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 DECEMBER 31, 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
December 31, 1997 and March 31, 1997 (Unaudited)
(In thousands)
ASSETS
December 31 March 31
----------- --------
Operating investment properties:
Land $ 7,351 $ 7,351
Buildings and improvements 40,199 40,018
-------- --------
47,550 47,369
Less accumulated depreciation (13,633) (12,155)
-------- --------
33,917 35,214
Investments in unconsolidated ventures,
at equity 30,540 31,784
Cash and cash equivalents 6,005 5,322
Escrowed cash 287 279
Accounts receivable 115 151
Prepaid expenses 57 50
Deferred rent receivable 757 832
Deferred expenses, net 543 646
Net advances to consolidated ventures 83 -
-------- --------
$ 72,304 $ 74,278
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 532 $ 271
Net advances from consolidated ventures - 400
Tenant security deposits 55 116
Bonds payable 2,197 2,297
Mortgage notes payable 19,460 19,650
Other liabilities 331 331
Partners' capital 49,729 51,213
-------- --------
$ 72,304 $ 74,278
======== ========
See accompanying notes.
<PAGE>
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and nine months ended December 31, 1997 and 1996 (Unaudited)
(In thousands, except per Unit data)
Three Months Ended Nine Months Ended
December 31, December 31,
------------------ -----------------
1997 1996 1997 1996
---- ---- ---- ----
Revenues:
Rental income and expense
reimbursements $ 1,152 $ 1,194 $ 3,714 $ 3,773
Interest and other income 104 138 304 318
------- ------- ------- -------
1,256 1,332 4,018 4,091
Expenses:
Property operating expenses 379 372 1,083 1,038
Depreciation and amortization 506 518 1,556 1,531
Interest expense 507 494 1,455 1,492
Real estate taxes 129 146 400 355
General and administrative 217 93 506 372
------- ------- ------- -------
1,738 1,623 5,000 4,788
------- ------- ------- -------
Operating loss (482) (291) (982) (697)
Partnership's share of
unconsolidated ventures' income 176 67 398 272
------- ------- ------- -------
Net loss $ (306) $ (224) $ (584) $ (425)
======= ======= ======= =======
Net loss per 1,000 Limited
Partnership Units $ (2.25) $ (1.65) $ (4.30) $ (3.13)
======= ======= ======= =======
Cash distributions per 1,000
Limited Partnership Units $ 2.21 $ 2.21 $ 6.63 $ 6.63
======= ======= ======= =======
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 nine months ended December 31, 1997 and 1996 (Unaudited)
(In thousands)
General Limited
Partners Partners
-------- --------
Balance at March 31, 1996 $ (494) $ 56,173
Cash distributions (9) (891)
Net loss (4) (421)
------- --------
Balance at December 31, 1996 $ (507) $ 54,861
======= ========
Balance at March 31, 1997 $ (539) $ 51,752
Cash distributions (9) (891)
Net loss (6) (578)
------- --------
Balance at December 31, 1997 $ (554) $ 50,283
======= ========
See accompanying notes.
<PAGE>
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended December 31, 1997 and 1996 (Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1997 1996
---- ----
Cash flows from operating activities:
Net loss $ (584) $ (425)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Partnership's share of unconsolidated
ventures' income (398) (272)
Depreciation and amortization 1,556 1,531
Amortization of deferred financings costs 33 24
Changes in assets and liabilities:
Escrowed cash (8) (113)
Accounts receivable 36 53
Prepaid expenses (7) (25)
Deferred rent receivable 75 (67)
Deferred expenses (8) (57)
Accounts payable and accrued expenses 261 238
Advances (to) from consolidated ventures (483) 329
Tenant security deposits (61) 20
-------- --------
Total adjustments 996 1,661
-------- --------
Net cash provided by operating activities 412 1,236
Cash flows from investing activities:
Distributions from unconsolidated ventures 2,486 1,966
Additional investments in unconsolidated ventures (844) (1,240)
Payment of leasing commissions - (52)
Additions to operating investment properties (181) (357)
-------- --------
Net cash provided by investing activities 1,461 317
-------- --------
Cash flows from financing activities:
Distributions to partners (900) (900)
Repayment of principal on long term debt (290) (268)
-------- --------
Net cash used in financing activities (1,190) (1,168)
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Net increase in cash and cash equivalents 683 385
Cash and cash equivalents, beginning of period 5,322 5,126
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Cash and cash equivalents, end of period $ 6,005 $ 5,511
======== ========
Cash paid during the period for interest $ 1,422 $ 1,493
======== ========
See accompanying notes.
