ITEM 1. BUSINESS.
The registrant 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 July 25, 1986 (the "Declaration of Trust"), which has as its principal investment policy the purchase of interests in real estate equities. The registrant qualifies as a real estate investment trust under Sections 856 through 860 of the Internal Revenue Code.
In order 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 registrant, in 1971, caused a management company to be organized pursuant to the laws of the State of Delaware under the name First Union Management, Inc. (the "Management Company"), to lease property from the registrant and to operate such property for its own account as a separate taxable entity. At December 31, 1996, the registrant net leased 35 of its properties to the Management Company. The shares of the Management Company are held in trust, with the shareholders of the registrant, as exist from time to time, as contingent beneficiaries. For financial reporting purposes, the financial statements of the Management Company are combined with those of the registrant.
The registrant owns regional enclosed shopping malls, apartment complexes and large downtown office buildings. Additionally, in 1996 the registrant invested $30 million in a joint venture which owns eight shopping malls and 50% of another shopping mall. The registrant's Management Company manages and leases the joint venture shopping malls. The registrant's portfolio is diversified by type of property, geographical location, tenant mix and rental market. As of December 31, 1996, the registrant owned (in fee or pursuant to long-term groundleases under which the registrant is lessee) 13 shopping malls, nine apartment complexes, six office properties and a 1,100-car parking garage and a 300-car parking facility, as well as other miscellaneous properties (see Item 2
Item 2 - Properties).
Currently, the registrant intends to concentrate its portfolio in retail and apartment properties while investments in office buildings will be de-emphasized. Although not presently seeking new mortgage investments, except when needed in the disposition of the registrant's office portfolio, the registrant intends to hold two of its three mortgage investments to maturity. In February 1997, the registrant accepted a payment of $16.2 million cash and a $1.8 million note for the other mortgage investment.
All of the registrant's shopping malls compete for tenants on the basis of the rent charged and location, and encounter competition from other retail properties in their respective market areas, and some of the registrant's shopping malls compete with other shopping malls in the environs. However, the principal competition for the registrant's shopping malls may come from future shopping malls locating in their market areas and from mail order and electronic retailers. In three markets in which the registrant competes, overbuilding of retail projects has caused occupancy levels to be negatively impacted. Additionally, the overall economic health of retail tenants impacts the registrant's shopping malls. Due to the overbuilding of retail space and a demand for large, open area, administrative service space in Denver, CO, the registrant has repositioned a former retail mall into an office property during 1995.
The registrant's apartment complexes compete with other apartments and residential housing in the immediate areas in which they are located and may compete with apartments and residential housing constructed in the same areas in the future.
The registrant's office properties compete for tenants principally with office buildings throughout the respective areas in which they are located. In most areas where the registrant's office buildings are located competition for tenants has been and continues to be intense on the basis of rent, location and age of the building. High vacancy rates in the cities in which the registrant has properties and the age of the registrant's office properties continue to negatively impact the registrant's occupancy rates and its ability to raise rental rates. Additionally, these factors also impact the ability of the registrant to dispose of its office properties.
The registrant's parking facilities compete with other parking facilities in the immediate areas in which they are located and may compete with new parking facilities constructed in the same areas in the future.
The registrant's mortgage investments are collateralized by an office building, shopping mall, partnership units of another public real estate investment trust and an apartment complex. Risks inherent with the registrant's portfolio are applicable to the collateral securing the mortgage investments. These risks may impair the realizability of the mortgage investments.
The registrant also experiences considerable competition when attempting to acquire equity interests in desirable real estate at operating yields below the registrant's cost of funds. As prices for real estate acquisitions continue to firm, purchasing properties at substantial yields above the registrant's cost of funds requires the registrant to assume an increased level of risk. The competition is provided by other real estate investment trusts, insurance companies, private pension plans and private developers. Additionally, the registrant's credit rating and leverage affect its competitive position in the public debt and equity markets.
The federal government and a number of states have adopted handicapped facilities and energy laws and regulations relative to the development and use of real estate. Such laws and regulations may operate to reduce the number and attractiveness of investment opportunities available to the registrant. The registrant has reviewed the properties which it owns or in which it has a leasehold interest to determine the extent and amount of capital expenditures to comply with the requirements for handicapped facilities. While the registrant is making and will continue to make modifications to the properties which it owns, the expenditures are not expected to be material. The registrant is not aware of any other requirements to make capital expenditures to comply with such laws and regulations. Other effects upon the registrant's investments which result from the application of such laws and regulations cannot be predicted.
