UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED September 30, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ______ to _______ .
Commission File Number: 0-15705
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, 1998 and March 31, 1998 (Unaudited)
(In thousands)
ASSETS
September 30 March 31
------------ --------
Operating investment properties:
Land $ 7,351 $ 7,351
Building and improvements 40,982 40,616
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48,333 47,967
Less accumulated depreciation (15,034) (14,044)
---------- ----------
33,299 33,923
Investments in unconsolidated joint ventures,
at equity 30,494 30,237
Cash and cash equivalents 5,424 6,202
Escrowed cash 611 398
Accounts receivable 223 236
Prepaid expenses 3 31
Deferred rent receivable 686 737
Net advances to consolidated ventures 792 -
Deferred expenses, net 487 510
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$ 72,019 $ 72,274
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 570 $ 427
Net advances from consolidated ventures - 115
Tenant security deposits 87 111
Bonds payable 2,118 2,171
Mortgage notes payable 19,219 19,369
Other liabilities 331 331
Partners' capital 49,694 49,750
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$ 72,019 $ 72,274
========== ==========
See accompanying notes.
<PAGE>
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and six months ended September 30, 1998 and 1997
(Unaudited) (In thousands, except per Unit data)
Three Months Ended Six Months Ended
September 30, September 30,
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
Revenues:
Rental income and expense
reimbursements $1,367 $1,210 $2,623 $2,562
Interest and other income 173 100 286 200
------- ------ ------ ------
1,540 1,310 2,909 2,762
Expenses:
Property operating expenses 319 283 634 704
Depreciation and amortization 529 531 1,051 1,050
Interest expense 479 475 956 948
Real estate taxes 137 135 273 271
General and administrative 138 195 258 289
------- ------ ------ ------
1,602 1,619 3,172 3,262
------- ------ ------ ------
Operating loss (62) (309) (263) (500)
Partnership's share of gain on
sale of unconsolidated
operating investment property 5,848 - 5,848 -
Partnership's share of
unconsolidated ventures'
income (losses) (139) 168 202 222
------- ------ ------ ------
Net income (loss) $ 5,647 $ (141) $5,787 $ (278)
======= ====== ====== ======
Net income (loss) per 1,000
Limited Partnership Unit $ 41.59 $(1.04) $42.62 $(2.05)
======= ====== ====== ======
Cash distributions per 1,000
Limited Partnership Unit $ 41.21 $ 2.21 $43.42 $ 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, 1998 and 1997 (Unaudited)
(In thousands)
General Limited
Partners Partners
-------- --------
Balance at March 31, 1997 $ (539) $ 51,752
Cash distributions (6) (594)
Net loss (3) (275)
-------- ---------
Balance at September 30, 1997 $ (548) $ 50,883
========= =========
Balance at March 31, 1998 $ (554) $ 50,304
Cash distributions (6) (5,837)
Net income 58 5,729
-------- ---------
Balance at September 30, 1998 $ (502) $ 50,196
======== =========
See accompanying notes.
<PAGE>
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended September 30, 1998 and 1997 (Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1998 1997
---- ----
Cash flows from operating activities:
Net income (loss) $ 5,787 $ (278)
Adjustments to reconcile net income (loss)
to net cash (used in) provided by
operating activities:
Partnership's share of gain on sale of
unconsolidated operating investment
property (5,848) -
Partnership's share of unconsolidated
ventures' income (202) (222)
Depreciation and amortization 1,051 1,050
Amortization of deferred financings costs 14 26
Changes in assets and liabilities:
Escrowed cash (213) (94)
Accounts receivable 13 (75)
Prepaid expenses 28 1
Deferred rent receivable 51 50
Deferred expenses (52) (19)
Accounts payable and accrued expenses 143 314
Advances (to) from consolidated ventures (907) (81)
Tenant security deposits (24) (51)
------- -------
Total adjustments (5,946) 899
------- -------
Net cash (used in) provided by operating
activities (159) 621
------- -------
Cash flows from investing activities:
Distributions from unconsolidated ventures 6,445 1,153
Additional investments in unconsolidated
ventures (652) (744)
Additions to operating investment properties (366) (97)
------- -------
Net cash provided by investing
activities 5,427 312
------- -------
Cash flows from financing activities:
Distributions to partners (5,843) (600)
Repayment of principal on long term debt (203) (226)
------- -------
Net cash used in financing activities (6,046) (826)
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Net (decrease) increase in cash and cash
equivalents (778) 107
Cash and cash equivalents, beginning of period 6,202 5,322
------- -------
Cash and cash equivalents, end of period $ 5,424 $ 5,429
======= =======
Cash paid during the period for interest $ 942 $ 922
======= =======
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, 1998. In the opinion of
management, the accompanying financial statements, which have not been audited,
reflect all adjustments necessary to present fairly the results for the interim
period. All of the accounting adjustments reflected in the accompanying interim
financial statements are of a normal recurring nature.
