, in favor of Keybank National Association (j)
10.11 Ownership Interest Pledge Agreement, dated November 18, 2004, from FT-Fin (j)
Acquisition LLC to Keybank National Association
10.12 Guaranty, dated as of November 18, 2004, by First Union Real Estate Equity and (j)
Mortgage Investments in favor of Keybank National Association, as the agent.
10.13 Indemnity Regarding Hazardous Materials, dated as of November 18, 2004, by First (j)
Union Real Estate Equity and Mortgage Investments in favor of Keybank National
Association, as the agent.
10.14 Amended and Restated Omnibus Agreement, dated March16, 2005, among Gerald Nudo, (n)
Laurence Weiner and First Union REIT L.P.
10.15 Securities Purchase Agreement, dated February 16, 2005, between First Union Real (o)
Estate Equity and Mortgage Investments and Kimco Realty Corporation
10.16 Securities Purchase Agreement, dated February 25, 2005, between First Union Real (p)
Estate Equity and Mortgage Investments, Perrin Holden & Davenport Capital Corp. and
the Investors named therein
66
10.17 Registration Rights Agreement, dated February 28, 2005, between First Union Real (p)
Estate Equity and Mortgage Investments and the Investors named therein
10.18 Investor Rights Agreement, dated February 28, 2005, between First Union Real Estate (p)
Equity and Mortgage Investments and the Investors named therein
10.19 Purchase and Sale Agreement, dated March 10, 2005, between Amherst Investors (q)
Business Trust and Micron Realty LLC
10.20 Assignment of Purchase and Sale Agreement, dated March 21, 2005, between Micron (q)
Realty LLC and First Union Real Estate Equity and Mortgage Investments
16 Letter from KPMG (i)
21 List of Subsidiaries *
23.1 Consent of Independent Registered Public Accounting Firm *
23.2 Consent of Independent Registered Public Accounting Firm *
24 Power of Attorney *
31 Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *
32 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *
* filed herewith
(a) Incorporated by reference to the Trust's 1998 Form 10-K
(b) Incorporated by reference to the Trust's 2000 Form 10-K
(c) Incorporated by reference to the Trust's Registration Statement on Form
S-3 No. 33-2818
(d) Incorporated by reference to the Trust's Form 8-K dated October 24, 1996
(e) Incorporated by reference to the Trust's 1999 Proxy Statement for Special
Meeting held May 17, 1999 in lieu of Annual Meeting
(f) Incorporated by reference to the Trust's March 31, 2004 Form 10-Q
(g) Incorporated by reference to the Trust's 2002 Form 10-K
(h) Incorporated by reference to the Trust's Form 8-K dated November 26, 2003
(i) Incorporated by reference to the Trust's Form 8-K dated March 2, 2004
(j) Incorporated by reference to the Trust's Form 8-K dated November 18, 2004
(k) Incorporated by reference to the Trust's Form 8-K dated January 1, 2004
(n) Incorporated by reference to the Trust's Form 8-K dated March 18, 2005
(o) Incorporated by reference to the Trust's Form 8-K dated February 17, 2005
(p) Incorporated by reference to the Trust's Form 8-K dated March 2, 2005
(q) Incorporated by reference to the Trust's Form 8-K dated March 23, 2005
67
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Trust has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
FIRST UNION REAL ESTATE EQUITY
AND MORTGAGE INVESTMENTS
Dated: March 30, 2005 By: /s/ Michael L. Ashner
-----------------------------
Michael L. Ashner
Chief Executive Officer
Dated: March 30, 2005 By: /s/ Thomas Staples
-----------------------------
Thomas Staples
Chief Financial Officer
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.
Name Title Date
- -------------------------- ------- --------------
/s/ Michael L. Ashner Trustee March 30, 2005
- ---------------------
/s/ Peter Braverman Trustee March 30, 2005
- -------------------
Bruce R. Berkowitz
Arthur Blasberg, Jr.
