UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ______ to _______ .
Commission File Number: 0-14857
PAINEWEBBER EQUITY PARTNERS ONE LIMITED PARTNERSHIP
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(Exact name of registrant as specified in its charter)
Virginia 04-2866287
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
265 Franklin Street, Boston, Massachusetts 02110
- ------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 439-8118
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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>
PAINEWEBBER EQUITY PARTNERS ONE LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
June 30, 1998 and March 31, 1998 (Unaudited)
(In thousands)
ASSETS
June 30 March 31
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Operating investment properties:
Land $ 5,218 $ 5,218
Building and improvements 32,766 32,691
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37,984 37,909
Less accumulated depreciation (15,569) (15,131)
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22,415 22,778
Investments in and notes receivable from
unconsolidated joint ventures, at equity 24,051 24,369
Cash and cash equivalents 3,888 3,268
Prepaid expenses - 13
Accounts receivable 402 69
Accounts receivable - affiliates 302 308
Deferred rent receivable 97 415
Deferred expenses, net 697 732
Other assets 290 290
--------- --------
$ 52,142 $ 52,242
========= ========
LIABILITIES AND PARTNERS' CAPITAL
Net advances from consolidated ventures $ 226 $ 32
Accounts payable and accrued expenses 490 412
Interest payable 58 71
Bonds payable 1,420 1,420
Mortgage notes payable 14,648 14,720
Partners' capital 35,300 35,587
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$ 52,142 $ 52,242
========= ========
See accompanying notes
<PAGE>
PAINEWEBBER EQUITY PARTNERS ONE LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended June 30, 1998 and 1997 (Unaudited)
(In thousands, except per Unit data)
1998 1997
---- ----
Revenues:
Rental income and expense
reimbursements $ 1,077 $ 758
Interest and other income 51 73
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1,128 831
Expenses:
Interest expense 283 243
Depreciation and amortization 481 381
Property operating expenses 397 265
Real estate taxes 96 80
General and administrative 89 66
Bad debt expense - 16
--------- -------
1,346 1,051
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Operating loss (218) (220)
Investment income:
Interest income on notes receivable
from unconsolidated ventures 200 200
Partnership's share of unconsolidated
ventures' income (losses) 236 (38)
--------- -------
Net income (loss) $ 218 $ (58)
========= =======
Net income (loss) per Limited
Partnership Unit $ 0.11 $ (0.03)
========= ========
Cash distributions per Limited
Partnership Unit $ 0.25 $ 0.25
========= ========
The above net income (loss) and cash distributions per Limited Partnership
Unit are based upon the 2,000,000 Limited Partnership Units outstanding during
each period.
See accompanying notes.
<PAGE>
PAINEWEBBER EQUITY PARTNERS ONE LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
For the three months ended June 30, 1998 and 1997 (Unaudited)
(In thousands)
General Limited
Partners Partners
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Balance at March 31, 1997 $ (950) $ 38,813
Net loss (1) (57)
Cash distributions (5) (500)
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Balance at June 30, 1997 $ (956) $ 38,256
========= ========
Balance at March 31, 1998 $ (973) $ 36,560
Net income 2 216
Cash distributions (5) (500)
--------- --------
Balance at June 30, 1998 $ (976) $ 36,276
========= ========
See accompanying notes
<PAGE>
PAINEWEBBER EQUITY PARTNERS ONE LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended June 30, 1998 and 1997 (Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1998 1997
---- ----
Cash flows from operating activities:
Net income (loss) $ 218 $ (58)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Partnership's share of unconsolidated
ventures' income (losses) (236) 38
Depreciation and amortization 481 381
Amortization of deferred financing costs 5 5
Changes in assets and liabilities:
Prepaid expenses 13 13
Accounts receivable (333) 97
Accounts receivable - affiliates 6 (52)
Other assets 29 -
Deferred rent receivable 318 8
Deferred expenses (42) (24)
Accounts payable and accrued expenses 78 148
Interest payable (13) -
Net advances from consolidated ventures 194 -
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Total adjustments 500 614
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Net cash provided by operating activities 718 556
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Cash flows from investing activities:
Distributions from unconsolidated joint ventures 650 216
Additions to operating investment properties (75) (12)
Additional investments in unconsolidated joint
ventures (96) (416)
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Net cash provided by (used in) investing
activities 479 (212)
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Cash flows from financing activities:
Repayment of principal on mortgage notes payable (72) (35)
Distributions to partners (505) (505)
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Net cash used in financing activities (577) (540)
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Net increase (decrease) in cash and cash equivalents 620 (196)
Cash and cash equivalents, beginning of period 3,268 4,325
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Cash and cash equivalents, end of period $ 3,888 $ 4,129
======= =======
Cash paid during the period for interest $ 291 $ 238
======= =======
See accompanying notes.