The accompanying financial statements have been prepared on the accrual
basis of accounting in accordance with generally accepted accounting principles
which requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities as of September 30, 1998 and March 31, 1998 and revenues and
expenses for each of the three-and six-month periods ended September 30, 1998
and 1997. Actual results could differ from the estimates and assumptions used.
2. Related Party Transactions
--------------------------
Included in general and administrative expenses for the six months ended
September 30, 1998 and 1997 is $116,000 and $114,000, respectively, representing
reimbursements to an affiliate of the Managing General Partner for providing
certain financial, accounting and investor communication services to the
Partnership.
Also included in general and administrative expenses for the six-month
periods ended September 30, 1998 and 1997 is $8,000 and $10,000, 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, 1998, the Partnership had investments in two
unconsolidated joint venture partnerships (three at September 30, 1997) 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.
On July 2, 1998, Richmond Gables Associates, a joint venture in which the
Partnership held an interest, sold The Gables at Erin Shades Apartments to an
unrelated third party for $11,500,000. After deducting closing costs and
property adjustments of $320,000, The Gables joint venture received net sale
proceeds of $11,180,000. These net sale proceeds were split between the
Partnership and its co-venture partner in accordance with the terms of The
Gables joint venture agreement. The Partnership received $10,602,000 and the
non-affiliated co-venture partner received $578,000 as their share of the sale
proceeds. From its share of the proceeds, the Partnership prepaid its refinanced
original zero coupon loan secured by the property and the related prepayment
fee, the sum of which was $5,449,000. The Partnership distributed the $5,153,000
of net proceeds from the sale of The Gables, along with an amount of cash
reserves that exceeded expected future requirements, in the form of a special
distribution totalling approximately $5,243,000, or $39 per original $1,000
investment on July 20, 1998. In accordance with the Partnership's policy to
recognize significant lag period transactions in the period which they occur,
the Partnership accelerated the recognition of the operating results of Richmond
Gables Associates during the quarter ended September 30, 1998 and recognized a
gain of $5,848,000 on the sale of the Gables operating investment property.
Summarized operations of the unconsolidated joint ventures, for the
periods indicated, are as follows.
<PAGE>
Condensed Combined Summary of Operations
For the three and six months ended June 30, 1998 and 1997
(in thousands)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1998 1997 1998 1997
---- ---- ---- ----
Revenues:
Rental revenues and expense
recoveries $2,607 $2,577 $5,220 $4,940
Interest and other income 31 25 52 50
------ ------ ------ ------
2,638 2,602 5,272 4,990
Expenses:
Property operating expenses 733 962 1,396 1,767
Real estate taxes 564 564 990 1,067
Interest expense 625 192 832 396
Depreciation and amortization 903 692 1,727 1,482
------ ------ ------ ------
2,825 2,410 4,945 4,712
------ ------ ------ ------
Operating income (loss) (187) 192 327 278
Gain on sale of operating
investment property 6,433 - 6,433 -
------ ------ ------ ------
Net income $6,246 $ 192 $6,760 $ 278
====== ====== ====== ======
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1998 1997 1998 1997
---- ---- ---- ----
Net income:
Partnership's share of
combined income $ 5,723 $ 183 $ 6,078 $ 251
Co-venturers' share of
combined income 523 9 682 27
------- ------ ------- -------
$ 6,246 $ 192 $ 6,760 $ 278
======= ====== ======= =======
<PAGE>
Reconciliation of Partnership's Share of Operations
For the three and six months ended September 30, 1998 and 1997
(in thousands)
Three Months Ended Six Months Ended
September 30, September 30,
------------------ ------------------
1998 1997 1998 1997
---- ---- ---- ----
Partnership's share of
operations, as shown above $ 5,723 $ 183 $ 6,078 $ 251
Amortization of excess basis (14) (15) (28) (29)
------- ------ ------- -------
Partnership's share of
unconsolidated ventures'
net income $ 5,709 $ 168 $ 6,050 $ 222
======= ====== ======= =======
The Partnership's share of the net income of the unconsolidated joint
ventures is presented as follows in the accompanying statements of operations:
Three Months Ended Six Months Ended
September 30, September 30,
-------------------- ------------------
1998 1997 1998 1997
---- ---- ---- ----
Partnership's share of
unconsolidated ventures'
income (losses) $ (139) $ 168 $ 202 $ 222
Partnership's share of gain
on sale of unconsolidated
operating investment
property 5,848 - 5,848 -
------- ------ ------- -------
$ 5,709 $ 168 $ 6,050 $ 222
======= ====== ======= =======
4. Operating Investment Properties
------------------------------
The Partnership's balance sheets at September 30, 1998 and March 31, 1998
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.
