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 QUARTERLY PERIOD ENDED JUNE 30, 1995
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 : 0-15705
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
Virginia 04-2918819
(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 .
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
June 30, 1995 and March 31, 1995
(Unaudited)
(In Thousands)
ASSETS
June 30 March 31
Operating investment properties:
Land $ 8,808 $ 8,808
Building and improvements 41,020 40,975
49,828 49,783
Less accumulated depreciation (9,255) (8,895)
40,573 40,888
Investments in unconsolidated joint
ventures, at equity 39,735 39,887
Cash and cash equivalents 1,373 1,827
Escrowed cash 124 57
Accounts receivable 172 129
Accounts receivable - affiliates 80 78
Prepaid expenses 32 28
Deferred rent receivable 524 476
Deferred expenses, net 703 778
$ 83,316 $ 84,148
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 383 $ 434
Net advances from consolidated ventures - 29
Tenant security deposits 101 103
Bonds payable 2,498 2,498
Notes payable and deferred interest 20,070 20,137
Other liabilities 349 348
Total partners' capital 59,915 60,599
$ 83,316 $ 84,148
See accompanying notes.
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended June 30, 1995 and 1994
(Unaudited)
(In Thousands, except for per Unit data)
1995 1994
REVENUES:
Rental income and expense
reimbursements $ 1,099 $ 1,002
Interest and other income 51 56
1,150 1,058
EXPENSES:
Property operating expenses 322 295
Depreciation and amortization 389 421
Interest expense 506 843
General and administrative 132 154
Real estate taxes 99 121
1,448 1,834
Operating loss (298) (776)
Investment income:
Interest income on notes receivable
from unconsolidated ventures 25 25
Partnership's share of unconsolidated
ventures' income 230 595
NET LOSS $ (43) $(156)
Net loss per 1,000 Limited
Partnership Units $(0.32) $(1.15)
Cash distributions per 1,000 Limited
Partnership Units $ 4.72 $12.38
The above per Limited Partnership Unit information is based upon the 134,425,741
Limited Partnership Units outstanding during each period.
See accompanying notes.
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
For the three months ended June 30, 1995 and 1994
(Unaudited)
(In Thousands)
General Limited
Partners Partners
Balance at March 31, 1994 $(478) $66,025
Cash distributions (17) (1,664)
Net loss (2) (154)
BALANCE AT JUNE 30, 1994 $(497) $64,207
Balance at March 31, 1995 $(527) $61,126
Cash distributions (7) (634)
Net loss (1) (42)
BALANCE AT JUNE 30, 1995 $(535) $60,450
See accompanying notes.
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended June 30, 1995 and 1994
Increase (Decrease) in Cash and Cash Equivalents
(In Thousands)
(Unaudited)
1995 1994
Cash flows from operating activities:
Net loss $ (43) $ (155)
Adjustments to reconcile net loss to net cash
used for operating activities:
Partnership's share of
unconsolidated ventures' income (230) (595)
Interest expense on zero coupon loans - 772
Depreciation and amortization 389 421
Amortization of deferred financings costs 5 -
Changes in assets and liabilities:
Escrowed cash (67) (153)
Accounts receivable (43) (166)
Accounts receivable - affiliates (2) (3)
Deferred rent receivable (48) 124
Deferred expenses and other assets 41 (211)
Prepaid expenses (4) 9
Tenant security deposits (2) 22
Accounts payable and accrued expenses (51) 17
Advances from consolidated ventures (29) (147)
Other liabilities 1 -
Total adjustments (40) 90
Net cash provided by operating
activities (83) (65)
Cash flows from investing activities:
Distributions from unconsolidated ventures 629 1,143
Additional investments in unconsolidated ventures (247) -
Additions to operating investment properties (45) (17)
Net cash provided by investing
activities 337 1,126
Cash flows from financing activities:
Distributions to partners (641) (1,681)
Payments of principal and interest on
notes payable (67) (812)
Net cash used for financing
activities (708) (2,493)
Net decrease in cash and cash equivalents 454 (1,432)
Cash and cash equivalents, beginning of period 1,827 4,529
Cash and cash equivalents, end of period $ 1,373 $ 3,097
Cash paid during the period for interest $ 549 $ 882
See accompanying notes.