<PAGE>
PAINEWEBBER EQUITY PARTNERS ONE LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
(Unaudited)
1. General
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The accompanying financial statements, footnotes and discussion should be
read in conjunction with the financial statements and footnotes in the
Partnership's Annual Report for the year ended March 31, 1998. In the opinion of
management, the accompanying financial statements, which have not been audited,
reflect all adjustments necessary to present fairly the results for the interim
period. All of the accounting adjustments reflected in the accompanying interim
financial statements are of a normal recurring nature.
The accompanying financial statements have been prepared on the accrual
basis of accounting in accordance with generally accepted accounting principles
which requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities as of June 30, 1998 and March 31, 1998 and revenues and expenses
for each of the three-month periods ended June 30, 1998 and 1997. Actual results
could differ from the estimates and assumptions used.
2. Related Party Transactions
--------------------------
Accounts receivable - affiliates at June 30, 1998 and March 31, 1998
includes $113,000 and $126,000, respectively, due from one joint venture for
interest earned on permanent loans and $174,000 and $167,000, respectively, of
investor servicing fees due from several joint ventures for reimbursement of
certain expenses incurred in reporting Partnership operations to the Limited
Partners of the Partnership. Accounts receivable - affiliates at both June 30,
1998 and March 31, 1998 also includes $15,000 of expenses paid by the
Partnership on behalf of one of the joint ventures during fiscal 1993.
Included in general and administrative expenses for the three-month
periods ended June 30, 1998 and 1997 is $45,000 and $47,000, respectively,
representing reimbursements to an affiliate of the Managing General Partner for
providing certain financial, accounting and investor communication services to
the Partnership.
Also included in general and administrative expenses for the three-month
period ended June 30, 1998 and 1997 is $1,000 and $5,000, respectively,
representing fees earned by an affiliate, Mitchell Hutchins Institutional
Investors, Inc., for managing the Partnership's cash assets.
3. Investments in Unconsolidated Joint Venture Partnerships
--------------------------------------------------------
As of June 30, 1998, the Partnership had investments in four
unconsolidated joint venture partnerships (five at June 30, 1997) which own
operating properties as more fully described in the Partnership's Annual Report.
The unconsolidated joint ventures are accounted for by using the equity method
because the Partnership does not have a voting control interest in the ventures.
Under the equity method, the assets, liabilities, revenues and expenses of the
unconsolidated joint ventures do not appear in the Partnership's financial
statements. Instead, the investments are carried at cost adjusted for the
Partnership's share of each venture's earnings, losses and distributions. The
Partnership reports its share of unconsolidated joint venture earnings or losses
three months in arrears. As discussed further in Note 4, effective in fiscal
1998 the Partnership assumed control over the affairs of Warner/Red Hill
Associates. Accordingly, this venture, which had been accounted for under the
equity method in prior years, is presented on a consolidated basis beginning in
the fourth quarter of fiscal 1998.