<PAGE>
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, 1998 and
1997 (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1998 1997 1998 1997
---- ---- ---- ----
Property operating expenses:
Repairs and maintenance $ 104 $ 77 $ 182 $ 233
Utilities 43 59 84 112
Salaries and related costs 53 29 114 79
Insurance 17 17 33 33
Management fees 40 35 75 82
Administrative and other 62 66 146 165
------- ------ ------ ------
$ 319 $ 283 $ 634 $ 704
======= ====== ====== ======
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, 1998 and March 31, 1998 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, 1998 and March 31,
1998. $ 9,208 $ 9,282
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
and June 30, 1998 and December 31,
1997. 6,655 6,707
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, 1998 and
December 31, 1997. 3,356 3,380
------- -------
$19,219 $19,369
======= =======
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 bore interest at 8.72% and was scheduled to mature in 7 years. As discussed
further in Note 3, The Gables Apartments was sold on July 2, 1998 and this
mortgage loan was repaid in full. On February 10, 1995, the Partnership repaid
an outstanding zero coupon loan secured by Gateway Plaza (formerly Loehmann's
Plaza), 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 Gateway
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 loan secured by
the Gateway Plaza property rests with the related unconsolidated joint venture.
Accordingly the mortgage loan liability is recorded on the books of the
unconsolidated joint venture. The Partnership has indemnified Daniel/Metcalf
Associates Partnership and the related co-venture partners against all
liabilities, claims and expenses associated with this borrowing.
<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, 1998 under the heading "Certain Factors Affecting Future
Operating Results", which could cause actual results to differ materially from
historical results or those anticipated. The words "believe," "expect,"
"anticipate," and similar expressions identify forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which were made based on facts and conditions as they existed as of
the date of this report. The Partnership undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
Liquidity and Capital Resources
- -------------------------------
In light of the continued strength in the national real estate market with
respect to multi-family apartment properties and the recent improvements in the
office/R&D property markets, management believes that this may be an opportune
time to 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. As part of that plan,
as discussed further below, The Gables Apartments was marketed for sale during
the quarter ended June 30, 1998 and sold during the quarter ended September 30,
1998. In addition, during the first quarter the Partnership began the process of
marketing the Hacienda Business Park property for sale. As discussed further
below, this property is currently under agreement for a sale transaction that is
expected to close during the third quarter. With regard to the four remaining
properties, the Partnership is working with each property's leasing and
management team to develop and implement programs that will protect and enhance
value and maximize cash flow at each property while at the same time exploring
potential sale opportunities. These programs include pursuing a new leasing
opportunity at 625 North Michigan Avenue, which is noted below, completing
leasing programs currently underway at Gateway Plaza and West Ashley Shoppes,
and improving operating efficiency and implementing property enhancements at the
Asbury Commons Apartments. Although there are no assurances, it is currently
contemplated that sales of the Partnership's remaining assets could be completed
prior to the end of calendar 1999.