1. Organization
The accompanying financial statements, footnotes and discussion should be
read in conjunction with the financial statements and footnotes contained in
the Partnership's Annual Report for the year ended March 31, 1995.
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.
2. Investments in Unconsolidated Joint Ventures
The Partnership has investments in five unconsolidated joint venture
partnerships which own operating investment properties at June 30, 1995.
The unconsolidated joint venture partnerships are accounted for on the
equity method in the Partnership's financial statements because the
Partnership does not have a voting control interest in these joint ventures.
The Partnership's policy is to recognize its share of ventures' operations
three months in arrears.
Summarized operations of the unconsolidated joint ventures, for the periods
indicated, are as follows.
CONDENSED COMBINED SUMMARY OF OPERATIONS
For the three months ended March 31, 1995 and 1994
(in thousands)
1995 1994
Rental revenues and expense recoveries $ 3,021 $ 2,728
Interest and other income 207 386
3,228 3,114
Property operating expenses 942 860
Real estate taxes 693 758
Interest expense 389 40
Depreciation and amortization 911 773
2,935 2,431
Net income $ 293 $ 683
Net income:
Partnership's share of combined income $ 251 $ 616
Co-venturers' share of combined income 42 67
$ 293 $ 683
Reconciliation of Partnership's Share of Operations
For the three months ended June 30, 1995 and 1994
(in thousands)
Partnership's share of operations,
as shown above $ 251 $ 616
Amortization of excess basis (21) (21)
Partnership's share of unconsolidated
ventures' income $ 230 $ 595
3. Operating Investment Properties
At June 30, 1995, the Partnership's balance sheet includes three operating
investment properties; Saratoga Center and EG&G Plaza, owned by Hacienda Park
Associates, the Asbury Commons Apartments, owned by Atlanta Asbury
Partnership, and the West Ashley Shoppes Shopping Center, owned by West
Ashley Shoppes Associates. In May 1994, the Partnership and the co-venturer
in the West Ashley joint venture executed a settlement agreement whereby the
Partnership assumed complete control over the affairs of the venture. The
Partnership obtained controlling interests in the other two joint ventures
during fiscal 1992. The Partnership's policy is to report the operations of
these consolidated joint ventures on a three-month lag. Saratoga Center and
EG&G Plaza consists of four separate office/R&D buildings comprising
approximately 185,000 square feet, located in Pleasanton, California. Asbury
Commons Apartments is a 204-unit residential apartment complex located in
Atlanta, Georgia. The West Ashley Shoppes Shopping Center consists of
approximately 135,000 square feet of leasable retail space located in
Charleston, South Carolina.
The following is a combined summary of property operating expenses for the
Saratoga Center and EG&G Plaza, the Asbury Commons Apartments, and the West
Ashley Shoppes Shopping Center for the three months ended March 31, 1995 and
1994 (in thousands):
1995 1994
\
Property operating expenses:
Repairs and maintenance $ 106 $ 88
Utilities 47 46
Salaries and related costs 47 42
Insurance 15 15
Management fees 36 38
Administrative and other 71 66
$ 322 $ 295
4.Related Party Transactions
Included in general and administrative expenses for the three months ended
June 30, 1995 and 1994 is $69,588 and $68,925, 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 months
ended June 30, 1995 and 1994 is $1,318 and $6,983, respectively,
representing fees earned by Mitchell Hutchins Institutional Investors, Inc.
for managing the Partnership's cash assets.
Accounts receivable - affiliates at June 30, 1995 and March 31, 1995
consist of investor servicing fees of $65,000 and $63,000, respectively, due
from the TCR Walnut Creek Limited Partnership and $15,000 at both dates due
from certain unconsolidated joint ventures for expenses paid by the
Partnership on behalf of the joint ventures.