Additionally, under various federal, state and local laws, ordinances and regulations, an owner of real estate generally is liable for the costs of removal or remediation of certain hazardous or toxic substances located on or in, or emanating from, its property, as well as related costs of investigation and property damage. These laws often impose such liability without regard to whether the owner knew of, or was responsible for, the presence of such hazardous or toxic substances. The presence of such substances, or the failure to properly remediate such substances, may adversely affect the registrant's ability to sell or lease a property or to borrow using such real estate as collateral. Other federal and state laws require the removal or encapsulation of asbestos-containing material in poor condition in the event of remodeling or renovation. Other statutes may require the removal of underground storage tanks that are out of service or out of compliance.
Certain environmental laws impose liability on a previous owner of property to the extent that hazardous or toxic substances were present during the prior ownership period. A transfer of the property does not relieve an owner of such liability. Thus, the registrant may have liability with respect to properties previously sold but is not aware of any such liability.
Prior to undertaking major transactions, the registrant has hired independent environmental experts to review specific properties. Thirteen properties have been reviewed and no significant environmental hazards have been uncovered. The registrant has 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. However, no assurance can be given that hazardous or toxic substances are not located on any of the properties. The registrant will also endeavor to protect itself 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 the registrant from all such liabilities.
The number of persons employed by the registrant is 47.
ITEM 2. PROPERTIES The following table sets forth certain information relating to the registrant's investments at December 31, 1996:
ITEM 2. PROPERTIES -CONTINUED
(1) The square footage shown represents gross leasable area for shopping malls and net rentable area for office buildings. The apartments are shown as number of units. The parking garage and parking facility are shown as number of parking spaces.
(2) Occupancy rates shown are as of December 31, 1996, and are based on the total square feet at each property, except apartments which are based on the number of units and average occupancy during the year.
(3) The registrant obtained mortgages on the following properties subsequent to acquisition: Meadows of Catalpa Apartments in the amount of $8,000,000 in 1992; Huntington Parking Garage in the amount of $9,300,000 in 1993; Mountaineer Mall in the amount of $4,600,000 in 1994; Crossroads Shopping Center (St. Cloud, MN) in the amount of $50,300,000 in 1995; Woodland Commons in the amount of $12,000,000 in 1996; Somerset Lakes in the amount of $15,000,000 in 1996; Steeplechase in the amount of $9,000,000 in 1996; Beech Lake in the amount of $12,500,000 in 1996.
(4) The total mall contains 676,000 square feet; the registrant owns 618,000 square feet, the balance being ground leased to Giant Eagle Markets, Inc.
(5) This property has two mortgages. Interest rates are 9.10% and 8.25%. The mortgages mature in 2001 and 2009, respectively. The 9.10% mortgage, in the principal amount of $3,936,000, has a principal payment for 1997 of $780,000. The 8.25% mortgage, in the principal amount of $4,152,000, has a principal payment for 1997 of $200,000.
(6) The total mall contains 737,000 square feet; the registrant owns 536,000 square feet, the balance being separately ground leased to Boscov Department Store, Inc.
(7) These properties are the collateral for the registrant's $90 million revolving line of credit.
(8) The registrant sold this property in January 1997.
(9) The total mall contains 734,000 square feet; the registrant owns 625,000 square feet, the balance being separately owned by Target Stores.
(10) This property has two mortgages. Interest rates are 7% and 7.485%. The mortgages mature in 2000 and 2002, respectively. The 7% mortgage, in the principal amount of $692,000 has a principal repayment for 1997 of $65,000. The 7.485% mortgage, in the principal amount of $48,859,000, has a principal repayment for 1997 of $640,000.
(11) The total mall contains 427,000 square feet; the registrant owns 327,000 square feet, the balance being separately owned by an unrelated third party with Sears, Roebuck and Co. as tenant.
(12) The total mall contains 386,000 square feet; the registrant owns 291,000 square feet, the balance being separately owned by Montgomery Ward & Co., Incorporated.
(13) Highly competitive market conditions have made leasing space difficult. The registrant continues to seek tenants and alternative retail strategies for this property.
(14) The total mall contains 432,000 square feet; the registrant owns 255,000 square feet, the balance being separately owned by Montgomery Ward Development Corporation.
(15) The total mall contains 426,000 square feet; the registrant owns 308,000 square feet, the balance being separately ground leased to Sears, Roebuck and Co.
(16) This property has two mortgages. Interest rates are 8.875% and 9.375%. The mortgages mature in 2005 and 2007, respectively. The 8.875% mortgage in the principal amount of $760,000 has a principal repayment for 1996 of $67,000. The 9.375% mortgage, in the principal amount of $609,000, has a principal repayment for 1996 of $36,000.