On July 2, 1998, Richmond Gables Associates, a joint venture in which the
Partnership held an interest, sold The Gables at Erin Shades Apartments to an
unrelated third party for $11,500,000. After deducting closing costs and
property adjustments of $320,000, The Gables joint venture received net sale
proceeds of $11,180,000. These net sale proceeds were split between the
Partnership and its co-venture partner in accordance with the terms of The
Gables joint venture agreement. The Partnership received $10,602,000 and the
non-affiliated co-venture partner received $578,000 as their share of the sale
proceeds. From its share of the proceeds, the Partnership prepaid its refinanced
original zero coupon loan secured by the property and the related prepayment
fee, the sum of which was $5,449,000. Despite incurring a sizable prepayment
penalty on the repayment of the outstanding first mortgage loan, management
believed that a current sale of The Gables property was in the best interests of
the Limited Partners due to the exceptionally strong market conditions that
exist at the present time and which resulted in the achievement of a very
favorable selling price. In addition, management was concerned that the rate of
job and population growth in the Richmond, Virginia area could lead to an
increase in new development activity in the near future. The Partnership
distributed the $5,153,000 of net proceeds from the sale of The Gables, along
with an amount of cash reserves that exceeded expected future requirements, in
the form of a special distribution totalling approximately $5,243,000, or $39
per original $1,000 investment, which was paid on July 20, 1998.
The four buildings comprising the Hacienda Business Park investment
property in Pleasanton, California, were 95% leased to four tenants as of
September 30, 1998 compared to 90% leased at the end of the prior quarter. This
leasing gain was due to an existing tenant that renewed its 31,547 square foot
lease and expanded its operations by leasing an additional 10,027 square feet.
This tenant is expected to occupy its new space by the March 31, 1999 fiscal
year-end. The overall Pleasanton market remains strong with increasing rental
rates and a low vacancy level. The existing rental rates on the leases at
Hacienda Park are significantly below current market rates. Provided there is
not a dramatic increase in either planned speculative development or
build-to-suit development with current tenants in the local market, the
Partnership would be expected to achieve a materially higher sale price for the
Hacienda Park property as the existing leases with below-market rental rates
approach their expiration dates. The Partnership had been planning to hold the
Hacienda Park property over the near term in order to capture this expected
increase in value. However, during the quarter ended September 30, 1997, a
51,683 square foot tenant occupying 28% of the property's leasable area
relocated from Hacienda Business Park and consolidated its operations into a
newly-constructed building 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 the Hacienda Park investment plus 10,027 square feet in an
adjoining building. While this tenant has the right to sublease the space,
subject to various approval rights, it remains responsible for rental payments
and its contractual share of operating expenses until the leases expire. During
the prior quarter, the Partnership accepted a net payment of $34,000 from this
tenant in return for a release from all of the tenant's obligations under the
10,027 square foot lease that was scheduled to expire in January 2001. In
addition, this tenant waived its sub-lease and renewal rights on the remaining
five leases which expire within the next 12 months. This lease termination
agreement is expected to provide the property's leasing team with more
flexibility in re-leasing the space and provided the Partnership with an
opportunity to capture a significant portion of the expected increase in the
value of Hacienda Park sooner than had been anticipated. In light of this
situation, and given the current strength of the local market conditions, during
the quarter ended June 30, 1998 management interviewed potential real estate
brokers and selected a national real estate firm that is a leading seller of
R&D/office properties. A marketing package was subsequently finalized, and
comprehensive sales efforts began in June. As a result of those efforts, several
offers were received. After completing an evaluation of these offers and the
relative strength of the prospective purchasers, the Partnership selected an
offer. A purchase and sale agreement was negotiated with an unrelated
third-party prospective buyer and a non-refundable deposit was made subsequent
to the quarter end. While there can be no assurances that a transaction will be
consummated, this prospective buyer is expected to complete its due diligence
work and close on this transaction by December 1, 1998. If the sale closes, the
net proceeds would be distributed to the Limited Partners.
The 625 North Michigan Office Building in Chicago, Illinois, was 95% leased
and 94% occupied at September 30, 1998. Three tenants occupying a total of 4,634
square feet moved from the building when their leases expired during the
quarter. One tenant occupying 2,162 square feet renewed its lease and expanded
its space by an additional 1,107 square feet. Another tenant occupying 1,926
square feet renewed its lease. As previously reported, the property's leasing
team had been negotiating a lease with a prospective new tenant which would
occupy approximately 22,000 square feet of space. During the quarter ended June
30, 1998, a lease was signed with this prospective tenant for 24,276 square
feet. This tenant took occupancy during the quarter ended September 30, 1998.
