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 SEPTEMBER 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
September 30, 1995 and March 31, 1995
(Unaudited)
(In Thousands)
ASSETS
September 30 March 31
Operating investment properties:
Land $ 8,808 $ 8,808
Building and improvements 41,229 40,975
50,037 49,783
Less accumulated depreciation (9,615) (8,895)
40,422 40,888
Investments in unconsolidated joint
ventures, at equity 39,449 39,887
Cash and cash equivalents 2,952 1,827
Escrowed cash 170 57
Accounts receivable 229 192
Accounts receivable - affiliates 83 15
Prepaid expenses - 28
Deferred rent receivable 565 476
Deferred expenses, net 708 778
$ 84,578 $ 84,148
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 473 $ 434
Net advances from consolidated ventures 93 29
Tenant security deposits 98 103
Bonds payable 2,458 2,498
Notes payable 22,020 20,137
Other liabilities 348 348
Partners' capital 59,088 60,599
$ 84,578 $ 84,148
See accompanying notes.
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and six months ended September 30, 1995 and 1994
(Unaudited)
(In Thousands, except per Unit data)
Three Months Ended Six Months Ended
September 30, September 30,
1995 1994 1995 1994
REVENUES:
Rental income and expense
reimbursements $ 1,167 $ 1,053 $ 2,266 $ 2,055
Interest and other income 67 56 118 110
1,234 1,109 2,384 2,165
EXPENSES:
Property operating expenses 305 280 627 654
Depreciation and amortization 408 416 797 767
Interest expense 517 892 1,023 1,805
General and administrative 196 164 328 317
Real estate taxes 138 102 237 225
1,564 1,854 3,012 3,768
Operating loss (330) (745) (628) (1,603)
Investment income:
Interest income on notes
receivable
from unconsolidated ventures 28 26 53 53
Partnership's share of
unconsolidated
ventures' income 86 512 346 1,108
NET LOSS $ (216) $ (207) $ (229) $ (442)
Net loss per 1,000 Limited
Partnership Units $ (1.59) $ (1.52) $ (1.69) $ (3.26)
Cash distributions per 1,000
Limited
Partnership Units $ 4.72 $ 12.38 $ 9.44 $ 24.76
The above per 1,000 Limited Partnership Units 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 six months ended September 30, 1995 and 1994
(Unaudited)
(In Thousands)
General Limited
Partners Partners
Balance at March 31, 1994 $ (478) $ 66,025
Cash distributions (34) (3,328)
Net loss (5) (437)
BALANCE AT SEPTEMBER 30, 1994 $ (517) $ 62,260
Balance at March 31, 1995 $ (527) $ 61,126
Cash distributions (13) (1,269)
Net loss (3) (226)
BALANCE AT SEPTEMBER 30, 1995 $ (543) $ 59,631
See accompanying notes.
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended September 30, 1995 and 1994
Increase (Decrease) in Cash and Cash Equivalents
(In Thousands)
(Unaudited)
1995 1994
Cash flows from operating activities:
Net loss $ (229) $ (442)
Adjustments to reconcile net loss to
net cash provided by operating
activities:
Partnership's share of unconsolidated
ventures' income (346) (1,108)
Interest expense on zero coupon loans - 1,429
Depreciation and amortization 797 913
Amortization of deferred
financings costs 19 -
Changes in assets and liabilities:
Escrowed cash (113) (208)
Accounts receivable (37) (21)
Accounts receivable - affiliates (68) (5)
Deferred rent receivable (89) 44
Deferred expenses and other assets (26) -
Prepaid expenses 28 16
Tenant security deposits (5) 10
Accounts payable - affiliates - 28
Accounts payable and accrued expenses 39 (2)
Advances from consolidated ventures 64 (378)
Total adjustments 263 718
Net cash provided by
operating activities 34 276
Cash flows from investing activities:
Distributions from unconsolidated ventures 1,271 9,675
Additional investments in
unconsolidated ventures (487) (384)
Additions to operating investment
properties (254) (59)
Net cash provided by
investing activities 530 9,232
Cash flows from financing activities:
Distributions to partners (1,282) (3,362)
Proceeds from issuance of loans 2,000 7,000
Payment of deferred financing costs - (583)
Payments of principal and interest
on notes payable (117) (7,989)
Repayment of principal on bonds payable (40) (32)
Net cash provided by (used for)
financing activities 561 (4,966)
Net increase in cash and cash equivalents 1,125 4,542
Cash and cash equivalents,
beginning of period 1,827 4,529
Cash and cash equivalents, end of period $ 2,952 $ 9,071
Cash paid during the period for interest $ 1,029 $ 4,370
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 September 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.