(17) North Valley Technical Center was repositioned from a shopping mall to an office property during 1995.
(18) The property was inundated by a flood which occurred in February 1986. The mall was subsequently rebuilt and re-opened in November 1986. A temporary tenant occupied approximately 70,000 square feet as of December 31, 1996. The Trust is pursuing a mixed use strategy for this former retail facility.
(19) The registrant has ground leased the land until October 30, 2011, with seven, 10-year renewal options.
(20) In December 1995, the registrant recorded a $14 million unrealized loss on the carrying value of assets identified for disposition. Subsequent to the disposition of three office buildings, this reserve was $7,004,000 as of December 31, 1996.
(21) This property represents 11.5% of gross revenues of the registrant. The property is located in St. Cloud, MN, which is approximately 55 miles northwest from Minneapolis, MN. St. Cloud has a population of 170,000. The property is a regional, enclosed retail center of 734,000 square feet, of which 625,000 square feet is owned in fee. The retail center was renovated in 1995. Also, the mall is the only regional, enclosed mall in its primary trade area. The competition for the mall are power strip centers in the primary trade area. Additionally, the mall represents 44% of the retail square feet of its primary trade area.
TENANTS OCCUPYING GREATER THAN 10% OR MORE OF THE - - ------------------------------------------------- RENTABLE SQUARE FOOTAGE OF MALL - - -------------------------------
OCCUPANCY OF CROSSROADS - ST. CLOUD FOR LAST 5 YEARS - - ----------------------------------------------------
1992 99% 1993 99% 1994 98% 1995 97% 1996 98%
BASE MINIMUM RENT PER SQUARE FOOT OF OWNED MALL EXCLUDING ANCHOR TENANTS FOR - - ---------------------------------------------------------------------------- THE LAST 5 YEARS - - ----------------
PER SQUARE FOOT
1992 $14.84 1993 15.09 1994 16.31 1995 17.95 1996 18.91
LEASE EXPIRATIONS FOR THE NEXT 10 YEARS - - ---------------------------------------
PROPERTY TAX RATE - - -----------------
$.06 per $1.00 of assessed value. 1996 property taxes were $1,983,606.
As of December 31, 1996, the registrant owned in fee its interests in Crossroads Center (St. Cloud, MN), Woodland Commons, Mall 205, Crossroads Mall (Ft. Dodge, IA), Westgate Towne Centre, Mountaineer Mall, Plaza 205, Valley Mall, Fingerlakes Mall, Fairgrounds Square Mall, Wilkes Mall, 55 Public Square Building, Henry C. Beck Building, Landmark Towers, Peach Tree Center, Somerset Lakes Apartments, Meadows of Catalpa Apartments, Briarwood Apartments, Woodfield Gardens Apartments, Windgate Place Apartments, Walden Village Apartments, Beech Lake Apartments, Steeplechase Apartments, Hunter's Creek Apartments, Land - Huntington Building and the Parking Facility. The registrant holds a leasehold estate or estates, or a fee interest and one or more leasehold estates in Valley North Mall, Two Rivers Mall, Kandi Mall, Circle Tower Building and North Valley Technical Center.
RENTALS FROM NET LEASES
The following table sets forth the rentals payable to the registrant for the year ended December 31, 1996, under net leases of the properties indicated:
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
REGISTRANT VS. THE STATE OF CALIFORNIA
The registrant has pursued legal action against the State of California associated with the 1986 flood of Peach Tree Mall. In September 1991, the court ruled in favor of the registrant on the liability portion of this inverse condemnation suit, which the State of California appealed. The registrant is proceeding with its damage claim in Superior Court of the State of California. No recognition of potential income has been made in the December 31, 1996 Combined Financial Statements.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET PRICE AND DIVIDEND RECORD.
"Market Price and Dividend Record" presented on page 1 of Exhibit 13.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
"Selected Financial Data" presented on page 2 and 3 of Exhibit 13.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
"Management's Discussion and Analysis of Financial Condition and Results of Operations" presented on pages 18 through 22 of Exhibit 13.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS.
The "Combined Balance Sheets" as of December 31, 1996 and 1995, and the "Combined Statements of Income, Combined Statements of Changes in Cash, Combined Statements of Shareholders' Equity" for the years ended December 31, 1996, 1995 and 1994, of the registrant, "Notes to Combined Financial Statements" and "Report of Independent Public Accountants" are presented on pages 4 through 17 of Exhibit 13.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
(A) DIRECTORS.
"Election of Trustees" presented on pages 2 through 6 of registrant's 1997 Proxy Statement is incorporated herein by reference.