Summarized operations of the unconsolidated joint ventures, for the
periods indicated, are as follows:
<PAGE>
Condensed Combined Summary Of Operations
For the three months ended March 31, 1998 and 1997
(in thousands)
1998 1997
---- ----
Revenues:
Rental revenues and expense recoveries $ 2,791 $ 2,686
Interest and other income 40 38
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2,831 2,724
Expenses:
Property operating expenses 817 1,083
Real estate taxes 421 473
Mortgage interest expense 175 217
Interest expense payable to partner 200 200
Depreciation and amortization 758 780
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2,371 2,753
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Net income (loss) $ 460 $ (29)
======= =======
Net income (loss):
Partnership's share of combined
income (loss) $ 248 $ (26)
Co-venturers' share of combined
income (loss) 212 (3)
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$ 460 $ (29)
======= =======
Reconciliation of Partnership's Share of Operations
For the three months ended June 30, 1998 and 1997
(in thousands)
1998 1997
---- ----
Partnership's share of combined income
(loss), as shown above $ 248 $ (26)
Amortization of excess basis (12) (12)
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Partnership's share of unconsolidated
ventures' income (losses) $ 236 $ (38)
======== ========
4. Operating Investment Properties
-------------------------------
At June 30, 1998, the Partnership's balance sheet includes three operating
investment properties (two at June 30, 1997): the wholly-owned Crystal Tree
Commerce Center, the Sunol Center Office Buildings, owned by Sunol Center
Associates, a majority-owned and controlled joint venture, and the Warner/Red
Hill Business Center, owned by Warner/Red Hill Associates, a majority-owned and
controlled joint venture. Effective August 1, 1997, the co-venture partner in
Warner/Red Hill Associates assigned its interest in the joint venture to First
Equity Partners, Inc., the Managing General Partner of the Partnership, in
return for a release from any further obligations under the terms of the joint
venture agreement. As a result, the Partnership assumed control of the
operations of the Warner/Red Hill joint venture. Accordingly, the venture is
presented on a consolidated basis in the Partnership's financial statements
beginning in the fourth quarter of fiscal 1998. Previously the venture was
accounted for on the equity method (see Note 3). The Crystal Tree Commerce
Center consists of three one-story retail plazas containing an aggregate of
74,923 square feet of leasable space and one four-story office building
containing 40,115 square feet of leasable space, located in North Palm Beach,
Florida. The Sunol Center Office Buildings comprise 116,680 square feet of
leasable space, located in Pleasanton, California. The Warner/Red Hill Business
Center consists of three two-story office buildings totalling 93,895 net
rentable square feet located in Tustin, California. The Partnership reports the
operations of Sunol Center Associates and Warner/Red Hill Associates on a
three-month lag.
The following is a combined summary of property operating expenses for the
Crystal Tree Commerce Center, the Sunol Center Office Buildings and the
Warner/Red Hill Business Center (fiscal 1999 only) as reported in the
Partnership's consolidated statements of operations for the three months ended
June 30, 1998 and 1997 (in thousands):
<PAGE>
For the three months ended June 30, 1998 and 1997
(in thousands)
1998 1997
---- ----
Property operating expenses:
Insurance $ 15 $ 13
Repairs and maintenance 158 81
Utilities 77 44
Management fees 24 26
Administrative and other 123 101
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$ 397 $ 265
======== ========
5. Bonds Payable
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Bonds payable consist of the Sunol Center joint venture's share of
liabilities for bonds issued by the City of Pleasanton, California for public
improvements that benefit the Sunol Center operating investment property. Bond
assessments are levied on a semi-annual basis as interest and principal become
due on the bonds. The bonds for which the operating investment property is
subject to assessment bear interest at rates ranging from 5% to 7.87%, with an
average rate of 7.2%. Principal and interest are payable in semi-annual
installments and mature in years 2004 through 2017. In the event the operating
investment property is sold, the liability for the bond assessments would be
transferred to the buyer. Therefore, the Sunol Center joint venture would no
longer be liable for the bond assessments.
