UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED September 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
-----------------------------------------------------
(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
--------------
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
September 30, 1998 and March 31, 1998 (Unaudited)
(In thousands)
ASSETS
September 30 March 31
------------ --------
Operating investment properties:
Land $ 5,218 $ 5,218
Building and improvements 32,817 32,691
--------- --------
38,035 37,909
Less accumulated depreciation (16,013) (15,131)
--------- --------
22,022 22,778
Investments in and notes receivable from
unconsolidated joint ventures, at equity 23,787 24,369
Cash and cash equivalents 4,408 3,118
Restricted cash 126 150
Prepaid expenses - 13
Accounts receivable 387 69
Accounts receivable - affiliates 194 308
Deferred rent receivable 97 415
Deferred expenses, net 732 732
Other assets 290 290
--------- --------
$ 52,043 $ 52,242
========= ========
LIABILITIES AND PARTNERS' CAPITAL
Net advances from consolidated ventures $ 162 $ 32
Accounts payable and accrued expenses 703 412
Interest payable 130 71
Bonds payable 1,385 1,420
Mortgage notes payable 14,574 14,720
Partners' capital 35,089 35,587
--------- --------
$ 52,043 $ 52,242
========= ========
See accompanying notes
<PAGE>
PAINEWEBBER EQUITY PARTNERS ONE LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and six months ended September 30, 1998 and 1997 (Unaudited)
(In thousands, except per Unit data)
Three Months Ended Six Months Ended
September 30, September 30,
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
Revenues:
Rental income and expense
reimbursements $ 1,035 $ 754 $ 2,112 $ 1,512
Interest and other income 63 60 114 133
------- ------- ------- ------
1,098 814 2,226 1,645
Expenses:
Interest expense 283 242 566 485
Depreciation and amortization 486 322 967 703
Property operating expenses 333 291 730 556
Real estate taxes 64 79 160 159
General and administrative 119 174 208 240
Bad debt expense - - - 16
------- ------- ------- ------
1,285 1,108 2,631 2,159
------- ------- ------- ------
Operating loss (187) (294) (405) (514)
Investment income:
Interest income on notes
receivable from
unconsolidated ventures 200 200 400 400
Partnership's share of
unconsolidated ventures'
income 281 65 517 27
------- ------- ------- ------
Net income (loss) $ 294 $ (29) $ 512 $ (87)
======= ======= ======= ======
Net income (loss) per Limited
Partnership Unit $ 0.14 $ (0.01) $ 0.25 $(0.04)
======= ======= ======= ======
Cash distributions per Limited
Partnership Unit $ 0.25 $ 0.25 $ 0.50 $ 0.50
======= ======= ======= ======
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 six months ended September 30, 1998 and 1997 (Unaudited)
(In thousands)
General Limited
Partners Partners
-------- --------
Balance at March 31, 1997 $ (950) $ 38,813
Net loss (1) (86)
Cash distributions (10) (1,000)
-------- --------
Balance at September 30, 1997 $ (961) $ 37,727
========= ========
Balance at March 31, 1998 $ (973) $ 36,560
Net income 5 507
Cash distributions (10) (1,000)
-------- --------
Balance at September 30, 1998 $ (978) $ 36,067
======== ========
See accompanying notes
<PAGE>
PAINEWEBBER EQUITY PARTNERS ONE LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended September 30, 1998 and 1997 (Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1998 1997
---- ----
Cash flows from operating activities:
Net income (loss) $ 512 $ (87)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Partnership's share of unconsolidated ventures' income (517) (27)
Depreciation and amortization 967 703
Amortization of deferred financing costs 10 10
Changes in assets and liabilities:
Prepaid expenses 13 13
Accounts receivable (318) 87
Accounts receivable - affiliates 114 (12)
Deferred rent receivable 318 17
Deferred expenses (95) (85)
Accounts payable and accrued expenses 291 186
Interest payable 59 -
Net advances from consolidated ventures 130 -
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Total adjustments 972 892
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Net cash provided by operating activities 1,484 805
--------- ------
Cash flows from investing activities:
Distributions from unconsolidated joint ventures 1,476 554
Additions to operating investment properties (126) -
Net withdrawals from restricted cash 24 -
Additional investments in unconsolidated joint ventures (377) (660)
--------- ------
Net cash provided by (used in) investing activities 997 (106)
--------- ------
Cash flows from financing activities:
Repayment of principal on mortgage notes payable (146) (70)
Repayment of district bond assessments (35) (31)
Distributions to partners (1,010) (1,010)
--------- ------
Net cash used in financing activities (1,191) (1,111)
--------- ------
Net increase (decrease) in cash and cash equivalents 1,290 (412)
Cash and cash equivalents, beginning of period 3,118 4,325
--------- ------
Cash and cash equivalents, end of period $ 4,408 $3,913
========= ======
Cash paid during the period for interest $ 497 $ 475
========= ======
See accompanying notes.
