UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
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
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(Exact name of registrant as specified in its charter)
Virginia 04-2918819
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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 TWO LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
September 30, 1997 and March 31, 1997 (Unaudited)
(In thousands)
ASSETS
September 30 March 31
------------ --------
Operating investment properties:
Land $ 7,351 $ 7,351
Buildings and improvements 40,115 40,018
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47,466 47,369
Less accumulated depreciation (13,141) (12,155)
-------- --------
34,325 35,214
Investments in unconsolidated ventures,
at equity 31,597 31,784
Cash and cash equivalents 5,429 5,322
Escrowed cash 373 279
Accounts receivable 226 151
Prepaid expenses 49 50
Deferred rent receivable 782 832
Deferred expenses, net 575 646
-------- --------
$ 73,356 $ 74,278
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 585 $ 271
Net advances from consolidated ventures 319 400
Tenant security deposits 65 116
Bonds payable 2,197 2,297
Mortgage notes payable 19,524 19,650
Other liabilities 331 331
Partners' capital 50,335 51,213
-------- --------
$ 73,356 $ 74,278
======== ========
See accompanying notes.
<PAGE>
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and six months ended September 30, 1997 and 1996 (Unaudited)
(In thousands, except per Unit data)
Three Months Ended Six Months Ended
September 30, September 30,
------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
Revenues:
Rental income and expense
reimbursements $1,210 $1,382 $2,562 $2,579
Interest and other income 100 104 200 180
------ ------ ------ ------
1,310 1,486 2,762 2,759
Expenses:
Property operating expenses 283 318 704 666
Depreciation and amortization 531 532 1,050 1,013
Interest expense 475 483 948 998
Real estate taxes 135 141 271 279
General and administrative 195 93 289 209
------ ------ ------ ------
1,619 1,567 3,262 3,165
------ ------ ------ ------
Operating loss (309) (81) (500) (406)
Partnership's share of
unconsolidated ventures'
income 168 129 222 205
------ ------ ------ ------
Net income (loss) $ (141) $ 48 $ (278) $ (201)
====== ====== ====== ======
Net income (loss) per 1,000
Limited Partnership Units $(1.04) $ 0.35 $(2.05) $(1.48)
====== ====== ====== ======
Cash distributions per 1,000
Limited Partnership Units $ 2.21 $ 2.21 $ 4.42 $ 4.42
====== ====== ====== ======
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.
<PAGE>
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
For the six months ended September 30, 1997 and 1996 (Unaudited)
(In thousands)
General Limited
Partners Partners
-------- --------
Balance at March 31, 1996 $ (494) $ 56,173
Cash distributions (6) (594)
Net loss (2) (199)
-------- --------
Balance at September 30, 1996 $ (502) $ 55,380
======== ========
Balance at March 31, 1997 $ (539) $ 51,752
Cash distributions (6) (594)
Net loss (3) (275)
-------- --------
Balance at September 30, 1997 $ (548) $ 50,883
======== ========
See accompanying notes.
<PAGE>
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended September 30, 1997 and 1996 (Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1997 1996
---- ----
Cash flows from operating activities:
Net loss $ (278) $ (201)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Partnership's share of unconsolidated
ventures' income (222) (205)
Depreciation and amortization 1,050 1,013
Amortization of deferred financings costs 26 25
Changes in assets and liabilities:
Escrowed cash (94) (137)
Accounts receivable (75) (73)
Prepaid expenses 1 26
Deferred rent receivable 50 (85)
Deferred expenses (19) (56)
Accounts payable and accrued expenses 314 167
Advances to (from) consolidated ventures (81) 245
Tenant security deposits (51) 25
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Total adjustments 899 945
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Net cash provided by operating activities 621 744
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Cash flows from investing activities:
Distributions from unconsolidated ventures 1,153 1,358
Additional investments in unconsolidated ventures (744) (747)
Payment of leasing commissions - (52)
Additions to operating investment properties (97) (209)
------ -------
Net cash provided by investing activities 312 350
------ -------
Cash flows from financing activities:
Distributions to partners (600) (600)
Repayment of principal on long term debt (226) (201)
------ -------
Net cash used in financing activities (826) (801)
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Net increase in cash and cash equivalents 107 293
Cash and cash equivalents, beginning of period 5,322 5,126
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Cash and cash equivalents, end of period $5,429 $ 5,419
====== =======
Cash paid during the period for interest $ 922 $ 946
====== =======
See accompanying notes.