5. Notes Payable
Notes payable on the consolidated balance sheet of the Partnership at
June 30, 1995 and March 31, 1995 consist of the following (in thousands):
June 30 March 31
9.125% mortgage note payable to an
insurance company secured by the 625 North
Michigan Avenue operating investment
property. The loan requires monthly
principal and interest payments of $55
through maturity on May 1, 1999. The
terms of the note were modified effective
May 31, 1994 (see discussion below). $ 9,620 $9,657
8.75% mortgage note payable to an
insurance company secured by the Asbury
Commons operating investment property. The
loan requires monthly principal and
interest payments of $88 through maturity
on October 15, 2001 (see discussion
below). 6,953 6,980
9.04% mortgage note payable to an
insurance company secured by the Saratoga
Center and EG&G Plaza operating investment
property. The loan requires monthly
principal and interest payments of $36
through maturity on January 20, 2002 (see
discussion below). 3,497 3,500
$20,070 $20,137
On April 29, 1988, the Partnership borrowed $6,000,000 in the form of a
zero coupon loan which had a scheduled maturity date in May of 1995. The
note bore interest at an effective compounded annual rate of 9.8% and was
secured by the 625 North Michigan Avenue Office Building. Payment of all
interest was deferred until maturity, at which time principal and interest
totalling approximately $11,556,000 was to be due and payable. On May 31,
1994 the Partnership executed a modification and extension agreement with the
625 North Michigan lender. The terms of the agreement called for the
Partnership to make a principal pay down of $801,000. The maturity date of
the loan, which now requires principal and interest payments on a monthly
basis as set forth above, was extended to May 31, 1999. The terms of the
loan agreement also required the establishment of an escrow account for real
estate taxes, as well as a capital improvement escrow which is to be funded
with monthly deposits from the Partnership aggregating approximately $1
million through the scheduled maturity date.
On June 20, 1988, the Partnership borrowed $17,000,000 in the form of
zero coupon loans due in June of 1995. These notes bore interest at a rate
of 10%, compounded annually. During fiscal 1991, the Partnership had repaid
the portion of the zero coupon loans which had been secured by the Highland
Village Apartments, which was sold in May of 1990. The aggregate amount of
principal and accrued interest repaid on May 31, 1990 amounted to
approximately $1,660,000. Additionally, a paydown of principal and accrued
interest, totalling approximately $2,590,000, was made on August 20, 1990.
This paydown represented a mandatory repayment of the full amount of the
principal and accrued interest which had been secured by the Ballston Place
property, which was sold in fiscal 1990, and an optional partial prepayment
of the principal and accrued interest secured by The Gables Apartments.
During fiscal 1995, the remaining balances of the zero coupon loans were
repaid from the proceeds of five new conventional mortgage loans issued to
the Partnership's joint venture investees, together with funds contributed
by the Partnership, as set forth below.
On September 27, 1994, the Partnership refinanced the portion of the zero
coupon loan secured by the Treat Commons Phase II apartment complex, of
approximately $3,353,000, with the proceeds of a new $7.4 million loan
obtained by TCR Walnut Creek Limited Partnership. The $7.4 million loan is
secured by the Treat Commons apartment complex, carries an annual interest
rate of 8.54% and matures in 7 years. The loan requires monthly principal
and interest payments of $59,786. On September 28, 1994, the Partnership
repaid the portion of the zero coupon loan secured by the Asbury Commons
apartment complex, of approximately $3,836,000, with the proceeds of a new
$7 million loan obtained by the consolidated Asbury Commons joint venture.