6. Mortgage Notes Payable
----------------------
Mortgage notes payable at June 30, 1998 and March 31, 1998 consist of the
following (in thousands):
June 30 March 31
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9.125% nonrecourse loan payable to
an insurance company, which is
secured by the 625 North Michigan
Avenue operating investment
property. The terms of the note
were modified effective May 31,
1994. Monthly payments, including
interest, of $55 are due beginning
July 1, 1994 through maturity on
May 31, 1999. In addition, the loan
requires monthly deposits to a
capital improvement escrow. The
fair value of the mortgage note
payable approximated its carrying
value at June 30, 1998 and March
31, 1998. $ 6,164 $ 6,188
8.39% nonrecourse note payable to
an insurance company, which is
secured by the Crystal Tree
Commerce Center operating
investment property. Monthly
payments, including interest, of
$28 are due beginning November 15,
1994 through maturity on September
19, 2001. The fair value of the
mortgage note payable approximated
its carrying value at June 30, 1998
and March 31, 1998. 3,304 3,318
Nonrecourse note payable to an
insurance company which is secured
by the Warner/Red Hill operating
investment property. The note was
amended and restated during 1994
(see discussion below). The note
bears interest at 2.875% per annum,
requires monthly payments of $24
and has a scheduled maturity date
of August 1, 2003. 5,180 5,214
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$14,648 $14,720
======= =======
During the quarter ended December 31, 1993, the Partnership negotiated and
signed a letter of intent with the existing lender to modify and extend the
maturity of a zero coupon loan secured by the Warner/Red Hill Office Building
with an accreted principal balance of $5,763,000. The terms of the extension and
modification agreement, which was finalized in August 1994, provided for a
10-year extension of the note effective as of the original maturity date of
August 15, 1993. During the term of the agreement, the loan will bear interest
at 2.875% per annum and monthly principal and interest payments of $24,000 will
be required. In addition, the lender required a participation in the proceeds of
a future sale or debt refinancing in order to enter into this agreement.
Accordingly, upon the sale or refinancing of the Warner/Red Hill property, the
lender will receive 40% of the residual value of the property, as defined, above
a specified level after the repayment of the outstanding balance of the loan
payable. The extension and modification agreement also required the Partnership
to establish an escrow account in the name of the joint venture and to fund such
escrow with an equity contribution of $350,000. The escrowed funds are to be
used solely for the payment of capital and tenant improvements, leasing
commissions and real estate taxes related to the Warner/Red Hill property. The
balance of the escrow account is to be maintained at a minimum level of
$150,000. In the event that the escrow balance falls below $150,000, all net
cash flow from the property is to be deposited into the escrow until the minimum
balance is re-established. It is not practicable for management to estimate the
fair value of the mortgage note secured by the Warner/Red Hill property without
incurring excessive costs due to the unique terms of the note.
In addition to the long-term mortgage debt described above, the
Partnership has indemnified Crow/PaineWebber - LaJolla, Ltd. and Lake Sammamish
Limited Partnership, along with the related co-venture partners, against all
liabilities, claims and expenses associated with certain outstanding secured
borrowings of the unconsolidated joint ventures. During September 1994, the
Partnership obtained two new nonrecourse, current-pay mortgage loans in the
amounts of $3,600,000 secured by the Chandler's Reach Apartments and $4,920,000
secured by the Monterra Apartments. The Chandler's Reach and Monterra
nonrecourse loans, which are recorded on the books of the unconsolidated joint
ventures, both have terms of seven years and mature in September of 2001. The
Chandler's Reach loan bears interest at a rate of 8.33% and requires monthly
principal and interest payments of $29,000. This loan will have an outstanding
balance of $3,199,000 at maturity. The Monterra loan bears interest at a rate of
8.45% and requires monthly principal and interest payments of $40,000. This loan
will have an outstanding balance of approximately $4,380,000 at maturity.
<PAGE>
PAINEWEBBER EQUITY PARTNERS ONE LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Information Relating to Forward-Looking Statements
- --------------------------------------------------
The following discussion of financial condition includes forward-looking
statements which reflect management's current views with respect to future
events and financial performance of the Partnership. These forward-looking
statements are subject to certain risks and uncertainties, including those
identified in Item 7 of the Partnership's Annual Report on Form 10-K for the
year ended March 31, 1998 under the heading "Certain Factors Affecting Future
Operating Results", which could cause actual results to differ materially from
historical results or those anticipated. The words "believe", "expect",
"anticipate," and similar expressions identify forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which were made based on facts and conditions as they existed as of
the date of this report. The Partnership undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
Liquidity and Capital Resources
- -------------------------------
In light of the continued strength in the national real estate market with
respect to multi-family apartment properties and the recent improvements in the
office/R&D property markets, management believes that this may be an opportune
time to begin the process of selling the Partnership's operating investment
properties. As a result, management is currently focusing on potential
disposition strategies for the seven remaining investments in the Partnership's
portfolio. Although there are no assurances, it is currently contemplated that
sales of the Partnership's remaining assets could be completed within the next 2
years. The two multi-family apartment properties in which the Partnership has an
interest continue to experience strong occupancy levels and increasing rental
rates. As discussed further below, marketing efforts for the sale of the
Chandler's Reach and Monterra apartment properties commenced during the quarter
ended June 30, 1998 and both properties are currently under contract for sale.