(B) EXECUTIVE OFFICERS.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION. - - -------- -----------------------
"Compensation of Trustees" and "Executive Compensation", presented on page 6 and pages 11 through 16, respectively, of registrant's 1997 Proxy Statement are incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. - - -------- ---------------------------------------------------------------
"Security Ownership of Trustees, Officers and Others" presented on pages 9 and 10 of registrant's 1997 Proxy Statement is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. - - -------- -----------------------------------------------
"Certain Relationships and Related Transactions" presented on page 10 of registrant's 1997 Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(A) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES.
(1) FINANCIAL STATEMENTS:
Combined Balance Sheets - December 31, 1996 and 1995 on page 4 of Exhibit 13.
Combined Statements of Income - For the Years Ended December 31, 1996, 1995 and 1994 on page 5 of Exhibit 13.
Combined Statements of Changes in Cash - For the Years Ended December 31, 1996, 1995 and 1994 on page 6 of Exhibit 13.
Combined Statements of Shareholders' Equity - For the Years Ended December 31, 1996, 1995 and 1994 on page 7 of Exhibit 13.
Notes to Combined Financial Statements on pages 8 to 16 of Exhibit 13.
Report of Independent Public Accountants on page 17 of Exhibit 13.
(2) FINANCIAL STATEMENT SCHEDULES:
Report of Independent Public Accountants on Financial Statement Schedules.
Schedule III - Real Estate and Accumulated Depreciation.
Schedule IV - Mortgage Loans on Real Estate.
All Schedules, other than III and IV, are omitted, as the information is not required or is otherwise furnished.
(B) EXHIBITS.
(C) REPORTS ON FORM 8-K. - - --- --------------------
DATE SUBJECT ---- -------
June 12, 1996 Joint venture investment in nine shopping malls.
October 24, 1996 Sale of 2,300,000 preferred shares of beneficial interest.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
By: /s/ James C. Mastandrea ------------------------------ James C. Mastandrea, Chairman, President and Chief Executive 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.
SIGNATURE TITLE DATE --------- ----- ----
Principal Executive Officer Chairman, President, March 21, 1997 and Chief Executive Officer /s/ James C. Mastandrea - - --------------------------- James C. Mastandrea
Principal Financial Officer Executive Vice President- March 21, 1997 Chief Financial Officer /s/ Steven M. Edelman - - --------------------------- Steven M. Edelman
Principal Accounting Senior Vice President- March 21, 1997 Officer Chief Accounting Officer /s/ John J. Dee - - --------------------------- John J. Dee
Trustees: ) Date *Kenneth K. Chalmers ) ) *William E. Conway ) March 21, 1997 ) *Daniel G. DeVos ) ) *Allen H. Ford ) ) *Russell R. Gifford ) ) *Spencer H. Heine ) ) *E. Bradley Jones ) ) *Herman J. Russell ) ) *James C. Mastandrea ) ) ) SIGNATURE ) --------- ) *By: /s/ Paul F. Levin ) ) Paul F. Levin, Attorney-in-fact )
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON -------------------------------------------
FINANCIAL STATEMENT SCHEDULES -----------------------------
To First Union Real Estate Equity and Mortgage Investments:
We have audited in accordance with generally accepted auditing standards, the combined financial statements included in the registrant's 1996 Annual Report included as Exhibit 13 of this form 10-K and have issued our report thereon dated February 5, 1997. Our audit was made for the purpose of forming an opinion on those combined statements taken as a whole. The schedules listed under Item 14(a)(2) on page 15 are the responsibility of management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic combined financial statements. These schedules have been subjected to the auditing procedures applied in the audit of the basic combined financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic combined financial statements taken as a whole.
Cleveland, Ohio, February 5, 1997.
Schedule III ------------
REAL ESTATE AND ACCUMULATED DEPRECIATION ---------------------------------------- AS OF DECEMBER 31, 1996 ------------------------ (IN THOUSANDS) --------------
Schedule III ------------ Continued
Aggregate cost for federal tax purposes is $434,641,000.
Schedule III ------------ - Continued
The following is a reconciliation of real estate assets and accumulated depreciation for the years ended December 31, 1996, 1995 and 1994:
Schedule IV -----------
MORTGAGE LOANS ON REAL ESTATE -----------------------------
AS OF DECEMBER 31, 1996 ----------------------- (IN THOUSANDS, EXCEPT FOR PAYMENT TERMS AND FOOTNOTES)
Schedule IV ----------- - Continued
The following is a reconciliation of the carrying amounts of the mortgage loans outstanding for the years ended December 31, 1996, 1995 and 1994:
EXHIBIT INDEX -------------