<PAGE>
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
(Unaudited)
1. General
-------
The accompanying financial statements, footnotes and discussion should be
read in conjunction with the financial statements and footnotes 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 December 31, 1997 and March 31, 1997 and revenues and
expenses for each of the three-month and nine-month periods ended December 31,
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 nine months ended
December 31, 1997 and 1996 is $172,000 and $164,000, 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 both of the
nine-month periods ended December 31, 1997 and 1996 is $13,000, 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 December 31, 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 nine months ended September 30, 1997 and 1996
(in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1997 1996 1997 1996
---- ---- ---- ----
Revenues:
Rental revenues and
expense recoveries $2,402 $2,368 $7,153 $7,228
Interest and other income 117 20 356 68
------ ------ ------ ------
2,519 2,388 7,509 7,296
Expenses:
Property operating expenses 619 675 2,386 2,135
Real estate taxes 593 545 1,660 1,658
Interest expense 198 200 594 602
Depreciation and amortization 901 812 2,383 2,423
------ ------ ------ ------
2,311 2,232 7,023 6,818
------ ------ ------ ------
Net income $ 208 $ 156 $ 486 $ 478
====== ====== ====== ======
Net income:
Partnership's share of
combined income $ 191 $ 82 $ 442 $ 316
Co-venturers' share of
combined income 17 74 44 162
------ ------ ------ ------
$ 208 $ 156 $ 486 $ 478
====== ====== ====== ======
<PAGE>
Reconciliation of Partnership's Share of Operations
For the three and nine months ended December 31, 1997 and 1996
(in thousands)
Three Months Ended Nine Months Ended
December 31, December 31,
-------------------- --------------------
1997 1996 1997 1996
---- ---- ---- ----
Partnership's share of
operations, as shown above $ 191 $ 82 $ 442 $ 316
Amortization of excess basis (15) (15) (44) (44)
------ ------ ------ ------
Partnership's share of
unconsolidated
ventures' income $ 176 $ 67 $ 398 $ 272
====== ====== ====== ======
4. Operating Investment Properties
-------------------------------
The Partnership's balance sheets at December 31, 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 nine months ended September 30, 1997
and 1996 (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1997 1996 1997 1996
---- ---- ---- ----
Property operating expenses:
Repairs and maintenance $ 128 $ 128 $ 361 $ 355
Utilities 57 59 169 149
Salaries and related costs 48 51 127 133
Insurance 17 17 50 50
Management fees 36 44 118 123
Administrative and other 93 73 258 228
------ ------ ------ ------
$ 379 $ 372 $1,083 $1,038
====== ====== ====== ======
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.
<PAGE>
6. Mortgage Notes Payable
----------------------
Mortgage notes payable on the consolidated balance sheets of the
Partnership at December 31, 1997 and March 31, 1997 consist of the following (in
thousands):
December 31 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
December 31, 1997 and March 31, 1997. $ 9,317 $ 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
September 30, 1997 and December 31,
1996. 6,751 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
September 30, 1997 and December 31,
1996. 3,392 3,426
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$19,460 $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 7 years. 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 six 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. During the
third quarter of fiscal 1998, bid application packages were distributed to
pre-qualified contractors. It is anticipated that the construction contracts
will be executed and that repair and replacement work will commence during the
quarter ending March 31, 1998. 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. Subsequent to the quarter end, the Partnership reached a settlement
agreement with the original developer of the Asbury Commons property. Under the
terms of this agreement, the Partnership expects to receive payments totaling
$200,000 during the fourth quarter of fiscal 1998. The Partnership believes that
it has adequate cash reserves to fund the repair work at Asbury Commons
regardless of whether any additional recoveries are realized. Nonetheless,
because of the seriousness of the construction problems at Asbury Commons, the
Partnership has suspended the distribution increase which was planned to begin
in the fourth quarter of fiscal 1997. The Partnership had planned to increase
the distribution rate from 1% to 2.5% per annum on a Limited Partner's remaining
capital account of $882 per original $1,000 investment. However, in light of the
magnitude of the repair work required at Asbury Commons, as well as other
potential near-term capital needs of the Partnership's commercial properties, as
discussed further below, management concluded that it would be prudent to
continue distributions at a conservative level for the foreseeable future.
The average occupancy level at the Asbury Commons Apartments was 92% for
the quarter ended December 31, 1997, compared to 96% for the prior quarter and
89% for the same period one year ago. In March 1997, a national property
management firm was hired to take over management at Asbury Commons effective
April 1, 1997. The new management firm has completed its initial market and
positioning surveys for Asbury Commons. The property's management and leasing
team is confident that the property will perform at average occupancies similar
to comparable properties in the market, including newly constructed communities,
once the repair program discussed above has been completed. The team has also
indicated that effective rents can be increased at Asbury Commons through
improved signage, targeted advertising and promotion, and selected unit interior
upgrades. During the third quarter of fiscal 1998, construction of new
apartments in the immediate market area consisted of the final phase of a
300-unit community. The outlook for additional apartment construction in the
local market over the next year is more moderate than the activity which
occurred in calendar 1996 and 1997.