The operations of the five commercial office and retail properties in the
Partnership's portfolio are either stable or improving. As discussed further
below, management has begun the process of marketing the Sunol Center property
for sale and has tentative plans to market the 1881 Worcester Road property for
sale during the second half of calendar 1998. Given the zoning approval recently
received at the 625 North Michigan property, as discussed further below, and the
recent leasing improvements at the Crystal Tree and Warner/Red Hill properties,
the Partnership is also exploring potential sale opportunities for these
properties.
As discussed further in the Annual Report, given the positive performance
of the Chandler's Reach property over the past several years and the current
strength of the national real estate market for the sale of apartment
properties, management had decided to explore potential sale opportunities for
Chandler's Reach during fiscal 1999. During the fourth quarter of fiscal 1998,
the Partnership and its co-venture partner held extensive discussions concerning
marketing strategies and requested broker proposals from national real estate
firms with a strong background in selling properties like Chandler's Reach. The
Partnership and its co-venture partner reviewed proposals from the broker
finalist candidates and completed interviews with them. During the first
quarter, the Partnership and its co-venture partner selected a national
brokerage firm that is a leading seller of apartment properties in the Seattle
area. A marketing package was prepared, and comprehensive sales efforts began in
May 1998. As a result of such efforts, several offers to purchase the Chandler's
Reach property were received. Subsequent to the quarter end, the Partnership
executed a purchase and sale agreement with a prospective third party buyer. The
sale transaction remains contingent upon, among other things, the satisfactory
completion of the buyer's due diligence. As a result, there are no assurances
that this sale transaction will be completed.
The Partnership and its co-venture partner have also been exploring
potential opportunities for the sale of the Monterra Apartments. As part of that
plan, the Partnership initiated discussions during the fourth quarter of fiscal
1998 with national real estate brokerage firms with a strong background in
selling apartment properties. The Partnership solicited marketing proposals from
several of these firms. During the first quarter, after reviewing their
respective proposals and conducting interviews, the Partnership and its
co-venture partner selected a national brokerage firm. Sales materials were
prepared, and an extensive marketing campaign began in May 1998. As a result of
such efforts, the Partnership received several offers to purchase the Monterra
property and negotiated a purchase and sale agreement with one of the
prospective third-party buyers subsequent to the quarter end. As with the
Chandler's Reach sale, this sale transaction remains contingent upon, among
other things, the satisfactory completion of the buyer's due diligence. As a
result, there are no assurances that the sale transaction will be completed.
Sunol Center, in Pleasanton, California, remained 100% leased to three
tenants at June 30, 1998. None of the current leases at Sunol Center were
scheduled to expire before October 2001. The overall market remains strong with
increasing rental rates and a low vacancy level. The existing rental rates on
the leases at Sunol Center are significantly below current market rates.
Provided there is not a dramatic increase in either planned speculative
development or build-to-suit development with current tenants in the local
market, the Partnership would be expected to achieve a materially higher sale
price for the Sunol Center property as the existing leases with below-market
rental rates approach their expiration dates. The Partnership had been planning
to hold the Sunol Center property over the near term in order to capture this
expected increase in value. However, during the third quarter of fiscal 1998
management learned that the largest tenant at Sunol Center, which occupies 52%
of the property's leasable area, wanted to consolidate its operations at another
building in the local market and was interested in negotiating an early
termination of their lease agreement. During the quarter ended June 30, 1998,
the Partnership reached an agreement with this tenant on a termination plan
whereby the tenant will be released from all obligations under their lease
effective in May 1999 in return for a payment of $125,000 to the Partnership.