Subsequent to the end of the current quarter, on November 1, 1995, the
joint venture which owned the Richmond Park and Richland Terrace Apartments
completed a sale of the properties to a third party for $11 million. The
Partnership received approximately $10 million from the sale transaction,
after closing costs and the co-venture's share of the proceeds. The
Partnership used a portion of the net proceeds to repay the $2 million
borrowing described in Note 5. Management expects to distribute
approximately $5 million of the net proceeds to the Limited Partners and
will add the remaining proceeds to its cash reserves. In addition, the
joint venture which owns the Treat Commons - Phase II Apartments has entered
into an agreement to sell the property to a third party. The Partnership
would receive net proceeds of approximately $3 million from the proposed
transaction, which would be distributed to the Limited Partners. However,
the sale transaction remains contingent upon, among other things, the
satisfactory completion of the buyer's due diligence. Accordingly, there
can be no assurances that this transaction will be consummated.
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, 1995 and 1994
(in thousands)
Three Months Ended Six Months Ended
June 30, June 30,
1995 1994 1995 1994
Rental revenues and
expense recoveries $ 3,096 $ 2,983 $ 6,162 $ 6,009
Interest and other income 54 97 182 185
3,150 3,080 6,344 6,194
Property operating expenses 989 935 1,874 1,795
Real estate taxes 694 761 1,388 1,519
Interest expense 349 41 725 81
Depreciation and
amortization 1,026 781 1,938 1,554
3,058 2,518 5,925 4,949
Net income $ 92 $ 562 $ 419 $ 1,245
Net income:
Partnership's share of
combined income $ 106 $ 532 $ 386 $ 1,148
Co-venturers' share of
combined income (loss) (14) 30 33 97
$ 92 $ 562 $ 419 $ 1,245
Reconciliation of Partnership's Share of Operations
For the three and six months ended June 30, 1995 and 1994
(in thousands)
Three Months Ended Six Months Ended
June 30, June 30,
1995 1994 1995 1994
Partnership's share of
operations,
as shown above $ 106 $ 532 $ 386 $ 1,148
Amortization of excess basis (20) (20) (40) (40)
Partnership's share of
unconsolidated
ventures' income $ 86 $ 512 $ 346 $ 1,108
3. Operating Investment Properties
At September 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. 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 and six months ended June 30,
1995 and 1994 (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
1995 1994 1995 1994
Property operating expenses:
Repairs and maintenance $ 89 $ 75 $ 227 $ 223
Utilities 47 53 98 102
Salaries and related costs 47 48 80 90
Insurance 15 15 31 29
Management fees 36 33 73 71
Administrative and other 71 56 118 139
$ 305 $ 280 $ 627 $ 654
4.Related Party Transactions
Included in general and administrative expenses for the six months ended
September 30, 1995 and 1994 is $132,000 and $131,000, 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 months
ended September 30, 1995 and 1994 is $5,000 and $7,000, respectively,
representing fees earned by Mitchell Hutchins Institutional Investors, Inc.
for managing the Partnership's cash assets.
Accounts receivable - affiliates at September 30, 1995 and March 31, 1995
consist of investor servicing fees of $68,000 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
September 30, 1995 and March 31, 1995 consist of the following (in
thousands):
September 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). $9,601 $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 $58 through maturity
on October 15, 2001 (see discussion
below). 6,932 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). 3,487 3,500
One year commercial note payable to a bank
secured by a first priority interest to
the proceeds from the sale or refinancing
of the Richland Terrace and Richmond Park
Apartments. The note requires monthly
interest only payments at a variable rate
of the lender's prime plus 1% through
maturity on August 2, 1996 (9.75% at
September 30, 1995) (see discussion below) 2,000 -
$ 22,020 $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 paydown 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 $57,575. 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 unconsolidated 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 unconsolidated joint ventures.