Gateway 2000 Plaza (formerly Loehmann's Plaza Shopping Center) in Overland
Park, Kansas was 91% leased as of December 31, 1997 and physical occupancy at
the Center increased to 89% from 84% as of the end of the prior quarter. During
the third quarter, the property's leasing team signed a lease expansion and
extension agreement with an existing 3,815 square foot tenant to occupy 4,830
square feet. The 1,015 square foot expansion area was carved out of the rear
portion of an adjacent 2,958 square foot space that has been available for lease
for over two years. The 2,958 square foot space has been difficult to lease due
to its narrow but very deep configuration. With the signing of this expansion
agreement, the leasing team is now marketing the more attractive 1,943 square
foot front portion of this space. The leasing team is also in final negotiations
with a prospective tenant to lease a vacant 4,980 square foot space. If this
lease is executed, only three spaces, comprising 5,879 square feet, or less than
4% of the Center would remain available for lease. 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 in the Center
have increased since the openings of both the 13,410 square foot Gateway store
and the re-opening of the expanded 13,000 square foot Alpine Hut store during
the first quarter of fiscal 1998.
A portion of the funds required to pay for the capital improvement work
related to the leasing and expansion projects at Gateway 2000 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
would have the right to apply the balance of the escrow account to the payment
of loan principal. As of August 1996, 18 months from the date of the loan
closing, such requirements had not been met. Therefore, 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. During the quarter ended December
31, 1997, management requested and received the release of the Renovation and
Occupancy Escrow Funds and the termination of the unconditional guaranty. The
escrow funds will be used to replenish the Partnership's reserves.
As reported in the second quarter, the leasing team at the West Ashley
Shoppes Shopping Center signed a lease for the previously vacant 36,416 square
foot former Children's Palace space. As previously reported, Children's Palace
closed its retail store at the center in May 1991 and subsequently filed for
bankruptcy protection from creditors. This anchor space at West Ashley Shoppes
had been vacant for the past six and a half years. The new tenant, Waccamaw, a
national home goods retailer, anticipates opening its new store during the first
calendar quarter of 1998. The Partnership will fund tenant improvement costs and
leasing commissions for the new Waccamaw store out of its existing cash
reserves. As Waccamaw should generate significant additional customer traffic
into the Center, the leasing team anticipates stronger interest from prospective
tenants for the remaining available 7,750 square feet of shop space. With the
signing of the Waccamaw Pottery lease during the current quarter, West Ashley
Shoppes was 95% leased as of December 31, 1997.
The 625 North Michigan Office Building in Chicago, Illinois, remained 89%
leased at December 31, 1997, unchanged from the prior quarter. During the
quarter ended December 31, 1997, two tenants renewed a total of 5,288 square
feet and expanded their spaces by a total of 2,276 square feet. One tenant
occupying 1,378 square feet vacated its space. During the next twelve months,
leases for eight tenants occupying 19,685 square feet will expire. The
property's leasing team expects seven of the eight tenants occupying 16,302
square feet to renew, and the remaining space is expected to be leased to a new
tenant. Currently, the property's leasing team is negotiating with a potential
new tenant which would occupy 22,000 square feet of space. This lease, if
completed, would increase the property's occupancy by 7%. Occupancy levels and
rental rates in the local market continue to improve steadily. The elevator
modernization project is nearing completion now that all four low-rise elevators
and three of the four high-rise cars are complete. The remaining high-rise car
is expected to be completed by the end of the fourth quarter. Management
continues to analyze a potential project to upgrade the building lobby,
recapture currently unleasable first floor space, and convert all of the
leasable first floor space at 625 North Michigan 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 Business Park investment
property in Pleasanton, California, remained 100% leased to four tenants at the
end of the third quarter. The local market continues to experience rental rate
growth with market occupancy levels over 98%. During May, a new BART (Bay Area
Rapid Transit) station opened which will serve this Pleasanton office market. As
previously reported, one of the property's tenants, which occupied 51,683 square
feet, or 28% of the property's leasable area, under several leases with
expiration dates in 1998, 1999 and 2001, announced that it would relocate from
Hacienda Business Park into a new building under construction in the local
market. One of the buildings at Hacienda Park contains 41,656 square feet and is
fully leased by this tenant. The tenant's remaining 10,027 square feet is leased
in an adjoining building. While this tenant has the right to sublease the space,
subject to various approval rights by the Partnership, it remains responsible
for rental payments and the contractual share of operating expenses until the
leases expire. During the quarter, this tenant began exercising its right to
sub-lease the 41,656 square foot building it vacated. The tenant signed three
sub-leases for 11,706, 12,254 and 11,706 square feet. The leasing team is
actively working to secure a replacement tenant for the remaining 5,990 square
feet of available space. Management is currently reviewing the Pleasanton office
market to assess the appropriate timing for the sale of the Hacienda Park
property.