This lease termination may provide the Partnership with an opportunity to
capture the expected increase in the value of Sunol Center sooner than had been
anticipated. In light of this situation, and given the current strength of the
local market conditions, management believes that this may be the appropriate
time to begin marketing the Sunol property for sale. During the quarter ended
June 30, 1998, the Partnership interviewed potential real estate brokers and
selected a national real estate firm that is a leading seller of R&D/office
properties. A marketing package was subsequently finalized, and comprehensive
sales efforts began in June.
The 64,000 square foot 1881 Worcester Road Office Building was 100% leased
as of June 30, 1998, unchanged from the previous quarter. With the property 100%
leased to two financially strong tenants and no lease expirations until 2002,
management had been developing potential sale strategies for this asset.
However, during the current quarter the tenant leasing the entire second floor
of the property informed the Partnership that it is consolidating its operations
and requested a lease termination which would be effective in the third quarter
of calendar year 1998. This tenant's lease does not expire until February 28,
2003. Negotiations with this tenant concerning a lease termination agreement are
currently underway. If a lease termination agreement with this tenant is
reached, the property's leasing team expects to re-lease this space at a
significantly higher rental rate, which could result in a higher sale price for
the property. During fiscal 1998, the former operator of a gas station abutting
the 1881 Worcester Road property notified the Partnership of a leak in an
underground storage tank on the gas station property and of the risk of
potential contamination of the Partnership's property. Subsequent to this
notification, the Partnership has received an indemnification from the former
operator of the gas station against any loss, cost or damage resulting from
failure to remediate the contamination. The extent of the contamination and any
resulting impact on the future operations and market value of the 1881 Worcester
Road property cannot be determined at the present time. Nonetheless, management
believes that the uncertainty regarding the lease termination request and the
contamination issue could depress the sale price for the property. As a result,
the marketing efforts for this property have been delayed. After the re-leasing
of the second floor and resolution of the ground water contamination issue, this
property is expected to be marketed for sale later in calendar year 1998.
The Warner/Red Hill Business Center was 98% leased and 84% occupied as of
June 30, 1998, up from 74% leased and occupied at the end of the prior quarter.
During the third quarter of fiscal 1998, a tenant occupying 13,160 square feet
declared bankruptcy and moved from the building in January 1998. During the
quarter ended June 30, 1998, the Partnership signed a lease with a replacement
tenant for the entire 13,160 square foot space. This tenant is expected to take
occupancy next quarter. Also, leases were signed with two other new tenants that
moved into their space during the quarter. These tenants occupy a total of 7,530
square feet. In addition, lease expansions were signed with 2 tenants that
increased their space by a total of 2,936 square feet. Over the next 12 months,
leases with 6 tenants occupying 30,371 square feet will expire. The property's
leasing team expects that 4 of these tenants occupying 27,897 square feet will
renew at higher rental rates, and that the remaining space will be leased to new
tenants. Local rental rates for office space continue to experience modest
increases due to the lack of speculative office construction in the local market
and the continued demand for office space. The property's leasing team is
cautiously optimistic that the general market conditions will continue to
improve throughout calendar 1998. Effective August 1, 1997, the co-venture
partner in Warner/Red Hill Associates assigned its interest in the joint venture
to First Equity Partners, Inc., the Managing General Partner of the Partnership,
in return for a release from any further obligations under the terms of the
joint venture agreement. As a result, the Partnership assumed control of the
operations of the Warner/Red Hill joint venture. Accordingly, the venture is
presented on a consolidated basis in the Partnership's financial statements
beginning in the fourth quarter of fiscal 1998. Previously the venture had been
accounted for on the equity method.