The $7 million loan is secured by the Asbury Commons apartment complex,
carries an annual interest rate of 8.75% and matures in 7 years. The loan
requires monthly principal and interest payments of $87,575. On October 22,
1994, the Partnership applied a portion of the excess proceeds from the
refinancings of the Treat Commons and Asbury Commons properties described
above and repaid the portion of the zero coupon loan which had been secured
by West Ashley Shoppes of approximately $2,703,000 and made a partial
prepayment toward the portion of the zero coupon loan secured by Hacienda
Business Park of $3,000,000. On November 7, 1994, the Partnership repaid
the portion of the zero coupon loans secured by The Gables Apartments and
the Richland Terrace and Richmond Park apartment complexes of approximately
$2,353,000 and $2,106,000, respectively, with the proceeds of a new $5.2
million loan secured by The Gables Apartments. The new $5.2 million loan
was issued to the Gables joint venture, bears interest at 8.72% and matures
in 7 years. The loan requires monthly principal and interest payments of
$42,646. On February 9, 1995, the Partnership repaid the remaining portion
of the zero coupon loan secured by the Hacienda Business Park, of
approximately $3,583,000, with the proceeds of a new $3.5 million loan
obtained by the consolidated Hacienda Park joint venture along with
additional funds contributed by the Partnership. The $3.5 million loan is
secured by the Hacienda Business Park, carries an annual interest rate of
9.04% and matures in 7 years. The loan requires monthly principal and
interest payments of $35,620. On February 10, 1995, the Partnership repaid
the portion of the zero coupon loan secured by the Loehmann's Plaza shopping
center, of approximately $4,093,000, with the proceeds of a new $4 million
loan obtained by Daniel/Metcalf Associates Partnership along with additional
funds contributed by the Partnership. The $4 million loan is secured by the
Loehmann's Plaza shopping center, carries an annual interest rate of 9.04%
and matures on February 15, 2003. The loan requires monthly principal and
interest payments of $33,700. Legal liability for the repayment of the new
mortgage loans secured by the Treat Commons, Gables and Loehmann's Plaza
properties rests with the respective joint ventures. Accordingly, these
mortgage loan liabilities are recorded on the books of the unconsolidated
joint ventures. The Partnership has indemnified TCR Walnut Creek Limited
Partnership, Richmond Gables Associates and Daniel/Metcalf Associates
Partnership and the related co-venture partners, against all liabilities,
claims and expenses associated with these borrowings. The net proceeds of
these loans were recorded as distributions to the Partnership by the joint
ventures.
6. Bonds Payable
Bonds payable consist of the Hacienda Park joint venture's share of
liabilities for bonds issued by the City of Pleasanton, California for public
improvements that benefit Hacienda Business Park and the operating investment
property and are secured by liens on the operating investment property. 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
approximately 7.2%. Principal and interest are payable in semi-annual
installments. In the event the operating investment property is sold,
Hacienda Park Associates will no longer be liable for the bond assessments.
7. Contingencies
The Partnership is involved in certain legal actions. The Managing General
Partner believes these actions will be resolved without material adverse
effect on the Partnership's financial statements, taken as a whole.
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
As discussed further in the Annual Report, during fiscal 1995 the
Partnership successfully refinanced the zero coupon loans secured by the
Partnership's operating investment properties which had been scheduled to mature
in May and June of 1995. The Partnership originally borrowed $23,000,000 to
finance its offering costs and related acquisition expenses in order to invest a
greater portion of the initial offering proceeds in real estate assets. The
zero coupon loans were with two different financial institutions, the first of
which issued a loan in the initial principal amount of $6,000,000 which was
secured by the 625 North Michigan Office Building, and the other of which issued
loans which were secured by the seven remaining investment properties. Due to
declines in the market value of the 625 North Michigan property over the past
several years, management's efforts were directed toward negotiating a
modification and extension agreement with the existing lender on this loan.