<PAGE>
PAINEWEBBER EQUITY PARTNERS ONE LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
(Unaudited)
1. General
-------
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 September 30, 1998 and March 31, 1998 and revenues and
expenses for each of the three-and six-month periods ended September 30, 1998
and 1997. Actual results could differ from the estimates and assumptions used.
2. Related Party Transactions
--------------------------
Accounts receivable - affiliates at September 30, 1998 and March 31, 1998
includes $179,000 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 September 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. In addition, accounts
receivable-affiliates at March 31, 1998 includes $126,000 due from one joint
venture for interest earned on a permanent loan.
Included in general and administrative expenses for the six-month periods
ended September 30, 1998 and 1997 is $91,000 and $90,000, 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 six-month
periods ended September 30, 1998 and 1997 is $2,000 and $7,000, 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 September 30, 1998, the Partnership had investments in four
unconsolidated joint venture partnerships (five at September 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.
Subsequent to the end of the quarter, on October 2, 1998, Lake Sammamish
Limited Partnership and Crow PaineWebber LaJolla Limited Partnership, two joint
ventures in which the Partnership has an interest, sold the properties known as
the Chandler's Reach Apartments and the Monterra Apartments to the same
unrelated third parties. Chandler's Reach, located in Redmond, Washington, was
sold for $17.85 million, and Monterra, located in LaJolla, California, was sold
for $20.1 million. The Partnership received net proceeds of approximately
$12,359,000 from the sale of Chandler's Reach after deducting closing costs of
approximately $561,000, closing proration adjustments of approximately $55,000,
the repayment of the existing mortgage note of approximately $3,415,000 and a
prepayment penalty of approximately $354,000 (of which $205,000 was paid by the
buyer), and a payment of approximately $1,311,000 to the Partnership's
co-venture partner for its share of the sale proceeds in accordance with the
joint venture agreement. The Partnership received net proceeds of approximately
$14,796,000 from the sale of Monterra after deducting closing costs of
approximately $306,000, closing proration adjustments of approximately $114,000,
the repayment of the existing mortgage note of approximately $4,672,000 and a
prepayment penalty of approximately $500,000 (of which $295,000 was paid by the
buyer), and a payment of approximately $7,000 to the Partnership's co-venture
partner for its share of the sale proceeds in accordance with the joint venture
agreement. The Partnership will distribute the majority of the net sales
proceeds from the sales of the Chandler's Reach and Monterra properties in the
form of a special distribution to be paid on November 13, 1998 with the regular
quarterly distribution for the quarter ended September 30, 1998.