<PAGE>
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
(Unaudited)
1. General
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The accompanying financial statements, footnotes and discussion should be
read in conjunction with the financial statements and footnotes contained in the
Partnership's Annual Report for the year ended March 31, 1997. 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, 1997 and March 31, 1997 and revenues and
expenses for each of the three-and six-month periods ended September 30, 1997
and 1996. Actual results could differ from the estimates and assumptions used.
2. Related Party Transactions
--------------------------
Included in general and administrative expenses for the three months ended
September 30, 1997 and 1996 is $114,000 and $106,000, respectively, representing
reimbursements to an affiliate of the Managing General Partner for providing
certain financial, accounting and investor communication services to the
Partnership.
Also included in general and administrative expenses for the three months
ended September 30, 1997 and 1996 is $10,000 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 Ventures
--------------------------------------------
As of September 30, 1997, the Partnership had investments in three
unconsolidated joint venture partnerships which own operating investment
properties as described further in the Partnership's Annual Report 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 and six months ended June 30, 1997 and 1996
(in thousands)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
1997 1996 1997 1996
---- ---- ---- ----
Revenues:
Rental revenues and expense
recoveries $2,527 $2,419 $4,751 $4,860
Interest and other income 75 10 239 48
------ ------ ------ ------
2,602 2,429 4,990 4,908
Expenses:
Property operating expenses 962 682 1,767 1,460
Real estate taxes 564 571 1,067 1,113
Interest expense 192 181 396 402
Depreciation and amortization 692 805 1,482 1,611
------ ------ ------ ------
2,410 2,239 4,712 4,586
------ ------ ------ ------
Net income $ 192 $ 190 $ 278 $ 322
====== ====== ====== ======
Net income:
Partnership's share of
combined income $ 183 $ 144 $ 251 $ 234
Co-venturers' share of
combined income 9 46 27 88
------ ------ ------ ------
$ 192 $ 190 $ 278 $ 322
====== ====== ====== ======
<PAGE>
Reconciliation of Partnership's Share of Operations
For the three and six months ended September 30, 1997 and 1996
(in thousands)
Three Months Ended Six Months Ended
September 30, September 30,
------------------- --------------------
1997 1996 1997 1996
---- ---- ---- ----
Partnership's share of
operations, as shown
above $ 183 $ 144 $ 251 $ 234
Amortization of excess
basis (15) (15) (29) (29)
------- ------- ------ ------
Partnership's share of
unconsolidated
ventures' income $ 168 $ 129 $ 222 $ 205
======= ======= ====== ======
4. Operating Investment Properties
-------------------------------
The Partnership's balance sheets at September 30, 1997 and March 31, 1997
include three operating investment properties owned by joint ventures in which
the Partnership has a controlling interest; 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
Saratoga Center and EG&G Plaza, Asbury Commons Apartments and the West Ashley
Shoppes shopping center for the three and six months ended June 30, 1997 and
1996 (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
Property operating expenses:
Repairs and maintenance $ 77 $ 131 $ 233 $ 227
Utilities 59 43 112 90
Salaries and related costs 29 40 79 82
Insurance 17 16 33 33
Management fees 35 40 82 79
Administrative and other 66 48 165 155
------ ------ ------ -----
$ 283 $ 318 $ 704 $ 666
====== ====== ====== =====
5. 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 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 Hacienda Park joint venture would no
longer be liable for the bond assessments. 6. Mortgage Notes Payable
Mortgage notes payable on the consolidated balance sheets of the
Partnership at September 30, 1997 and March 31, 1997 consist of the following
(in thousands):
September 30 March 31
------------ --------
9.125% mortgage note payable by the
Partnership to an insurance company
secured by the 625 North Michigan
Avenue operating investment
property. The terms of the note
were modified effective May 31,
1994. The loan requires monthly
principal and interest payments of
$83 through maturity on May 1,
1999. In addition, the loan
requires monthly deposits to a
capital improvement escrow. The
fair value of the mortgage note
approximated its carrying value at
September 30, 1997 and March 31,
1997. $ 9,351 $ 9,418
8.75% mortgage note payable by the
consolidated Atlanta Asbury
Partnership to an insurance company
secured by the Asbury Commons
operating investment property. The
loan requires monthly principal and
interest payments of $55 through
maturity on October 15, 2001. The
fair value of the mortgage note
approximated its carrying value at
June 30, 1997 and December 31,
1996. 6,769 6,806
9.04% mortgage note payable by the
consolidated Hacienda Park
Associates 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. The fair value of the
mortgage note approximated its
carrying value at June 30, 1997 and
December 31, 1996. 3,404 3,426
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$19,524 $19,650
======= =======
On November 7, 1994, the Partnership repaid certain outstanding 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 obtained by Richmond
Gables Associates and secured by The Gables Apartments. The new $5.2 million
loan bears interest at 8.72% and matures in November 2001. The loan requires
monthly principal and interest payments of $43,000. On February 10, 1995, the
Partnership repaid an outstanding 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 $34,000. Legal liability for the repayment of the new
mortgage loans secured by the Gables and Loehmann's Plaza properties rests with
the respective unconsolidated joint ventures. Accordingly the mortgage loan
liabilities are recorded on the books of these unconsolidated joint ventures.