Such declines in value mirrored the state of commercial office buildings
nationwide over this period, and particularly in major metropolitan areas such
as Chicago. The Partnership executed an extension and modification agreement
with the 625 North Michigan lender in May 1994. The modification agreement
changed the nature of the existing debt obligation from a zero coupon to a
current paying, principal amortizing loan. Limited sources for the financing of
commercial office buildings in general and the stringent loan-to-value ratio
requirements for such loans would have made refinancing the 625 North Michigan
property by conventional means very difficult. The final terms of the 625 North
Michigan agreement required the Partnership to make a principal paydown on the
loan of approximately $801,000. The new loan, in the initial principal amount
of approximately $9.7 million, has a scheduled maturity date of May 1999. The
loan bears interest at a rate of 9.125% per annum and requires monthly payments
of principal and interest of approximately $83,000. The terms of the loan
agreement also required the establishment of an escrow account for real estate
taxes, as well as a capital improvement escrow which is to be funded with
monthly deposits from the Partnership aggregating approximately $1 million
through the scheduled maturity date.
The zero coupon loans secured by the other seven investment properties had
scheduled maturity dates in June 1995 and became prepayable without penalty
beginning in September 1994. On September 27, 1994, the Partnership refinanced
the portion of the zero coupon loan secured by the Treat Commons Phase II
apartment complex, of approximately $3,353,000, with the proceeds of a new $7.4
million loan obtained by the Treat Commons joint venture. The $7.4 million loan
is secured by the Treat Commons apartment complex, carries an annual interest
rate of 8.54% and matures in 7 years. The loan requires monthly principal and
interest payments of $59,786. On September 28, 1994, the Partnership repaid the
portion of the zero coupon loan secured by the Asbury Commons apartment complex,
of approximately $3,836,000, with the proceeds of a new $7 million loan obtained
by the consolidated Asbury Commons joint venture. The $7 million loan is
secured by the Asbury Commons apartment complex, carries an annual interest rate
of 8.75% and matures in 7 years. The loan requires monthly principal and
interest payments of $87,575. On October 22, 1994, the Partnership applied a
portion of the excess proceeds from the refinancings of the Treat Commons and
Asbury Commons properties described above and repaid the portion of the zero
coupon loan which had been secured by the West Ashley Shoppes of approximately
$2,703,000 and made a partial prepayment toward the portion of the zero coupon
loan secured by Hacienda Business Park of $3,000,000. On November 7, 1994, the
Partnership repaid the portion of the zero coupon loans secured by The Gables
Apartments and the Richmond Park and Richland Terrace apartment complexes of
approximately $2,353,000 and $2,106,000, respectively, with the proceeds of a
new $5.2 million loan secured by The Gables Apartments. The new $5.2 million
loan was issued to the Gables joint venture, bears interest at 8.72% and matures
in 7 years. The loan requires monthly principal and interest payments of
$42,646. On February 9, 1995, the Partnership repaid the remaining portion of
the zero coupon loan secured by the Hacienda Business Park, of approximately
$3,583,000, with the proceeds of a new $3.5 million loan obtained by the
consolidated Hacienda Park Associates joint venture. The $3.5 million loan is
secured by the Hacienda Business Park, carries an annual interest rate of 9.04%
and matures in 7 years. The loan requires monthly principal and interest
payments of $35,620. On February 10, 1995, the Partnership repaid the portion
of the zero coupon loan secured by the Loehmann's Plaza shopping center, of
approximately $4,093,000, with the proceeds of a new $4 million loan obtained by
the Loehmann's Plaza joint venture. The $4 million loan is secured by the
Loehmann's Plaza shopping center, carries an annual interest rate of 9.04% and
matures on February 15, 2003. The loan requires monthly principal and interest
payments of $33,700. Legal liability for the repayment of the new mortgage
loans secured by the Treat Commons, Gables and Loehmann's Plaza properties rests
with the respective joint ventures. Accordingly, these mortgage loan
liabilities are recorded on the books of the unconsolidated joint ventures. The
Partnership has indemnified TCR Walnut Creek Limited Partnership, Richmond
Gables Associates and Daniel/Metcalf Associates Partnership, and the related co-
venture partners, against all liabilities, claims and expenses associated with
these borrowings.
