<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
COMMISSION FILE NUMBER 0-14458
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
(A MARYLAND LIMITED PARTNERSHIP)
(Exact name of registrant as specified in its charter)
MARYLAND 52-1365317
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
8065 LEESBURG PIKE, SUITE 400
VIENNA, VIRGINIA 22182
(Address of principal executive offices)
(Zip Code)
(703) 394-2400
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report.)
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 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 the past 90 days.
Yes X No
----- -----
<PAGE> 2
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
(A MARYLAND LIMITED PARTNERSHIP)
STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
March 31,
1997 December 31,
(Unaudited) 1996
----------- -------------
<S> <C> <C>
ASSETS
------
Cash and cash equivalents $ 36,606 $ 37,396
Investments in and advances to Local Limited Partnerships (Note 2) 4,243,095 4,241,127
----------- -----------
$ 4,279,701 $ 4,278,523
=========== ===========
LIABILITIES AND PARTNERS' DEFICIT
---------------------------------
Liabilities:
Deferred acquisition notes payable to General Partner $2,414,468 $2,414,468
Accrued interest on deferred acquisition notes payable to
General Partner 2,878,350 2,817,988
Administrative and reporting fee payable to General Partner (Note 3) 1,053,115 1,018,803
Other accrued expenses 51,445 39,445
----------- -----------
6,397,378 6,290,704
----------- -----------
Partners' deficit:
General Partner -- The National Housing Partnership (NHP) (176,266) (175,211)
Original Limited Partner -- 1133 Fifteenth Street Two Associates (181,166) (180,111)
Other Limited Partners -- 18,300 investment units (1,760,245) (1,656,859)
----------- -----------
(2,117,677) (2,012,181)
----------- -----------
$ 4,279,701 $ 4,278,523
=========== ===========
</TABLE>
See notes to financial statements.
-1-
<PAGE> 3
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
(A MARYLAND LIMITED PARTNERSHIP)
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------------
1997 1996
--------- --------
<S> <C> <C>
REVENUES:
Share of income from Local Limited Partnerships $ 1,968 $ 81,357
Interest income 332 1,543
--------- --------
2,300 82,900
--------- --------
COSTS AND EXPENSES:
Administrative and reporting fees to
General Partner (Note 3) 34,312 34,312
Interest on deferred acquisition notes
to General Partner 60,362 60,362 60,362
Interest on partner loans - 753
Other operating expenses 13,122 14,806
--------- --------
107,796 110,233
--------- --------
NET LOSS $(105,496) $(27,333)
========= ========
NET LOSS ASSIGNABLE TO LIMITED PARTNERS $(103,386) $(26,787)
========= ========
NET LOSS PER LIMITED PARTNERSHIP
INTEREST $ (6) $ (1)
========= ========
</TABLE>
See notes to financial statements.
-2-
<PAGE> 4
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
(A MARYLAND LIMITED PARTNERSHIP)
STATEMENT OF PARTNERS' DEFICIT
(UNAUDITED)
<TABLE>
<CAPTION>
The National 1133
Housing Fifteenth Other
Partnership Street Two Limited
(NHP) Associates Partners Total
----------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Deficit at January 1, 1997 $(175,211) $(180,111) $(1,656,859) $(2,012,181)
Net loss -- three months ended
March 31, 1997 (1,055) (1,055) (103,386) (105,496)
--------- --------- ------------ ------------
Deficit at March 31, 1997 $(176,266) $(181,166) $(1,760,245) $(2,117,677)
========= ========= =========== ===========
Percentage interest at March 31, 1997 1% 1% 98% 100%
========= ========= =========== ===========
(A) (B) (C)
</TABLE>
(A) General Partner
(B) Original Limited Partner
(C) Consists of 18,300 investment units of 0.0085% held by 1,297 investors
See notes to financial statements.