The 625 North Michigan Office Building in Chicago, Illinois, was 95%
leased and 87% occupied at June 30, 1998, compared to 88% leased and occupied at
the end of the prior quarter. As discussed further in the Annual Report, the
property's leasing team had been negotiating a lease with a prospective new
tenant which would occupy approximately 22,000 square feet of space. During the
quarter ended June 30, 1998, a lease was signed with this prospective tenant for
24,276 square feet. The space is now being renovated in preparation for the
tenant's expected occupancy in September 1998. In addition, subsequent to the
quarter-end a lease was signed with an existing tenant that occupies
approximately 8,000 square feet. This tenant will relocate and expand into a
total of 10,200 square feet. The downtown Chicago real estate market continues
to display an improving trend. A competitive office property within the local
market has recently obtained approvals to convert its lower floors into a hotel.
This should result in the removal of 290,000 square feet of office space from
the market. In addition, an office tenant at that property has recently
completed a 62,000 square foot expansion, which brings the occupancy level in
the building's office portion to 100%. In this local market, where there is no
current or planned new construction of office space, this reduction in vacant
office space has resulted in a reduction in the market vacancy level and places
more upward pressure on rental rates. The higher effective rents currently being
achieved at 625 North Michigan are expected to increase cash flow and value as
new tenants sign leases and existing tenants sign lease renewals. Retail and
hotel development in the local market continues, as evidenced by plans for a
Nordstrom's-anchored 95,000 square foot retail development which recently
received preliminary approval from the City. This proposed development, which
will be located two blocks from 625 North Michigan, is part of a master plan
that includes several new hotels, entertainment and parking facilities
encompassing five city blocks. Management continues to analyze a potential
project for the property which includes an upgrade to the building lobby and the
addition of a major retail component to the building's North Michigan Avenue
frontage. Rental rates paid by high-end retailers on North Michigan Avenue are
substantially greater than those paid by office tenants. While the costs of such
a project would be substantial, it could have a significant positive effect on
the market value of the 625 North Michigan property. During the quarter ended
June 30, 1998, preliminary approval was received from the City to enclose the
arcade sections of the first floor of the 625 North Michigan building, which
opens the way for this potential retail development. Formal approval is expected
to be received at the September meeting of the City Council. Now that this
preliminary approval has been obtained, the Partnership is exploring potential
sale opportunities for this property.
The Crystal Tree Commerce Center in North Palm Beach, Florida remained
100% leased and occupied for the quarter ended June 30, 1998. During the
quarter, seven tenants occupying a total of 9,197 square feet renewed their
leases. One tenant occupying 1,659 square feet moved from the Center and the
space was leased to a new tenant. Over the next twelve months, leases with 9
tenants occupying 8,013 square feet will expire. All 9 tenants are expected to
renew their leases. Rental rates and occupancy levels in the local market are
continuing to increase gradually. However, rents are not expected to rise to a
level over the near term that would justify new construction. Management is
continuing to position Crystal Tree Commerce Center for a possible sale by
having the property's management and leasing team negotiate rental rates for new
leases on a triple-net basis. This requires each tenant to be 100% responsible
for its share of operating expenses. Currently, 53% of the leases at the
property are on a triple-net basis. Consequently, at this time the property
owner is responsible for the tenant's portion of operating expenses above a base
amount for a total of 47% of the leases. Because most new leases in the local
market are on a triple-net basis, this conversion is expected to increase
interest from prospective buyers of the property and result in a higher sale
price.
At June 30, 1998, the Partnership and its consolidated joint venture had
available cash and cash equivalents of approximately $3,888,000. These funds,
along with the future cash flow distributions from the operating properties,
will be utilized for the working capital requirements of the Partnership,
monthly loan payments, the funding of capital enhancements and potential leasing
costs for its commercial property investments, and for distributions to the
partners. The source of future liquidity and distributions to the partners is
expected to be from the sales or refinancing of the operating investment
properties. Such sources of liquidity are expected to be sufficient to meet the
Partnership's needs on both a short-term and long-term basis.