The average occupancy level at The Gables Apartments was 95% for the
quarter ended December 31, 1997, compared to 96% for the previous quarter and
90% for the same period a year ago. The high occupancy figures, coupled with
favorable rental rate growth over the past year, reflect a healthy demand for
apartments resulting from strong job, household formation and population growth
in the Richmond, Virginia market. As job growth is projected to continue during
the next few years, the economic outlook for Richmond remains positive. Two
significant new employers in the Richmond market include the White Oaks
semiconductor plant, which is nearly completed and projected to employ 1,500
people, and the recently completed Capital One credit facility, which will
employ up to 1,000 people. 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. Given the currently favorable market
conditions in Richmond and for apartment properties in general, management plans
to explore the potential for a near term sale of The Gables Apartments during
calendar 1998.
At December 31, 1997, the Partnership and its consolidated joint ventures
had available cash and cash equivalents of approximately $6,005,000. 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 December 31, 1997
- ------------------------------------
The Partnership reported a net loss of $306,000 for the three months ended
December 31, 1997, as compared to net loss of $224,000 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
$191,000, when compared to the same period in the prior year, due to an increase
in total expenses of $115,000 and a decrease in total revenues of $76,000.
The $115,000 increase in total expenses is mainly attributable to an
increase in general and administrative expenses of $124,000. 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. 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 decrease in the Partnership's revenues consisted of a $42,000 decline
in rental income from the consolidated joint ventures and a $34,000 reduction in
interest and other income. Rental income decreased mainly due to declines 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 decreased mainly as a
result of reductions in miscellaneous income at the West Ashley and Asbury
Commons consolidated joint ventures.
The Partnership's share of unconsolidated ventures' income increased by
$55,000 primarily due to an increase of $154,000 in net income at the Gateway
2000 Plaza joint venture which was partially offset by a decrease of $42,000 in
net income at the 625 North Michigan joint venture. Net income increased at the
Gateway 2000 joint venture due to an increase in rental income as a result of
the increase in average occupancy referred to above. 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.
Nine Months Ended December 31, 1997
- -----------------------------------
The Partnership reported a net loss of $584,000 for the nine months ended
December 31, 1997, as compared to a net loss of $425,000 for the same period in
the prior year. This increase in the Partnership's net loss resulted from a
$285,000 increase in the Partnership's operating loss which was partially offset
by a $126,000 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, real
estate taxes and depreciation and amortization expenses. General and
administrative expenses increased by $134,000 primarily due to an increase in
certain required professional fees, including legal fees related to the
examination of potential recovery sources for repair costs at the Asbury Commons
Apartments, as discussed further above. Property operating expenses increased by
$45,000 primarily due to an increase in utilities expense at Asbury Commons and
repair and maintenance expenses at Hacienda Park. Real estate taxes increased by
$45,000 mainly due to higher tax expense at Hacienda Park based on the fact that
the prior year expense included successful tax appeals and refunds from the tax
periods of 1994 and 1995. Depreciation and amortization expense increased by
$25,000 due to small increases at all three consolidated joint ventures during
the current nine-month period. In addition, rental income decreased by $59,000
mainly due to declines in rental income at the consolidated Asbury Commons and
West Ashley Shoppes joint ventures. These unfavorable changes in the
Partnership's operating loss were partially offset by a decrease in interest
expense. Interest expense decreased by $37,000 mainly as a result of the
scheduled amortization of the outstanding mortgage principal balances.
The Partnership's share of unconsolidated ventures' income increased by
$126,000 for the current nine-month period primarily due to an increase of
$275,000 in net income at Gateway 2000 Plaza joint venture which was partially
offset by a decrease of $141,000 in net income at the 625 North Michigan joint
venture. Net income increased at Gateway 2000 Plaza due to an increase in rental
income as a result of the increase in average occupancy referred to above. 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: February 12, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Partnership's audited financial statements for the quarter ended December 31,
1997 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> DEC-31-1997
<CASH> 6,005
<SECURITIES> 0
<RECEIVABLES> 115
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,464
<PP&E> 47,550
<DEPRECIATION> 13,633
<TOTAL-ASSETS> 72,304
<CURRENT-LIABILITIES> 587
<BONDS> 21,657
0
0
<COMMON> 0
<OTHER-SE> 49,729
<TOTAL-LIABILITY-AND-EQUITY> 72,304
<SALES> 0
<TOTAL-REVENUES> 4,416
<CGS> 0
<TOTAL-COSTS> 3,545
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,455
<INCOME-PRETAX> (584)
<INCOME-TAX> 0
<INCOME-CONTINUING> (584)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (584)
<EPS-PRIMARY> (4.30)
<EPS-DILUTED> (4.30)
</TABLE>