The Partnership has indemnified Richmond Gables Associates and Daniel/Metcalf
Associates Partnership and the related co-venture partners, against all
liabilities, claims and expenses associated with these borrowings.
<PAGE>
PAINEWEBBER EQUITY PARTNERS TWO 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, 1997 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 sell the Partnership's remaining operating investment properties. As a
result, management is currently 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 within the next 2-to-3 years.
As discussed in the Annual Report, management discovered the existence of
certain potential construction problems at the Asbury Commons Apartments during
fiscal 1997. The initial analysis of the construction problems at Asbury Commons
revealed extensive deterioration of the wood trim and evidence of potential
structural problems affecting the exterior breezeways, the decks of certain
apartment unit types and the stairway towers. A design and construction team was
organized to further evaluate the potential problems, make cost-effective
remediation recommendations and implement the repair program. Based on this
evaluation, the structural problems may be more extensive and cost significantly
more than originally estimated. It will also require further investigation which
together with eventual construction repair work may result in disruptions to
property operations while units are possibly taken out of service for testing
and repairs. The cost of the repair work required to remediate this situation is
currently estimated at between approximately $1.5 to $2 million. Subsequent to
the end of the second quarter, bid application packages were distributed to
pre-qualified contractors. Management anticipates that construction contracts
will be executed and that repair and replacement work will commence in early
calendar year 1998 and finish during the summer. During the first quarter of
fiscal 1998, the Partnership filed a warranty claim against the manufacturer of
the wood-composite siding used throughout Asbury Commons. During the second
quarter, the Partnership filed a warranty claim against the manufacturer of the
fiberglass-composite roofing shingles installed when the property was built.
While there can be no assurances regarding the Partnership's ability to
successfully recover any damages relating to the siding and roofing shingles,
the Partnership will diligently pursue these and other potential recovery
sources. The Partnership believes that it has adequate cash reserves to fund the
repair work at Asbury Commons regardless of whether any recoveries are realized.
The average occupancy level at the Asbury Commons Apartments was 96% for
the quarter ended September 30, 1997, compared to 84% for the prior quarter and
93% for the same period one year ago. As previously reported, the property's
average occupancy level had slipped to 81% in March of 1997. On April 1, 1997 a
national property management firm was hired to take over management at Asbury
Commons. The property's average occupancy level now compares favorably to the
local market average of 92%. During the second quarter, the ongoing lease-up of
newly constructed apartments in the local market forced two competing properties
with previously higher rents to drop their asking rents to levels similar to
Asbury Commons. As rental rates at Asbury Commons have been at the low end of
the market range, as part of the successful effort to stabilize occupancy
levels, the property's leasing staff was able to hold rental rates steady. Now
that occupancy levels at the property have stabilized, the property's leasing
staff had discontinued all rental concessions by the end of the quarter. As
reported in the first quarter, the management team had indicated that it
believed effective rents could be increased at Asbury Commons through improved
signage, targeted advertising and promotion, and selected unit interior
upgrades. A review of rental rates and interior amenities at competing
properties during the past few quarters indicated that upgrades to each unit's
door and cabinet hardware, closet-shelving, and kitchen-area lighting, should
enable the leasing team to raise rental rates significantly enough to warrant
the additional investment. Accordingly, the management team has begun
implementing the unit interior upgrades at each new lease and lease renewal.