Howard Goldberg Trustee March 30, 2005
By: /s/ Peter Braverman
-------------------
Peter Braverman,
as attorney-in fact
68
Report of Independent Registered Accounting Firm
To the Board of Trustees and Shareholders
First Union Real Estate Equity and Mortgage Investments:
Under date of March 4, 2004, except for the effects of the discontinued
operations described in notes 2, 8, and 18 which are as of March 16, 2005, we
reported on the combined balance sheet of First Union Real Estate Equity and
Mortgage Investments and First Union Management, Inc. and subsidiaries (the
Company) as of December 31, 2003, and the related combined statements of
operations, shareholders' equity, and cash flows for each of the years in the
two-year period then ended, which is included in the Annual Report on Form 10-K.
In connection with our audits of the aforementioned combined financial
statements, we also audited the related financial statement schedule for the
years ended December 31, 2003 and 2002 listed under Item 15(a)(2) on page 66.
This financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic combined financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
/s/ KPMG LLP
New York, New York
March 4, 2004, except for the effects of the
discontinued operations described in notes 2,
8, and 18 which are as of March 16, 2005
FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
At December 31, 2004
(amounts in thousands)
Cost capitalized
subsequent to
Initial Cost to Registrant acquistion
------------------------------------------------------
Mortgage Land Building and Land/Building and
Description Location Location Encumbrances Land Estates Improvements Improvements
- ------------------------------------------------------------------------------------------------------------------
Continuing Operations:
Office Orlando FL 0 0 0 17,248 0
Office Plantation FL 12,624 0 0 8,915 0
Office Churchill PA 0 0 0 23,834 0
Office Indianapolis IN 0 270 0 1,609 6,310
---------------------------------------------------------------------
12,624 270 0 51,607 6,310
---------------------------------------------------------------------
Retail Athens GA 1,036 0 0 3,669 0
Retail Atlanta GA 1,220 0 0 4,633 0
Retail Louisville KY 928 0 0 2,722 0
Retail Lafayette LA 841 0 0 0 0
Retail St. Louis MO 1,092 0 0 990 0
Retail Biloxi MS 1,032 0 0 851 0
Retail Greensboro NC 953 0 0 3,797 0
Retail Knoxville TN 1,009 0 0 2,121 0
Retail Memphis TN 1,036 0 0 760 0
Retail Denton TX 1,036 0 0 1,574 0
Retail Seabrook TX 996 0 0 1,393 0
---------------------------------------------------------------------
11,179 0 0 22,510 0
---------------------------------------------------------------------
Other Jacksonville FL 7,402 2,166 0 8,665 0
Other (1) 53,000 0 0 0 0
---------------------------------------------------------------------
60,402 2,166 0 8,665 0
---------------------------------------------------------------------
---------------------------------------------------------------------
Total from Continuing Operations 84,206 2,436 0 82,782 6,310
---------------------------------------------------------------------
Discontinued Operations:
---------------------------------------------------------------------
Retail Sherman TX 956 0 0 820 0
---------------------------------------------------------------------
---------------------------------------------------------------------
TOTALS 85,162 2,436 0 83,602 6,310
=====================================================================
As of December 31, 2004
------------------------------------------------------------
Land Building and Accumulated Date
Description Location Location Land Estates Improvements Total Depreciation Acquired Life
- ---------------------------------------------------------------------------------------------------------------------------------
Continuing Operations:
Office Orlando FL 0 0 17,248 17,248 54 11/14/2004 40 yrs
Office Plantation FL 0 0 8,915 8,915 28 11/14/2004 40 yrs
Office Churchill PA 0 0 23,834 23,834 74 11/14/2004 40 yrs
Office Indianapolis IN 1,763 0 6,426 8,189 4,496 10/16/1974 40 yrs
0
--------------------------------------------------------
1,763 0 56,424 58,187 4,652