-3-
<PAGE> 5
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
(A MARYLAND LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------------
1997 1996
---------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest received $ 332 $ 1,543
Operating expenses paid (1,122) (4,806)
--------- --------
Net cash used in operating activities (790) (3,263)
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD 37,396 30,173
--------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 36,606 $ 26,910
========= ========
RECONCILIATION OF NET LOSS TO NET CASH
USED IN OPERATING ACTIVITIES:
Net loss $(105,496) $(27,333)
--------- --------
Adjustments to reconcile net loss to net cash used in
operating activities:
Share of income from Local Limited Partnerships (1,968) (81,357)
Increase in accrued interest on deferred acquisition
notes 60,362 60,362
Increase in accrued interest on partner loans - 753
Increase in administrative and reporting fees
payable 34,312 34,312
Increase in accrued expenses 12,000 10,000
--------- --------
Total adjustments 104,706 24,070
--------- --------
Net cash used in operating activities $ (790) $ (3,263)
========= ========
</TABLE>
See notes to financial statements.
-4-
<PAGE> 6
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
(A MARYLAND LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
(1) ACCOUNTING POLICIES
ORGANIZATION
National Housing Partnership Realty Fund Two (the "Partnership") is a
limited partnership organized under the laws of the State of Maryland
under the Maryland Revised Uniform Limited Partnership Act on January
22, 1985. The Partnership was formed for the purpose of raising
capital by offering and selling limited partnership interests and then
investing in limited partnerships ("Local Limited Partnerships"), each
of which owns and operates an existing rental housing project which is
financed and/or operated with one or more forms of rental assistance
or financial assistance from the U.S. Department of Housing and Urban
Development ("HUD").
The General Partner raised capital for the Partnership by offering and
selling to additional limited partners 18,300 investment units at a
price of $1,000 per unit. The Partnership acquired limited partnership
interests of 94.5% (98% with respect to allocation of losses) in
twenty-one Local Limited Partnerships, nineteen of which were
organized to acquire and operate an existing rental housing project.
The remaining two Local Limited Partnerships were formed to construct
and operate rental housing projects.
BASIS OF PRESENTATION
The accompanying unaudited interim financial statements reflect all
adjustments which are, in the opinion of management, necessary to a
fair statement of the financial condition and results of operations
for the interim periods presented. All such adjustments are of a
normal and recurring nature.
While the General Partner believes that the disclosures presented are
adequate to make the information not misleading, it is suggested that
these financial statements be read in conjunction with the financial
statements and notes included in NHP Realty Fund Two's Annual Report
filed in Form 10-K for the year ended December 31, 1996.
(2) INVESTMENTS IN AND ADVANCES TO LOCAL LIMITED PARTNERSHIPS
The Partnership owns a 94.5% limited partnership interest (98% with
respect to allocation of losses) in twenty-one Local Limited
Partnerships. Because the Partnership, as a limited partner, does not
exercise control over the activities of the Local Limited Partnerships
in accordance with the partnership agreements, the investments in
Local Limited Partnerships are accounted for using the equity method.
Thus, the investments (and the advances made to the Local Limited
Partnerships as discussed below) are carried at cost less the
Partnership's share of the Local Limited Partnerships' losses and
distributions. However, because the Partnership is not legally liable
for the obligations of the Local Limited Partnerships, and is not
otherwise committed to provide additional support to them, it does not
recognize losses once its investments, reduced for its share of losses
and cash distributions, reaches zero in each of the individual Local
Limited Partnerships. As of March 31, 1997 and December 31, 1996,
investments in nineteen of the twenty-one Local Limited Partnerships
had been reduced to zero. As a result, the Partnership did not
recognize $377,016 and $409,671 of losses from these nineteen Local
Limited Partnerships during the three months ended March 31, 1997 and
1996, respectively. As of March 31, 1997 and December 31, 1996, the
Partnership has not recognized a total of $21,342,285 and $20,965,269,
respectively, of its allocated share of cumulative losses from the
Local Limited Partnerships in which its investment is zero.