<PAGE>
Loehmann's Plaza Shopping Center in Overland Park, Kansas remained 90%
leased and 89% occupied as of September 30, 1997, unchanged from the prior
quarter but improved from a 79% occupancy level of one year ago. As previously
reported, the property's leasing team signed a 13,410 square foot lease,
representing 9% of the Center's leasable area, with Gateway 2000 Country Stores
to occupy the former Loehmann's space. Gateway 2000 Country Stores, a
manufacturer and retailer of personal computers, opened its new store on June
30, 1997. The property's management team reports that customer traffic levels at
the Center have increased since the openings of both the 13,410 square foot
Gateway store and the re-opening of an expanded 13,000 square foot Alpine Hut
store during the first quarter of fiscal 1998. Other tenant activity during the
first quarter included the signing of a three-year lease extension agreement
with an existing 1,920 square foot tenant, the closing on the April 30, 1997
lease expiration date of a 4,289 square foot store with weak sales, and the
closing of a 2,000 square foot store of a credit tenant whose lease expires in
July 2000. It is anticipated that this tenant will continue to pay its rental
payments and contractual share of operating expenses through the lease
expiration date or until the space is re-leased to another tenant. During the
current quarter, the leasing team signed a three-year lease with a 1,455 square
foot tenant to replace an existing tenant with weak sales and below market
rental rates. Currently, the leasing team is negotiating with a number of
tenants to lease the remaining 9,900 square feet of vacant shop space in the
Center. With the September 1997 grand opening of a new grocery store near
Loehmann's Plaza, there has been an increase in shopper traffic levels along the
Center's road frontage. When a lease-up of the remaining vacant space at
Loehmann's Plaza is completed, management believes that the property should be
in a position to be marketed for a potential sale.
All of the improvements and leasing costs incurred at Loehmann's Plaza
have been paid for using the property net cash flow and Partnership reserves. A
portion of the funds required to pay for the capital improvement work at
Loehmann's Plaza was expected to come from a $550,000 Renovation and Occupancy
Escrow withheld by the lender from the proceeds of a $4 million loan secured by
the property which was obtained in February 1995. Funds were to 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 satisfied certain
requirements, which included specified occupancy and rental income thresholds.
If such requirements were not met within 18 months from the date of the loan
closing, the lender had the right to 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 was to be released in the event that the joint venture satisfied
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.
Despite not meeting the occupancy and rental income thresholds until June of
1997 with the opening of the Gateway store, the lender has agreed to release the
full amount of the Renovation and Occupancy escrow to the Partnership and to
eliminate the Partnership's guaranty. The funds from the Renovation and
Occupancy Escrow will be used to replenish the Partnership's cash reserves.
During the current quarter, the property's leasing team signed a lease for
the previously vacant 36,416 square foot former Children's Palace space at West
Ashley Shoppes. The tenant, Waccamaw, a national home goods retailer,
anticipates opening the new store during the first calendar quarter of 1998.
Tenant improvement costs and leasing commissions for the Waccamaw lease are
expected to total approximately $500,000 and will be funded from the
Partnership`s cash reserves. As Waccamaw should generate significant additional
customer traffic at the Center, the leasing team anticipates stronger interest
from prospective tenants for the available 7,750 square feet of shop space. Also
during the current quarter, the leasing team at West Ashley Shoppes signed three
new small-shop leases totalling 5,250 square feet. With the signing of the
Waccamaw lease after the quarter end, the Center is now 94% leased. West
Ashley's other major anchor tenant, Phar-Mor, emerged from the protection of
Chapter 11 of the U.S. Bankruptcy Code during fiscal 1996. While Phar-Mor closed
a number of its stores nationwide as part of its bankruptcy reorganization, the
company remains obligated under a lease at West Ashley which runs through August
2002.
The 625 North Michigan Office Building in Chicago, Illinois, was 89%
leased at September 30, 1997, compared to 87% at the end of the prior quarter.