The refinancing of the zero coupon loans with conventional loans requiring
monthly principal and interest payments has significantly reduced the cash flows
from the properties to the Partnership. The reduction in cash flows from the
properties, combined with expected future capital needs, required management to
reduce the quarterly distribution rate from 5.25% per annum to 2% beginning with
the payment made on November 15, 1994 for the quarter ended September 30, 1994.
The expected future capital needs relate primarily to the ongoing capital
requirements of the Partnership's commercial properties, including planned
capital alterations, tenant improvements and leasing commissions. As discussed
further below, there remains a significant amount of vacant space at the 625
North Michigan and West Ashley commercial properties as of June 30, 1995. In
addition, the trend toward corporate downsizing and restructurings that has
followed in the wake of the last national recession continues to impact the
leasing of office/R&D space in general, resulting in significant tenant turnover
and lease modification requests. The Partnership has also planned a major
capital improvement program for Loehmann's Plaza which is presently in process.
Significant capital will be required to fund these anticipated leasing and
capital improvement expenditures.
During fiscal 1995, the Partnership secured a new tenant, under a seven-
year lease, for the vacant 31,000 square foot building at Hacienda Park. The
Partnership agreed to pay for a tenant improvement costs to modify this space to
the needs of the new tenant. Tenant improvements and leasing commissions
related to this lease totalled approximately $630,000. During the current
quarter, the Partnership leased an additional 10,808 square foot space to this
same tenant. As a result, the Hacienda Park investment property, which was 89%
leased as of March 31, 1995, had improved to 95% leased at June 30, 1995. At
Loehmann's Plaza, management plans to invest approximately $2 million within the
next 12 to 18 months to complete a major capital enhancement program which
includes a general upgrade of the property's exterior. The improvement program
is necessary in order for the property to remain competitive in its market. A
portion of the funds required to pay for this capital work are expected to come
from a $550,000 Renovation and Occupancy Escrow withheld by the lender from the
proceeds of the $4 million loan discussed further above which was obtained in
February 1995. Funds may be released from the Renovation and Occupancy Escrow
to reimburse the venture for the costs of the planned renovations in the event
that the venture satisfies certain requirements which include specified
occupancy and rental income thresholds. If such requirements have not been met
within 18 months from the date of the loan closing, the lender may apply the
balance of the escrow account to the payment of loan principal. In addition,
the lender required that the Partnership unconditionally guaranty up to
$1,400,000 of the loan obligation. This guaranty will be released in the event
that the venture satisfies the requirement for the release of the Renovation and
Occupancy Escrow funds or upon the repayment, in full, of the entire outstanding
mortgage loan liability. A significant amount of funds may also be needed to
pay for tenant improvement costs to re-lease the vacant anchor tenant space at
West Ashley Shoppes in the near term. As previously reported, Children's Palace
closed its retail store at the center in May 1991 and subsequently filed for
bankruptcy protection from creditors. In addition, Phar-Mor, West Ashley's
other major anchor tenant is currently operating under the protection of Chapter
11 of the U.S. Bankruptcy Code. While Phar-Mor has closed a number of its
locations nationwide as part of its bankruptcy reorganization, the Phar-Mor
drugstore at West Ashley Shoppes is reported to have strong retail sales. As a
result, management is optimistic that its continued operation is likely,
assuming Phar-Mor successfully emerges from its current Chapter 11 status.
Capital improvement and leasing costs at 625 North Michigan totalled $1.2
million in calendar 1994 and are expected to continue to be significant for the
foreseeable future due to the size and age of the building, the large number of
leases and the extremely competitive conditions which exist in the market for
downtown Chicago office space.