Summarized operations of the unconsolidated joint ventures, for the
periods indicated, are as follows:
Condensed Combined Summary Of Operations
For the three and six months ended June 30, 1998 and 1997
(in thousands)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
Revenues:
Rental revenues and expense
recoveries $ 2,822 $ 2,865 $ 5,613 $ 5,551
Interest and other income 63 54 103 92
------- ------- ------- -------
2,885 2,919 5,716 5,643
Expenses:
Property operating expenses 822 1,067 1,639 2,150
Real estate taxes 548 578 969 1,051
Mortgage interest expense 176 215 351 432
Interest expense payable to
partner 200 200 400 400
Depreciation and amortization 766 821 1,524 1,601
------- ------- ------- -------
2,512 2,881 4,883 5,634
------- ------- ------- -------
Net income $ 373 $ 38 $ 833 $ 9
======= ======= ======= =======
Net income:
Partnership's share of
combined income (loss) $ 292 $ 76 $ 540 $ 50
Co-venturers' share of
combined income (loss) 81 (38) 293 (41)
------- ------- ------- -------
$ 373 $ 38 $ 833 $ 9
======= ======= ======= =======
Reconciliation of Partnership's Share of Operations
For the three and six months ended September 30, 1998 and 1997
(in thousands)
Three Months Ended Six Months Ended
September 30, September 30,
------------------ ------------------
1998 1997 1998 1997
---- ---- ---- ----
Partnership's share of combined
income, as shown above $ 292 $ 76 $ 540 $ 50
Amortization of excess basis (11) (11) (23) (23)
------- ------ ------- ------
Partnership's share of
unconsolidated ventures'
income $ 281 $ 65 $ 517 $ 27
======= ====== ======= ======
4. Operating Investment Properties
-------------------------------
At September 30, 1998, the Partnership's balance sheet includes three
operating investment properties (two at September 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 and six months
ended September 30, 1998 and 1997 (in thousands):
Three Months Ended Six Months Ended
September 30, September 30,
------------------ ------------------
1998 1997 1998 1997
---- ---- ---- ----
Property operating expenses:
Insurance $ 15 $ 15 $ 30 $ 30
Repairs and maintenance 103 109 261 190
Utilities 83 51 160 95
Management fees 24 24 48 50
Administrative and other 108 92 231 191
------ ----- ------ ------
$ 333 $ 291 $ 730 $ 556
====== ===== ====== ======
5. Bonds Payable
-------------
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 September 30, 1998 and March 31, 1998 consist of
the following (in thousands):
September 30 March 31
------------ --------
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 September 30, 1998 and
March 31, 1998. $ 6,139 $ 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 September 30,
1998 and March 31, 1998. 3,290 3,318
<PAGE>
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. 5,145 5,214
------- -------
$14,574 $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 had 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 were recorded on the books of the unconsolidated joint
ventures, both had terms of seven years and were scheduled to mature in
September of 2001. The Chandler's Reach loan bore interest at a rate of 8.33%
and required monthly principal and interest payments of $29,000. The Monterra
loan bore interest at a rate of 8.45% and required monthly principal and
interest payments of $40,000. As discussed further in Note 3, the outstanding
balances of these mortgage loans were repaid in full out of the proceeds from
the sales of the Chandler's Reach and Monterra properties which occurred on
October 2, 1998.
<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 has been focusing on potential disposition
strategies for the 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 by the end of calendar year
1999. 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 were sold subsequent to the quarter
ended September 30, 1998. 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 as soon as certain leasing and environmental
issues are resolved. 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.
Subsequent to the end of the quarter, on October 2, 1998, Lake Sammamish
Limited Partnership and Crow PaineWebber LaJolla Limited Partnership, two joint
ventures in which the Partnership has an interest, sold the properties known as
the Chandler's Reach Apartments and the Monterra Apartments to the same
unrelated third parties. Chandler's Reach, located in Redmond, Washington, was
sold for $17.85 million, and Monterra, located in LaJolla, California, was sold
for $20.1 million. The Partnership received net proceeds of approximately
$12,359,000 from the sale of Chandler's Reach after deducting closing costs of
approximately $561,000, closing proration adjustments of approximately $55,000,
the repayment of the existing mortgage note of approximately $3,415,000 and a
prepayment penalty of approximately $354,000 (of which $205,000 was paid by the
buyer), and a payment of approximately $1,311,000 to the Partnership's
co-venture partner for its share of the sale proceeds in accordance with the
joint venture agreement. The Partnership received net proceeds of approximately
$14,796,000 from the sale of Monterra after deducting closing costs of
approximately $306,000, closing proration adjustments of approximately $114,000,
the repayment of the existing mortgage note of approximately $4,672,000 and a
prepayment penalty of approximately $500,000 (of which $295,000 was paid by the
buyer), and a payment of approximately $7,000 to the Partnership's co-venture
partner for its share of the sale proceeds in accordance with the joint venture
agreement.