--------------------------------------------------------
Retail Athens GA 0 0 3,669 3,669 11 11/14/2004 40 yrs
Retail Atlanta GA 0 0 4,633 4,633 14 11/14/2004 40 yrs
Retail Louisville KY 0 0 2,722 2,722 9 11/14/2004 40 yrs
Retail Lafayette LA 0 0 0 0 0 11/14/2004 40 yrs
Retail St. Louis MO 0 0 990 990 3 11/14/2004 40 yrs
Retail Biloxi MS 0 0 851 851 3 11/14/2004 40 yrs
Retail Greensboro NC 0 0 3,797 3,797 12 11/14/2004 40 yrs
Retail Knoxville TN 0 0 2,121 2,121 7 11/14/2004 40 yrs
Retail Memphis TN 0 0 760 760 2 11/14/2004 40 yrs
Retail Denton TX 0 0 1,574 1,574 5 11/14/2004 40 yrs
Retail Seabrook TX 0 0 1,393 1,393 4 11/14/2004 40 yrs
--------------------------------------------------------
0 0 22,510 22,510 70
--------------------------------------------------------
Other Jacksonville FL 2,166 0 8,665 10,831 27 11/14/2004 40 yrs
Other (1) 0 0 0 0 0
--------------------------------------------------------
2,166 0 8,665 10,831 27
--------------------------------------------------------
--------------------------------------------------------
Total from Continuing Operations 3,929 0 87,599 91,528 4,750
--------------------------------------------------------
Discontinued Operations:
--------------------------------------------------------
Retail Sherman TX 0 0 820 (2) 820 0 11/14/2004 40 yrs
--------------------------------------------------------
--------------------------------------------------------
TOTALS 3,929 0 88,419 92,349 4,750
========================================================
(1) Represents a first mortgage loan on the Orlando, Florida and Churchill,
Pennsylvania properties.
(2) Balance does not include $559 of lease intangibles shown on the balance
sheet.
FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
(amounts in thousands)
The following is a reconciliation of real estate assets and accumulated
depreciation:
Year ended Year ended Year ended
December 31, December 31, December 31,
2004 2003 2002
------------ ------------ ------------
Real Estate
Balance at beginning of period $ 71,983 $ 70,953 $ 70,275
Additions during the period:
Land & land estates 3,659 -- --
Buildings & improvements 83,096 1,043 688
-------- -------- --------
158,738 71,996 70,963
Less: Disposition of assets 66,389 -- 10
Less: Reclassification to discontinued operations 820 13 --
-------- -------- --------
Balance at end of period $ 91,528 $ 71,983 $ 70,953
======== ======== ========
Accumulated Depreciation
Balance at beginning of period $ 14,102 $ 12,057 $ 10,108
Additions charged to operating expenses 1,355 2,058 1,959
-------- -------- --------
15,457 14,115 12,067
Less: Accumulated depreciation on assets
disposed of 10,707 13 10
-------- -------- --------
$ 4,750 $ 14,102 $ 12,057
======== ======== ========
EXHIBIT INDEX
Exhibit Description Page Number
- ------- ----------- -----------
3.1 Bylaws of Trust as amended (a)
3.2 Certificate of Amendment to Amended and Restated Declaration of Trust as of March 6, 2001 (b)
3.3 Amendments to Amended and Restated Declaration of Trust dated April 15, 2004 (f)
3.4 By-Law Amendments (p)
4.1 Form of certificate for Shares of Beneficial Interest (c)
4.2 Certificate of Designations relating to Trust's Series A Cumulative Redeemable (d)
Preferred Shares of Beneficial Interest
4.3 Warrant to purchase 500,000 shares of Beneficial Interest of Trust (a)
4.4 Agreement of Limited Partnership of First Union REIT L.P., dated as of January 1, 2005 (k)
4.5 Certificate of Designations relating to Trust's Series B-1 Cumulative Convertible (p)
Redeemable Preferred Shares of Beneficial Interest
10.1 1999 Trustee Share Option Plan (e)
10.2 1999 Long Term Incentive Performance Plan (e)
10.3 Indemnification Agreement with Neil Koenig, dated as of April 29, 2002 (g)
10.4 Stock Purchase Agreement between First Union Real Estate Equity and Mortgage (h)
Investments and FUR Investors, LLC, dated as of November 26, 2003 ("Stock Purchase
Agreement"), including Annex A thereto, being the list of Conditions to the Offer.
10.5 Guaranty of Michael L. Ashner, Guarantor, dated November 26, 2003, in favor of First (h)
Union Real Estate Equity and Mortgage Investments, Guarantee, in the form provided
as Annex F to the Stock Purchase Agreement.