In order to have sufficient funds to proceed with a renovation program at
one of its joint venture properties, the Partnership secured a one year loan
in the amount of $2 million, collateralized by the Partnership's share of
the proceeds from a future sale or refinancing of the Richmond Park/Richland
Terrace Apartments. Subsequent to the quarter end, on November 1, 1995, the
Partnership repaid the note with the proceeds from the sale of Richmond
Park/Richland Terrace (see Note 2).
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 previously reported, the refinancing of the Partnership's 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 September 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 is also currently implementing a major capital
improvement program at Loehmann's Plaza. 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 the 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 first quarter
of fiscal 1996, 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 September 30,
1995. At Loehmann's Plaza, management plans to invest a total of approximately
$2 million to complete a major capital enhancement and repositioning program
which will be substantially completed within the next 6 months. The improvement
program is necessary in order for the property to remain competitive in its
market. As part of the repositioning program, management believed it would
significantly enhance the value of the shopping center to replace the property's
anchor tenant, Loehmann's, which occupies 15,000 square feet or approximately
10% of the property's net leasable area. Loehmann's, which is no longer a
prominent retailer in the Kansas City area, was not serving as a major draw for
the center and was paying a substantially below market lease rates. Subsequent
to the end of the current quarter, on November 7, 1995, the Partnership
completed the negotiation of an agreement whereby Loehamann's consented to
terminate its lease, vacate the property and relinquish control of its space to
the Partnership in return for a payment of $75,000. Management is already
actively negotiating with two prominent national credit tenants for the entire
Loehamann's space. A lease with either of these two prospects would greatly
enhance the position of the property in its marketplace, resulting in increased
cash flow and an improved ability to lease vacant shop space. Tenant
improvement costs to lease the Loehmann's space is likely to be significant and
would be in addition to the $2 million referred to above. A portion of the
funds required to pay for the capital improvement work at Loehmann's Plaza is
expected to come from a $550,000 Renovation and Occupancy Escrow withheld by the
lender from the proceeds of the $4 million loan secured by the property 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. The remainder of the funds required
to pay for the improvement program and re-leasing costs at Loehamann's Plaza
will be provided by the proceeds retained by the Partnership from the sale
transaction discussed further below.
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. Management is currently negotiating with a strong
national retailer to take approximately half of the old Children's Palace space.
Such negotiations are in the preliminary stages. West Ashley's other major
anchor tenant, Phar-Mor, has recently emerged from 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.
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.
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 the additional liquidity which is
expected to be required by the Partnership. The primary options for generating
liquidity would be to complete the sales of certain assets, to engage in
additional borrowing activities and/or to further reduce the Partnership's
distribution rate. As discussed further below, the Partnership has identified
certain properties as favorable candidates for potential sales transactions. In
addition to the targeted sale transactions, management has determined that it
will be necessary to reduce the Partnership's distribution rate from its present
level of 2% on remaining invested capital to 1% effective for the payment to be
made on February 15, 1996 for the quarter ending December 31, 1995.
Distributions are expected to remain at this level until the leasing status of
the commercial properties has been stabilized. In order to have sufficient
funds to proceed with the Loehmann's Plaza renovation program discussed further
above, management also secured a short term loan in the amount of $2 million.
The note which was obtained in August 1995 had an August 2, 1996 maturity date
and required monthly interest-only payments at a variable interest rate of the
lender's prime plus one percent. Subsequent to the quarter end, on November 1,
1995, the Partnership repaid this note with the proceeds from the sale
transaction discussed below.
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 II 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 believed that the market value of Richmond Park and Richland Terrace
was at or near its peak for the current market cycle and began to actively
market the property for sale in fiscal 1995. During the quarter ended September
30, 1995, the Partnership signed a letter of intent to sell the Portland
properties to a third-party for $11 million. Subsequent to the quarter end, on
November 1, 1995, the Partnership completed this sale of the Richmond Park and
Richland Terrace properties and received net sale proceeds of approximately $8
million after deducting closing costs, the co-venture partner's share of the
proceeds and repayment of the $2 million short term note discussed above. The
Partnership expects to distribute approximately $5 million of this amount, or
approximately $37 per original $1,000 investment, in a Special Distribution to
be made by December 31, 1995. The remaining sale proceeds will be retained by
the Partnership to be used for the capital needs of its commercial properties.
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 to actively market the property for sale during fiscal 1996.