The market for multi-family residential properties throughout the country
continues to show signs of improvement, as the lack of significant new
construction of multi-family housing over the past 2-to-3 years has allowed the
oversupply which existed in most markets to be absorbed. The results of the
improving market supply and demand characteristics have been a gradual
improvement in occupancy levels and effective rental rates and a corresponding
increase in property values. Management expects to continue to see improvement
in this market segment in the near term and has examined the Partnership's four
apartment properties to identify whether a current sale of one or more of these
properties may be in the Partnership's best interests. Based on such analysis,
the Richmond Park/Richland Terrace and Treat Commons properties were determined
to be the best candidates for a current sale. In the case of Richmond Park and
Richland Terrace, the economic growth in the Portland, Oregon area has been
among the best in the country for some time. Such results may lead to increased
levels of development activity which could limit the current favorable trends in
the market for existing apartment properties. Accordingly, management believes
that the market value of Richmond Park and Richland Terrace may be at or near
its peak for the current market cycle. During the quarter ended June 30, 1995,
the Partnership had signed a letter of intent to sell the Portland properties to
a third-party. However, the potential buyer was not able to secure the required
financing commitment during the specified due diligence period. The Partnership
is currently negotiating with one of the other prospective buyers that made an
offer to purchase the properties. If an agreement cannot be reached with this
party, management intends to solicit other offers through further marketing
efforts in fiscal 1996. In the case of Treat Commons, the Partnership owns Phase
II of a 2-phase development. During fiscal 1995, management learned that the
owner of Phase I had decided to market the property for sale. Management
believes there may be advantages to a joint marketing effort of both phases
which could maximize the potential proceeds to the Partnership from a sale of
Treat Commons. If Phase I were sold separately in the near future to a buyer
with a long-term planned holding period, the Partnership may not have the
opportunity to market its property jointly with Phase I. Accordingly,
management has been working with the Phase I owner and expects to actively
market the property for sale during fiscal 1996. There are no assurances that
the Partnership will complete a sale transaction with regard to these
investments during fiscal 1996.
In light of the expected future capital needs for the Partnership's
commercial properties, as discussed above, and given the use of cash reserves
required to complete the fiscal 1995 refinancing and leasing transactions,
management has examined alternative sources of additional liquidity which might
be required by the Partnership. The primary options for generating liquidity
would be to complete the sales of the Richmond Park/Richland Terrace and/or
Treat Commons investments, as discussed above, or to engage in additional
borrowing activities. As of June 30, 1995, the Partnership's Richmond
Park/Richland Terrace and West Ashley properties are unencumbered and represent
additional borrowing capacity. Management plans to employ this borrowing
capacity to secure a short-term line-of-credit for up to $2,000,000 during the
second quarter of fiscal 1996 in order to have sufficient funds to complete the
Loehmann's Plaza renovation program discussed further above. The Partnership is
expected to repay the line-of-credit borrowings from the proceeds of a sale
transaction or from the permanent financing of one of the unencumbered
properties. In the unlikely event that a sale or financing transaction could
not be consummated, the Partnership could reduce or suspend distribution
payments to the partners in order to repay the line-of-credit borrowings. Such
distributions, which are presently being paid at a rate of 2% per annum on
remaining invested capital of $943 per original $1,000 investment, total
approximately $2.6 million on an annual basis.
At June 30, 1995, the Partnership and its consolidated joint ventures had
available cash and cash equivalents of approximately $1,373,000. The balance
of such cash and cash equivalents amounts will be utilized for the working
capital requirements of the Partnership, for reinvestment in certain of the
Partnership's properties (as required) and for distributions to the partners.