-5-
<PAGE> 7
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
(A MARYLAND LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
Advances made by the Partnership to the individual Local Limited
Partnerships are considered part of the Partnership's investment in
Local Limited Partnerships. When advances are made, they are charged
to operations as a loss on investment in the Local Limited Partnership
using previously unrecognized cumulative losses. As discussed above,
due to the cumulative losses incurred by nineteen of the Local Limited
Partnerships, the aggregate balance of investments in and advances to
Local Limited Partnerships, for these nineteen Local Limited
Partnerships, has been reduced to zero at March 31, 1997 and December
31, 1996. To the extent these advances are repaid by the Local Limited
Partnerships in the future, the repayments will be credited as
distributions and repayments received in excess of investment in Local
Limited Partnerships. These advances are carried as a payable to the
Partnership by the Local Limited Partnerships.
No working capital advances or repayments were made during the three
months ended March 31, 1997 and 1996. The combined amount carried as
due to the Partnership by the Local Limited Partnerships was $592,927
at March 31, 1997.
The following are combined statements of operations for the three
months ended March 31, 1997 and 1996, respectively, of the Local
Limited Partnerships in which the Partnership has invested. The
statements are compiled from financial statements of the Local Limited
Partnerships, prepared on the accrual basis of accounting, as supplied
by the management agents of the projects, and are unaudited.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Rental income $3,620,595 $3,664,956
Other income 154,860 93,573
---------- ----------
Total income 3,775,455 3,758,529
---------- ----------
Operating expenses 2,452,912 2,423,485
Interest, taxes and insurance 1,094,658 1,091,910
Depreciation 608,976 573,390
---------- ----------
Total expenses 4,156,546 4,088,785
---------- ----------
Net loss $ (381,091) $ (330,256)
========== ==========
National Housing Partnership Realty Fund Two
share of losses $ (375,048) $ (328,314)
========== ==========
</TABLE>
(3) TRANSACTIONS WITH THE GENERAL PARTNER
During the three month periods ended March 31, 1997 and 1996, the
Partnership accrued administrative and reporting fees payable to the
General Partner in the amount of $34,312 for services provided to the
Partnership. The Partnership did not make any payments to the General
Partner for these fees during each of the respective periods. The
amount due the General Partner by the Partnership was $1,053,115 and
$1,018,803 at March 31, 1997 and December 31, 1996, respectively.
-6-
<PAGE> 8
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
(A MARYLAND LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
The accrued administrative and reporting fees payable to the General
Partner will be paid only as cash flow permits or from the sale or
refinancing of one or more of the underlying properties of the Local
Limited Partnerships.
-7-
<PAGE> 9
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
(A MARYLAND LIMITED PARTNERSHIP)
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements in certain circumstances. Certain information
included in this Report and other Partnership filings (collectively "SEC
Filings") under the Securities Act of 1933, as amended, and the Securities
Exchange Act of 1934, as amended (as well as information communicated orally or
in writing between the dates of such SEC Filings) contains or may contain
information that is forward looking, including statements regarding the effect
of government regulations. Actual results may differ materially from those
described in the forward-looking statements and will be affected by a variety
of factors including national and local economic conditions, the general level
of interest rates, terms of governmental regulations that affect the
Partnership and interpretations of those regulations, the competitive
environment in which the properties owned by the Local Limited Partnerships
operate, the availability of working capital and dispositions of properties
owned by the Partnership.
LIQUIDITY AND CAPITAL RESOURCES
The properties in which the Partnership has invested, through its investments
in the Local Limited Partnerships, receive one or more forms of assistance from
Federal, state or local governments or agencies. As a result, the Local Limited
Partnerships' ability to transfer funds either to the Partnership or among
themselves in the form of cash distributions, loans or advances is generally
restricted by these government-assistance programs. These restrictions,
however, are not expected to impact the Partnership's ability to meet its cash
obligations.