Subsequent to the quarter end, management, together with the Phase I owner,
reached an agreement with a prospective purchaser of Treat Commons. If the
proposed sale were to close, the Partnership would expect to receive net
proceeds of approximately $3 million, after the payment of the balance of the
mortgage loan encumbering the property and customary closing costs. Management
would expect to distribute such net proceeds to the Limited Partners. However,
the sale transaction remains contingent upon, among other things, the
satisfactory completion of the buyer's due diligence. Accordingly, there are no
assurances that the Partnership will complete this sale transaction.
At September 30, 1995, the Partnership and its consolidated joint ventures
had available cash and cash equivalents of approximately $2,952,000. 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 September 30, 1995
The Partnership reported a net loss of $216,000 for the three months ended
September 30, 1995, as compared to a net loss of $207,000 for the same period in
the prior year. This increase in net loss was the result of a decrease in the
Partnership's share of unconsolidated ventures' income of $426,000 which was
almost entirely offset by a decrease in the Partnership's operating loss of
$415,000. These offsetting changes in unconsolidated ventures' results and the
Partnership's operating loss reflect 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 in the Partnership's
Annual Report, 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 declined
slightly as a result of the refinancings as the new loans were obtained with
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 $40,000 primarily due to increases in rental revenues at the consolidated
Asbury Commons and Hacienda Park joint ventures for the current three-month
period. Rental income at Asbury Commons increased by $49,000 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 $47,000 for the current three-month period mainly due to the
leasing activity referred to above. The increases in rental income were
partially offset by increases in real estate taxes and Partnership general and
administrative expenses of $36,000 and $32,000, respectively, for the current
three-month period.
The Partnership's share of unconsolidated ventures' income prior to the
effect of the change in interest expense described above decreased by $131,000
for the three months ended September 30, 1995 primarily due to an increase in
combined depreciation and amortization expense, which was partially offset by an
increase in combined rental income. Depreciation and amortization expense
increased by $245,000 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. Rental income increased by $114,000 over
the prior period mainly due to increased occupancy at 625 North Michigan and an
increase in occupancy and rental rates at Richmond Gables.
Six Months Ended September 30, 1995
The Partnership reported a net loss of $229,000 for the six months ended
September 30, 1995, as compared to a net loss of $442,000 for the same period in
the prior year. This decrease in net loss resulted from a decrease in operating
loss of $975,000, which was partially offset by a decrease in the Partnership's
share of unconsolidated ventures' income of $762,000. As discussed above in the
results for the three months ended September 30, 1995, the major reasons for
these offsetting changes are the change in the entity reporting the interest
expense associated with the borrowings secured by the Partnership's operating
investment properties and the lower interest rates on the refinanced loans. The
Partnership's operating loss prior to the effect of the change in interest
expense decreased by $193,000 for the six months ended September 30, 1995
primarily due to increases in rental revenues at the consolidated Asbury Commons
and Hacienda Park joint ventures. Rental income at Asbury Commons increased by
$118,000 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 $70,000 for the current six-month period
mainly due to the leasing activity referred to above.
The Partnership's share of unconsolidated ventures' income prior to the
effect of the change in interest expense described above decreased by $118,000
for the six months ended September 30, 1995 primarily due to increases in
combined depreciation and amortization and property operating expenses, which
were partially offset by increases in combined rental income. Depreciation and
amortization expense increased by $370,000 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 $122,000 for the current six-month period 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 prepare the property for sale in the
current year. Rental income increased by $43,000 over the prior period mainly
due to increased occupancy at 625 North Michigan and increased rental rates at
Richmond Gables.
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: November 13, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Partnership's interim financial statements for the six months ended September
30, 1995 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 2,952
<SECURITIES> 0
<RECEIVABLES> 312
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,999
<PP&E> 89,486
<DEPRECIATION> (9,615)
<TOTAL-ASSETS> 84,578
<CURRENT-LIABILITIES> 664
<BONDS> 24,478
<COMMON> 0
0
0
<OTHER-SE> 59,088
<TOTAL-LIABILITY-AND-EQUITY> 84,578
<SALES> 0
<TOTAL-REVENUES> 2,783
<CGS> 0
<TOTAL-COSTS> 1,989
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,023
<INCOME-PRETAX> (229)
<INCOME-TAX> 0
<INCOME-CONTINUING> (229)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (229)
<EPS-PRIMARY> (1.69)
<EPS-DILUTED> (1.69)
</TABLE>