Despite incurring sizable prepayment penalties on the repayment of both
outstanding first mortgage loans, management believed that the current sale of
the Chandler's Reach and Monterra properties was in the best interests of the
Limited Partners due to the exceptionally strong market conditions that exist at
the present time and which resulted in the achievement of very favorable selling
prices. The Partnership will distribute the majority of the net sales proceeds
from the sales of the Chandler's Reach and Monterra properties in the form of a
special distribution to be paid on November 13, 1998 with the regular quarterly
distribution for the quarter ended September 30, 1998. A portion of the net
proceeds (10% or less) may be retained and added to the Partnership's cash
reserves to ensure that the Partnership has sufficient capital resources to fund
its share of potential capital improvement expenses at its remaining investment
properties. The Managing General Partner is currently analyzing the
Partnership's potential future capital requirements in order to determine the
exact amount, if any, that the Partnership should retain from the net sale
proceeds.
<PAGE>
Sunol Center, in Pleasanton, California, remained 100% leased to three
tenants at September 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 believed that this was the appropriate time
to begin marketing the Sunol property for sale. During the quarter ended June
30, 1998, the Partnership began exploring potential opportunities to sell Sunol
Center, while the property's leasing team simultaneously worked on re-leasing
the space that becomes available in May 1999. As part of these efforts, the
Partnership initiated discussions with real estate firms with a strong
background in selling properties like Sunol Center. The Partnership subsequently
selected a national firm that is a leading seller of this type of property.
Preliminary sales materials were prepared and initial marketing efforts were
undertaken. A marketing package was then finalized and comprehensive sale
efforts began in June 1998. As a result of those efforts, several offers were
received. After completing an evaluation of these offers and the relative
strength of the prospective purchasers, the Partnership selected an offer. A
purchase and sale agreement was negotiated with an unrelated third-party
prospective buyer and a non-refundable deposit was made subsequent to the
quarter end. While there can be no assurances that a transaction will be
consummated, this prospective buyer is expected to complete its due diligence
work and close on this transaction by December 1, 1998. If the sale closes, the
net proceeds would be distributed to the Limited Partners.
The 64,000 square foot 1881 Worcester Road Office Building was 100% leased
as of September 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 first quarter of fiscal 1999 the tenant leasing the entire
second floor of the property informed the Partnership that it is consolidating
its operations and requested a lease termination. This tenant's lease does not
expire until February 28, 2003. Negotiations with this tenant concerning a lease
termination agreement are currently underway. 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.
The Warner/Red Hill Business Center was 97% leased and occupied as of
September 30, 1998, compared to 98% leased and 84% 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
took occupancy during the quarter ended September 30, 1998. In addition, the
bankruptcy case with the tenant that occupied the 13,160 square foot space was
resolved during the current quarter, with the Partnership receiving a settlement
of $100,701 before payment of attorney fees. During the quarter, one tenant
occupying a total of 1,467 square feet renewed its lease, and one tenant
occupying 1,165 square feet moved from the center. Over the next 12 months,
leases with 5 tenants occupying 34,223 square feet will expire. The property's
leasing team expects that 4 of these tenants occupying 18,957 square feet will
renew at higher rental rates, and that the remaining space will be leased to new
tenants. With an occupancy level of 97% and a stable base of tenants, the
Partnership believes it may be an opportune time to sell Warner/Red Hill
Business Center. As part of a plan to market the property for sale, discussions
are being held with real estate firms with a specialty in selling properties
like Warner/Red Hill Business Center. 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 September 30, 1998. Three tenants occupying a total of 4,634
square feet moved from the building when their leases expired during the
quarter. One tenant occupying 2,162 square feet renewed its lease and expanded
its space by an additional 1,107 square feet. Another tenant occupying 1,926
square feet renewed its lease. As previously reported, 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. This tenant took occupancy during the quarter ended September 30, 1998.
Also during the current quarter, 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 was received at the September meeting of the City
Council. Now that this 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 September 30, 1998. During the
quarter, two tenants occupying a total of 3,004 square feet renewed their
leases. Two tenants occupying 2,050 square feet moved from the Center and the
space was leased to two new tenants. Over the next twelve months, leases with 9
tenants occupying 8,143 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, 56% 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 44% 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. With the occupancy level of 100% and a stable base of tenants, the
Partnership believes it may be an opportune time to sell Crystal Tree Commerce
Center. As part of a plan to market the property for sale, the Partnership
initiated discussions with real estate firms with a strong background in selling
properties like Crystal Tree Commerce Center. Subsequent to the quarter end, the
Partnership selected a Florida real estate firm that is a leading seller of this
type of property.