Results of Operations
Three Months Ended June 30, 1998
- --------------------------------
There was a $276,000 favorable change in the Partnership's net operating
results for the three months ended June 30, 1998 when compared to the same
period in the prior year. This favorable change in the Partnership's net
operating results was mainly due to a $274,000 favorable change in the
Partnership's share of unconsolidated ventures' income (losses). The
Partnership's share of unconsolidated ventures' income (losses) changed
primarily as a result of favorable changes in the net operating results of the
Monterra, Chandler's Reach, 1881 Worcester Road and 625 North Michigan joint
ventures. The favorable changes in the net operating results of the Monterra and
Chandler's Reach joint ventures were mainly due to an increase in average rental
rates during the current three-month period as a result of the strong local
apartment markets, along with reductions in certain administrative expenses. The
favorable changes in net operating results at 1881 Worcester Road and 625 North
Michigan were primarily due to increases in average occupancy at both of the
properties. The favorable change in net operating results at 625 North Michigan
was also due to a decrease in operating expenses of $142,000. Operating expenses
decreased at 625 North Michigan due to a $69,000 reduction in repairs and
maintenance expenses and a $58,000 decline in real estate taxes.
The increase in the Partnership's share of income from the four joint
ventures discussed above was partially offset by the Partnership's share of
income realized from Warner/Red Hill Associates during fiscal 1998. As discussed
above, the operating results of Warner/Red Hill are presented on a consolidated
basis in the Partnership's financial statements for the current period. In the
prior period, the Partnership's share of the net operating results of Warner/Red
Hill Associates was included in the Partnership's share of unconsolidated
ventures' losses.
The Partnership's operating loss decreased by $2,000 for the three months
ended June 30, 1998 when compared to the same period in the prior year. The
Partnership's operating loss, which includes the operating results of the
wholly-owned Crystal Tree Commerce Center and the consolidated Sunol Center and
Warner/Red Hill (fiscal 1999 only) joint ventures, decreased mainly due to the
inclusion of the operating results of the Warner/Red Hill joint venture during
the current period, as explained above. Warner/Red Hill had net income of
$44,000 during the current three-month period. In addition, net income increased
at the Sunol Center joint venture primarily due to an increase in tenant
reimbursements. The increases in net income from the consolidated Warner/Red
Hill and Sunol Center joint ventures were offset by an increase in deprecation
expense on the wholly-owned Crystal Tree Commerce Center, a decrease in interest
income earned on the Partnership's cash and cash equivalents and an increase in
general and administrative expenses. Depreciation expense on the Crystal Tree
property increased for the current period as a result of a reassessment of the
Partnership's depreciation policy based on a re-evaluation of the Partnership's
anticipated remaining holding period for this asset. Interest income earned on
the Partnership's cash reserves decreased by $16,000 due to a decline in the
average amount of cash and cash equivalents. General and administrative expenses
increased by $22,000 mainly due to an increase in certain required legal
expenses.
<PAGE>
PART II
Other Information
Item 1. Legal Proceedings NONE
Item 2. through 5. NONE
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: NONE
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed by the registrant during the quarter
for which this report is filed.
<PAGE>
PAINEWEBBER EQUITY PARTNERS ONE LIMITED PARTNERSHIP
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Partnership has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
PAINEWEBBER EQUITY PARTNERS ONE
LIMITED PARTNERSHIP
By: First Equity Partners, Inc.
---------------------------
Managing General Partner
By: /s/ Walter V. Arnold
--------------------
Walter V. Arnold
Senior Vice President and
Chief Financial Officer
Dated: August 11, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Partnership's unaudited financial statements for the quarter ended June 30, 1998
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> JUN-30-1998
<CASH> 3,888
<SECURITIES> 0
<RECEIVABLES> 705
<ALLOWANCES> 1
<INVENTORY> 0
<CURRENT-ASSETS> 4,592
<PP&E> 62,035
<DEPRECIATION> 15,569
<TOTAL-ASSETS> 52,142
<CURRENT-LIABILITIES> 774
<BONDS> 16,068
0
0
<COMMON> 0
<OTHER-SE> 35,300
<TOTAL-LIABILITY-AND-EQUITY> 52,142
<SALES> 0
<TOTAL-REVENUES> 1,564
<CGS> 0
<TOTAL-COSTS> 1,063
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 283
<INCOME-PRETAX> 218
<INCOME-TAX> 0
<INCOME-CONTINUING> 218
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 218
<EPS-PRIMARY> 0.11
<EPS-DILUTED> 0.11
</TABLE>