During the second quarter, one new tenant signed a lease for 7,011 square feet,
and two tenants totalling 2,577 square feet renewed their leases. During the
next twelve months, leases for eight tenants occupying 14,750 square feet will
expire. The property's leasing team expects four of the eight tenants occupying
7,035 square feet to renew, and the remaining space is expected to be leased to
new tenants. Rental rates in the local market continue to improve steadily. The
elevator modernization project at 625 North Michigan is nearing completion now
that all four low-rise elevators and two of the four high-rise cars are
complete. The remaining two high-rise cars are expected to be completed by the
end of calendar year 1997. The elevator controls upgrade project is progressing
on schedule and within the budgeted cost of approximately $700,000. Management
is currently analyzing a potential project to upgrade the building lobby,
recapture currently unleasable first floor space, and convert all of the
leasable first floor space to retail usage. 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 significantly positive effect on the market value of the 625 North
Michigan property. A comprehensive cost-benefit analysis of this potential
project is expected to be completed over the next several months.
The four buildings comprising the Hacienda Park investment property in
Pleasanton, California, remained 100% leased to four tenants at the end of the
second quarter. However, as previously reported, one of the property's tenants,
which leases 51,683 square feet, or 28% of the property's leasable area,
announced that it planned to relocate from Hacienda Business Park into a new
building under construction in the local market. This tenant has several leases
with expiration dates in 1998, 1999 and 2001 and fully leases one of the four
buildings comprising Hacienda Business Park plus 10,027 square feet in a second
building. The tenant vacated Hacienda Park and consolidated its operations into
the new building in September 1997. This tenant will remain responsible for
rental payments and its contractual share of operating expenses until the leases
expire. Nonetheless, the property's leasing team is diligently working to secure
replacement tenants for this 51,683 square feet. Because the existing rental
rates on the leases of this tenant are below current market rates, the
Partnership could have an opportunity to re-lease any vacated space at the
higher prevailing market rental rates. In any event, provided there is no
dramatic increase in either planned speculative development or build-to-suit
development with current tenants in the local market, the Partnership can be
expected to achieve a higher sale price for the Hacienda Park property as the
existing below-market leases approach their expiration dates. Accordingly,
management plans to defer any sale efforts for the immediate future in order to
capture this expected increase in value. In the meantime, management will
continue to closely monitor all planned development activity in this market.
The average occupancy level at The Gables Apartments was 96% for the
quarter ended September 30, 1997, compared to 95% for the same period a year
ago. The Richmond, Virginia market continues to experience strong demand for
apartments resulting from strong job, household formation and population growth.
As job growth is projected to continue during the next few years, the economic
outlook for Richmond remains strong. While there are three apartment
communities, comprising approximately 900 units, under construction in the local
market, only one 280-unit community is considered competition for The Gables
Apartments. The other communities are located at least five miles from The
Gables and offer larger units at significantly higher rents. Additional
apartment construction projected to start in the spring of 1998 includes a
144-unit second phase of a competing community and a 508-unit project located
five miles west of The Gables. Capital improvement work planned at The Gables
for the third quarter of fiscal 1998 includes the painting of the building
exteriors.
At September 30, 1997, the Partnership and its consolidated joint ventures
had available cash and cash equivalents of approximately $5,429,000. Such cash
and cash equivalent amounts will be utilized for the working capital
requirements of the Partnership, for reinvestment in certain of the
Partnership's properties including the anticipated construction repair work at
Asbury Commons and the capital needs of the Partnership's commercial properties
(as discussed further above) 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, 1997
- -------------------------------------
The Partnership reported a net loss of $141,000 for the three months ended
September 30, 1997, as compared to net income of $48,000 for the same period in
the prior year. This unfavorable change in the Partnership's net operating
results is primarily attributable to an increase in the Partnership's operating
loss which was partially offset by an increase in the Partnership's share of
unconsolidated ventures' income. The Partnership's operating loss increased by
$228,000, when compared to the same period in the prior year, due to a decrease
in total revenues of $176,000 and an increase in total expenses of $52,000. The
decrease in the Partnership's revenues consisted of a $172,000 decrease in
rental income and a $4,000 decrease in interest and other income. Rental income
decreased mainly due to an decrease in rental income at the consolidated Asbury
Commons and West Ashley Shoppes joint ventures which was partially offset by an
increase in rental income at the consolidated Hacienda Park joint venture.