For the past several years, various proposals have been advanced by the United
States Department of Housing and Urban Development ("HUD"), Congress and others
proposing the restructuring of HUD's rental assistance programs under Section 8
of the United States Housing Act of 1937 ("Section 8"), under which many
affiliated properties receive rental subsidies. One such proposal has recently
been introduced in the U.S. Senate, and two such proposals have recently been
introduced in the U.S. House of Representatives. These proposals generally seek
to lower subsidized rents to market levels and to lower required debt service
costs as needed to ensure financial viability at the reduced rents, but utilize
varying approaches to achieve that goal. Congress is currently also considering
various proposals for the renewal of Section 8 contracts that will expire
during the federal fiscal year 1998 (October 1997 through September 1998).
While the Partnership does not believe that the proposed changes would result
in a significant number of tenants relocating from properties owned by the
Local Limited Partnerships, there can be no assurance that the proposed changes
would not significantly affect the operations of the properties of the Local
Limited Partnerships. Furthermore, there can be no assurance that changes in
federal subsidies will not be more restrictive than those currently proposed or
that other changes in policy will not occur. Any such changes could have an
adverse effect on the operation of the Partnership.
Net cash used in operations for the three months ended March 31, 1997 was $790
as compared to $3,263 for the three months ended March 31, 1996. The decrease
in cash used in operations resulted from a decrease in operating expenses paid,
partially offset by a decrease in interest received during the three months
ended March 31, 1997, compared to the three months ended March 31, 1996.
No working capital advances or repayments were made to the Local Limited
Partnerships during the three months ended March 31, 1997 and 1996. The
combined amount carried as due to the Partnership by the Local Limited
Partnerships was $592,927 at March 31, 1997. Future advances made to the
nineteen Local Limited Partnerships' properties whose investments have been
reduced to zero, will be charged to operations; likewise, future repayments
from these properties will be credited to operations.
-8-
<PAGE> 10
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
(A MARYLAND LIMITED PARTNERSHIP)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Distributions received from Local Limited Partnerships represent the
Partnership's proportionate share of the excess cash available for distribution
from the Local Limited Partnerships. As a result of the use of the equity
method of accounting for the Partnership's investments, as of March 31, 1997,
investments in nineteen Local Limited Partnerships had been reduced to zero.
For these investments, cash distributions received are recorded in income as
distributions received in excess of investment in Local Limited Partnerships.
For those investments not reduced to zero, distributions received are recorded
as distributions from Local Limited Partnerships. There were no cash
distributions during the three months March 31, 1997 and 1996. The receipt of
distributions in future quarters is dependent upon the operations of the
underlying properties of the Local Limited Partnerships.
Cash and cash equivalents amounted to $36,606 at March 31, 1997. The ability of
the Partnership to meet its on-going cash requirements, in excess of cash on
hand at March 31, 1997, is dependent upon the future receipt of distributions
from the Local Limited Partnerships or proceeds from sales or refinancings of
one or more of the underlying properties of the Local Limited Partnerships.
Cash on hand at March 31, 1997, plus any distributions from the underlying
operations of the combined Local Limited Partnerships is expected to adequately
fund the operations of the Partnership in the current year. However, there can
be no assurance that future distributions will be adequate to fund the
operations beyond the current year.
The Partnership currently owes the General Partner $1,053,115 for
administrative and reporting services performed. The payment of these unpaid
administrative and reporting fees will most likely result from the sale or
refinancing of the underlying properties of the Local Limited Partnerships,
rather than through recurring operations.
Nineteen of the Local Limited Partnerships in which the Partnership has
invested carry deferred acquisition notes due to the original owners of the
Properties. These notes are secured by both the Partnership's and NHP's
interests in the Local Limited Partnerships and, as discussed below, mature
between 1996 and 1999. In the event of a default on the notes, the noteholders
would be able to assume NHP's and the Partnership's interests in the Local
Limited Partnerships.