At September 30, 1998, the Partnership and its consolidated joint venture
had available cash and cash equivalents of approximately $4,534,000. 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.
As noted above, the Partnership expects to be liquidated within the next
one to two years. Notwithstanding this, the Partnership believes that it has
made all necessary modifications to its existing systems to make them year 2000
compliant and does not expect that additional costs associated with year 2000
compliance, if any, will be material to the Partnership's results of operations
or financial position.
Results of Operations
Three Months Ended September 30, 1998
- -------------------------------------
There was a $323,000 favorable change in the Partnership's net operating
results for the three months ended September 30, 1998 when compared to the same
period in the prior year. This favorable change in the Partnership's net
operating results was due to a $216,000 increase in the Partnership's share of
unconsolidated ventures' income and a $107,000 decline in the Partnership's
operating loss. The Partnership's share of unconsolidated ventures' income
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. 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 changes in net
operating results at 1881 Worcester Road and 625 North Michigan were also due to
a decrease in operating expenses. Operating expenses decreased at both
properties primarily due to a reduction in repairs and maintenance expenses.
The increase in the Partnership's share of income from the four
unconsolidated 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' income.
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 partly 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 generated net
operating income of $20,000 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. General and administrative expenses also
decreased by $55,000 mainly due to a decline in certain required professional
fees. The increases in net income from the consolidated Warner/Red Hill and
Sunol Center joint ventures and the decrease in general and administrative
expenses were partially offset by an increase in depreciation expense on the
wholly-owned Crystal Tree Commerce Center. 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.
Six Months Ended September 30, 1998
- -----------------------------------
There was a $599,000 favorable change in the Partnership's net operating
results for the six months ended September 30, 1998 when compared to the same
period in the prior year. This favorable change in the Partnership's net
operating results was due to a $490,000 increase in the Partnership's share of
unconsolidated ventures' income and a $109,000 decline in the Partnership's
operating loss. The Partnership's share of unconsolidated ventures' income
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 six-month period as a result of the
strong local apartment markets. 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 changes in net
operating results at 1881 Worcester Road and 625 North Michigan were also due to
declines in operating expenses which were the result of declines in repairs and
maintenance costs at both properties and a reduction in real estate taxes at 625
North Michigan.
The increase in the Partnership's share of income from the four
unconsolidated 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' income.
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 partly 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 generated net
operating income of $23,000 during the current six-month period. In addition,
net income increased at the Sunol Center joint venture primarily due to an
increase in tenant reimbursements. General and administrative expenses also
decreased by $32,000 mainly due to a decline in certain required professional
fees. The increases in net income from the consolidated Warner/Red Hill and
Sunol Center joint ventures and the decrease in general and administrative
expenses were partially offset by an increase in depreciation expense on the
wholly-owned Crystal Tree Commerce Center. 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.
<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. A Form 8-K was filed subsequent to the end of
the quarter to report the sales of the Chandler's Reach and Monterra apartment
properties on October 2, 1998 and is hereby incorporated herein by reference.
<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: November 6, 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 September 30,
1998 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> SEP-30-1998
<CASH> 4,408
<SECURITIES> 0
<RECEIVABLES> 679
<ALLOWANCES> 1
<INVENTORY> 0
<CURRENT-ASSETS> 5,115
<PP&E> 61,822
<DEPRECIATION> 16,013
<TOTAL-ASSETS> 52,043
<CURRENT-LIABILITIES> 995
<BONDS> 15,959
0
0
<COMMON> 0
<OTHER-SE> 35,089
<TOTAL-LIABILITY-AND-EQUITY> 52,043
<SALES> 0
<TOTAL-REVENUES> 3,143
<CGS> 0
<TOTAL-COSTS> 2,065
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 566
<INCOME-PRETAX> 512
<INCOME-TAX> 0
<INCOME-CONTINUING> 512
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 512
<EPS-PRIMARY> 0.25
<EPS-DILUTED> 0.25
</TABLE>