Rental income decreased at West Ashley Shoppes due to a decrease in average
occupancy and substantial decreases in common area maintenance reimbursements
and insurance reimbursements. Rental income decreased at Asbury Commons due to a
decrease in average occupancy. Rental income at Hacienda Park increased mainly
due to the expansion of a major tenant and a lease renewal of another major
tenant, both at substantially higher rates, during fiscal 1997. Interest and
other income increased as a result of a small increase in the average balance of
cash and cash equivalents outstanding when compared to the same period in the
prior year.
The $52,000 increase in total expenses is mainly attributable to an
increase in general and administrative expenses of $102,000. General and
administrative expenses increased primarily due to an increase in certain
required professional fees, including legal fees related to the examination of
potential recovery sources for the repair costs at the Asbury Commons
Apartments, as discussed further above. The increase in general and
administrative expenses was partially offset by a decrease in property operating
expenses of $35,000. Property operating expenses decreased primarily due to a
decrease in repairs and maintenance expenses of $54,000 due to a decrease in
such expenses at the consolidated Asbury Commons joint venture. As discussed
further above, the Partnership is still in the process of assessing the
magnitude of the required repairs at Asbury Commons and expects to begin to
incur repair costs during the fourth quarter of fiscal 1998.
The Partnership's share of unconsolidated ventures' income increased by
$39,000 primarily due to an increase in net income at the Loehmann's Plaza joint
venture of $93,000 which was partially offset by a decrease in net income at the
625 North Michigan joint venture. Net income increased at the Loehmann's Plaza
joint venture due to an increase in rental income as a result of an increase in
average occupancy. Net income decreased at the 625 North Michigan joint venture
primarily due to an increase in repairs and maintenance expenses as a result of
the elevator modernization project discussed above.
Six Months Ended September 30, 1997
- -----------------------------------
The Partnership reported a net loss of $278,000 for the six months ended
September 30, 1997, as compared to a net loss of $201,000 for the same period in
the prior year. This increase in the Partnership's net loss resulted from a
$94,000 increase in the Partnership's operating loss which was partially offset
by a $17,000 increase in the Partnership's share of unconsolidated ventures'
income. The increase in the Partnership's operating loss was primarily the
result of increases in general and administrative, property operating and
depreciation and amortization expenses. General and administrative expenses
increased by $80,000 primarily due to an increase in legal and other required
professional fees, as discussed further above. Property operating expenses
increased by $38,000 primarily due to an increase in utilities expense at Asbury
Commons and administrative expenses at Hacienda Park. Depreciation and
amortization expense increased by $37,000 due to small increases at all three
consolidated joint ventures during the current six-month period. The increases
in property operating expenses, general and administrative expenses, and
depreciation and amortization expense were partially offset by a decrease in
interest expense and an increase in interest and other income. Interest expense
decreased by $50,000 mainly as a result of the scheduled amortization of
mortgage principal balances outstanding. Interest and other income increased by
$20,000 due to a small increase in the interest rates earned on invested cash
equivalents and a small increase in the average balance of such invested cash
equivalents.
The Partnership's share of unconsolidated ventures' income increased by
$17,000 primarily due to an increase in net income at the Loehmann's Plaza joint
venture of $128,000 which was partially offset by a decrease in net income at
the 625 North Michigan joint venture. Net income increased at Loehmann's Plaza
due to an increase in rental income as a result of an increase in average
occupancy. Net income decreased at the 625 North Michigan joint venture
primarily due to an increase in repairs and maintenance expenses as a result of
the elevator modernization project discussed above.
<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 Current Reports on Form 8-K were filed during the period covered by this
report.
<PAGE>
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 10, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Partnership's audited financial statements for the six months ended September
30, 1997 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-31-1998
<PERIOD-END> SEP-30-1997
<CASH> 5,429
<SECURITIES> 0
<RECEIVABLES> 226
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,077
<PP&E> 79,063
<DEPRECIATION> 13,141
<TOTAL-ASSETS> 73,356
<CURRENT-LIABILITIES> 969
<BONDS> 21,721
0
0
<COMMON> 0
<OTHER-SE> 50,335
<TOTAL-LIABILITY-AND-EQUITY> 73,356
<SALES> 0
<TOTAL-REVENUES> 2,984
<CGS> 0
<TOTAL-COSTS> 2,314
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 948
<INCOME-PRETAX> (278)
<INCOME-TAX> 0
<INCOME-CONTINUING> (278)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (278)
<EPS-PRIMARY> (2.05)
<EPS-DILUTED> (2.05)
</TABLE>