The West Oak Village note finally matured on November 30, 1996. The General
Partner is negotiating with the note holders to extend the maturity date of the
note to protect the interests of the Partnership. In addition, the deferred
acquisition notes of eight of the other Local Limited Partnerships mature
during 1997. Due to weak rental market conditions where some of the Properties
are located, the General Partner believes the amount due on the deferred
acquisition notes may likely exceed the value to be obtained through sale or
refinancing opportunities. The General Partner intends to continue negotiations
with the note holders to either extend the maturity date of the notes and/or to
structure an arrangement under which both the note holders and the partners can
receive a financial benefit by having the eligible Properties participate in
sale or refinancing opportunities. Should no agreement be reached and the notes
mature, absent of sale or refinancing which produces sufficient funds to repay
the notes in full, a default would occur on the notes. Such default could lead
to a foreclosure by the noteholder of the security underlying the notes such
that the Partnership may lose its interest in these Local Limited Partnerships.
Should the Partnership lose its interest in a Local Limited Partnership,
partners in the Partnership may incur adverse tax consequences. The impact of
the tax consequence is dependent upon each partner's individual tax situation.
All other notes have final maturity dates in 1999.
RESULTS OF OPERATIONS
The Partnership has invested as a limited partner in Local Limited Partnerships
which operate twenty-one rental housing properties. In prior years, results of
operations of NHP Realty Fund Two were significantly impacted by the
Partnership's share of the losses of the Local Limited Partnerships. These
losses included depreciation and accrued
<PAGE> 11
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
(A MARYLAND LIMITED PARTNERSHIP)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
deferred acquisition note interest expense which are noncash in nature.
Nineteen of the twenty-one investments in Local Limited Partnerships have been
reduced to zero. As a result, the Partnership's operations are no longer being
affected by its share of the operations from these nineteen partnerships. The
Partnership has recorded its share of income in the remaining two Local Limited
Partnerships which amounted to $1,968 and $81,357 for the three months ended
March 31, 1997 and 1996, respectively.
The Partnership's net loss increased to $105,496 for the three months ended
March 31, 1997 from a net loss of $27,333 for the three months ended March 31,
1996. Net loss per unit of limited partnership increased from $1 to $6 for the
18,300 units outstanding throughout both periods. The increase in net loss was
primarily due to a decrease in the Partnership's share of income from the Local
Limited Partnerships. The Partnership did not recognize $377,016 of its
allocated share of losses from nineteen Local Limited Partnerships for the
three months ended March 31, 1997, as the Partnership's net carrying basis in
these Local Limited Partnerships had been reduced to zero. The Partnership's
share of losses from the Local Limited Partnerships, if not limited to its
investment account balance, would have increased $46,734 between periods,
primarily due to an increase in operating expenses and depreciation, partially
offset by an increase in other income.
-10-
<PAGE> 12
SIGNATURES
Pursuant to the requirements 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.
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
--------------------------------------------
(Registrant)
By: The National Housing Partnership,
its sole General Partner
By: National Corporation for Housing
Partnerships, its sole General Partner
May 12, 1997 By: /s/
- ------------ ----------------------------------------------
Jeffrey J. Ochs
As Vice President and Chief Accounting Officer
-11-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 36,606
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 36,606
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,279,701
<CURRENT-LIABILITIES> 1,104,560
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> (2,117,677)
<TOTAL-LIABILITY-AND-EQUITY> 4,279,701
<SALES> 0
<TOTAL-REVENUES> 2,300
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 47,434
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 60,362
<INCOME-PRETAX> (105,496)
<INCOME-TAX> 0
<INCOME-CONTINUING> (105,496)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (105,496)
<EPS-PRIMARY> (6)
<EPS-DILUTED> (6)
</TABLE>