10.6 Advisory Agreement between First Union Real Estate Equity and Mortgage Investments (h)
and FUR Advisors, LLC.
10.7 Exclusivity Services Agreement between First Union Real Estate Equity and Mortgage (h)
Investments and Michael L. Ashner.
10.8 Covenant Agreement between First Union Real Estate Equity and Mortgage Investments (h)
and FUR Investors, LLC.
10.9 Loan Agreement, dated November 18, 2004, among FT-Fin Acquisition LLC, Keybank (j)
National Association, Newstar CP Funding LLC, Keybank National Association, as agent
for itself and such other lending institutions, and Keybanc Capital Markets, as the
Arranger
10.10 Form of Mortgage, dated November 18, 2004, in favor of Keybank National Association (j)
10.11 Ownership Interest Pledge Agreement, dated November 18, 2004, from FT-Fin (j)
Acquisition LLC to Keybank National Association
10.12 Guaranty, dated as of November 18, 2004, by First Union Real Estate Equity and (j)
Mortgage Investments in favor of Keybank National Association, as the agent.
10.13 Indemnity Regarding Hazardous Materials, dated as of November 18, 2004, by First (j)
Union Real Estate Equity and Mortgage Investments in favor of Keybank National
Association, as the agent.
10.14 Amended and Restated Omnibus Agreement, dated March16, 2005, among Gerald Nudo, (n)
Laurence Weiner and First Union REIT L.P.
10.15 Securities Purchase Agreement, dated February 16, 2005, between First Union Real (o)
Estate Equity and Mortgage Investments and Kimco Realty Corporation
10.16 Securities Purchase Agreement, dated February 25, 2005, between First Union Real (p)
Estate Equity and Mortgage Investments, Perrin Holden & Davenport Capital Corp. and
the Investors named therein
10.17 Registration Rights Agreement, dated February 28, 2005, between First Union Real (p)
Estate Equity and Mortgage Investments and the Investors named therein
10.18 Investor Rights Agreement, dated February 28, 2005, between First Union Real Estate (p)
Equity and Mortgage Investments and the Investors named therein
10.19 Purchase and Sale Agreement, dated March 10, 2005, between Amherst Investors (q)
Business Trust and Micron Realty LLC
10.20 Assignment of Purchase and Sale Agreement, dated March 21, 2005, between Micron (q)
Realty LLC and First Union Real Estate Equity and Mortgage Investments
16 Letter from KPMG (i)
21 List of Subsidiaries *
23.1 Consent of Independent Registered Public Accounting Firm *
23.2 Consent of Independent Registered Public Accounting Firm *
24 Power of Attorney *
31 Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *
32 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *
* filed herewith
(a) Incorporated by reference to the Trust's 1998 Form 10-K
(b) Incorporated by reference to the Trust's 2000 Form 10-K
(c) Incorporated by reference to the Trust's Registration Statement on Form
S-3 No. 33-2818
(d) Incorporated by reference to the Trust's Form 8-K dated October 24, 1996
(e) Incorporated by reference to the Trust's 1999 Proxy Statement for Special
Meeting held May 17, 1999 in lieu of Annual Meeting
(f) Incorporated by reference to the Trust's March 31, 2004 Form 10-Q
(g) Incorporated by reference to the Trust's 2002 Form 10-K
(h) Incorporated by reference to the Trust's Form 8-K dated November 26, 2003
(i) Incorporated by reference to the Trust's Form 8-K dated March 2, 2004
(j) Incorporated by reference to the Trust's Form 8-K dated November 18, 2004
(k) Incorporated by reference to the Trust's Form 8-K dated January 1, 2004
(n) Incorporated by reference to the Trust's Form 8-K dated March 18, 2005
(o) Incorporated by reference to the Trust's Form 8-K dated February 17, 2005
(p) Incorporated by reference to the Trust's Form 8-K dated March 2, 2005
(q) Incorporated by reference to the Trust's Form 8-K dated March 23, 2005
The Registrant will file a definitive Proxy Statement pursuant to Regulation 14A
involving the election of trustees with the Securities and Exchange Commission
not later than 120 days after December 31, 2004, portions of which are
incorporated by reference therein.