The source of future liquidity and distributions to the partners is expected to
be through cash generated from operations of the Partnership's income-producing
investment properties and proceeds received from the sale or refinancing of such
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, 1995
The Partnership reported a net loss of $43,000 for the three months ended
June 30, 1995, as compared to a net loss of $156,000 for the same period in the
prior year. Although the Partnership reported a decrease in operating loss of
$478,000 and a decrease in the Partnership's share of unconsolidated ventures'
income of $365,000 when compared to the same three-month period in the prior,
the major portion of this change reflects a change in the entity reporting the
interest expense associated with the borrowings secured by the Partnership's
operating investment properties. As more fully discussed above, the Partnership
refinanced the majority of the zero coupon loans, which had been issued directly
to the Partnership, with the proceeds of new loans obtained by the respective
joint ventures. This caused a change in the entity reporting the interest
expense from the Partnership to the joint ventures. As a result, the interest
expense component of operating loss on the Partnership's consolidated statements
of operations declined significantly in the current period. However, this
decrease was offset by a reduction in the Partnership's share of income from its
unconsolidated joint ventures due to the recognition of interest expense by the
unconsolidated ventures on the new borrowings in the current period. Overall,
interest costs have decline as a result of the refinancings as the new loans
were obtained with significantly lower interest rates than the prior zero coupon
loans.
The Partnership's operating loss prior to the effect of the change in
interest expense decreased by $139,000 primarily due to increases in rental
revenues at the consolidated Asbury Commons and Hacienda Park joint ventures as
well as reductions in the real estate tax and general and administrative expense
categories. Rental income at Asbury commons increased by $70,000 over the prior
period primarily due to increases in rental rates at the property over the past
year made possible by the strong Atlanta market. Rental income at Hacienda Park
increased by $24,000 for the current period mainly due to the leasing activity
referred to above. Real estate tax expense decreased primarily due to a $23,000
real estate tax refund received by the Hacienda Park joint venture for real
estate taxes paid in the prior year. General and administrative expenses
decreased by $22,000 largely due to additional costs incurred in the prior year
for independent valuations of the Partnership's operating properties in
conjunction with management's refinancing efforts.
The Partnership's share of unconsolidated joint ventures' income prior to
the effect of the change in interest expense decreased by $17,000 for the three
months ended June 30, 1995 primarily due to increases in the depreciation and
property operating expense categories which were partially offset by increases
in rental and other income. Depreciation and amortization expense increased by
$138,000 mainly due to an acceleration of the depreciation rate at 625 North
Michigan and additional capital improvements made to the Loehmann's Plaza
property during the past year. Property operating expenses increased by $82,000
due in part to additional repairs and maintenance costs incurred at the 625
North Michigan property to seal and repair a portion of the building's facade.
Property operating expenses also increased due to additional expenses incurred
at Richland Terrace and Richmond Park to replace worn out carpeting in the
current period. Rental income increased by $293,000 over the prior period
mainly due to increased occupancy at 625 North Michigan and continued
improvement in rental rates at Treat Commons and Richmond Park/Richland Terrace.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
As discussed in the Partnership's annual report on Form 10-K for the year
ended March 31, 1995, in November 1994, a series of purported class actions (the
"New York Limited Partnership Actions") were filed in the United States District
Court for the Southern District of New York concerning PaineWebber
Incorporated's sale and sponsorship of various limited partnership investments,
including those offered by the Partnership. On May 30, 1995, the court
certified class action treatment of the claims asserted in the litigation.
Refer to the description of the claims in the prior quarterly report for further
information. The General Partners continue to believe that the action will be
resolved without material adverse effect on the Partnership's financial
statements, taken as a whole.
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.
PAINEWEBBER EQUITY PARTNERS TWO 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 TWO
LIMITED PARTNERSHIP
By: Second Equity Partners, Inc.
Managing General Partner
By:/s/ Walter V. Arnold
Walter V. Arnold
Senior Vice President and
Chief Financial Officer
Dated: August 11, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Partnership's interim financial statements for the three months ended June 30,
1995 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1995
<PERIOD-END> JUN-30-1995
<CASH> 1,373
<SECURITIES> 0
<RECEIVABLES> 776
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,781
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<DEPRECIATION> (9,255)
<TOTAL-ASSETS> 83,316
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<BONDS> 22,568
<COMMON> 0
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0
<OTHER-SE> 59,915
<TOTAL-LIABILITY-AND-EQUITY> 83,316
<SALES> 0
<TOTAL-REVENUES> 1,405
<CGS> 0
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<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 506
<INCOME-PRETAX> (43)
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