Also during the current quarter, a lease was signed with an existing tenant that
occupies approximately 8,000 square feet. This tenant will relocate and expand
into a total of 10,200 square feet. The downtown Chicago real estate market
continues to display an improving trend. A competitive office property within
the local market has recently obtained approvals to convert its lower floors
into a hotel. This should result in the removal of 290,000 square feet of office
space from the market. In addition, an office tenant at that property has
recently completed a 62,000 square foot expansion, which brings the occupancy
level in the building's office portion to 100%. In this local market, where
there is no current or planned new construction of office space, this reduction
in vacant office space has resulted in a reduction in the market vacancy level
and places more upward pressure on rental rates. The higher effective rents
currently being achieved at 625 North Michigan are expected to increase cash
flow and value as new tenants sign leases and existing tenants sign lease
renewals. Retail and hotel development in the local market continues, as
evidenced by plans for a Nordstrom's-anchored 95,000 square foot retail
development which recently received preliminary approval from the City. This
proposed development, which will be located two blocks from 625 North Michigan,
is part of a master plan that includes several new hotels, entertainment and
parking facilities encompassing five city blocks. Management continues to
analyze a potential project for the property which includes an upgrade to the
building lobby and the addition of a major retail component to the building's
North Michigan Avenue frontage. Rental rates paid by high-end retailers on North
Michigan Avenue are substantially greater than those paid by office tenants.
While the costs of such a project would be substantial, it could have a
significant positive effect on the market value of the 625 North Michigan
property. During the quarter ended June 30, 1998, preliminary approval was
received from the City to enclose the arcade sections of the first floor of the
625 North Michigan building, which opens the way for this potential retail
development. Formal approval was received at the September meeting of the City
Council. Now that this approval has been obtained, the Partnership is exploring
potential sale opportunities for this property.
Gateway Plaza Shopping Center (formerly Loehmann's Plaza Shopping Center)
in Overland Park, Kansas was 94% leased and 92% occupied as of September 30,
1998. 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. The property's leasing team
is currently negotiating with a prospective tenant which would occupy 4,289
square feet. Over the next twelve months, two leases representing a total of
9,387 square feet will expire. One tenant which occupies 1,557 square feet is
expected to renew its lease, while the other tenant which occupies 7,830 square
feet will not renew its lease. The property's leasing team is actively working
to lease this space to a new tenant. Another tenant occupying 6,875 square feet
is experiencing operational difficulties and has fallen 3 months behind in
rental payments. An agreement has been signed with this tenant which provides
for a payment schedule that should allow the tenant to stay current with their
rent and pay the past due amounts over the next 7 months. Because of the
consistent improvement in occupancy levels over the past year and the strong
performance of the Center's new anchor tenant, the Partnership believes it is
the appropriate time to market the Gateway Plaza property for sale. As part of a
plan to market the property for sale, the Partnership initiated discussions with
real estate firms with a strong background in selling properties like Gateway
Plaza. The Partnership expects to engage a national real estate firm that is a
leading seller of this property type to market Gateway Plaza for sale during the
third quarter.
As previously reported, in the second quarter of fiscal 1998 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. 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, opened its new store in March 1998
which brought the occupancy level at the property up to 95%. As Waccamaw should
generate significant additional customer traffic into the Center, the leasing
team anticipates stronger interest from prospective tenants for the remaining
available 7,650 square feet of shop space. During the next year, only one lease
representing a total of 2,450 square feet will expire. With an occupancy level
of 95% and a stable base of tenants, the Partnership believes it may be an
opportune time to sell West Ashley Shoppes. As part of a plan to market the
property for sale, the Partnership initiated discussions with real estate firms
with a specialty in selling properties like West Ashley Shoppes. Subsequent to
the quarter end, the Partnership selected a national real estate firm that is a
leading seller of this type of property.
As discussed in the Annual Report, management discovered the existence of
certain 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. 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.
The construction contracts were executed during the fourth quarter, and the
repair and replacement work has commenced. This work is now expected to be
completed by December 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.
During the quarter ended June 30, 1998, the manufacturer of the roofing shingles
agreed to provide the Partnership with the materials to replace the existing
roofing shingles. While there can be no assurances regarding the Partnership's
ability to successfully recover any further damages relating to the siding, the
Partnership will diligently pursue these and other potential recovery sources.
During the fourth quarter of fiscal 1998, the Partnership reached a settlement
agreement with the original developer of the Asbury Commons property whereby the
original developer agreed to pay the Partnership $200,000. Under the terms of
this agreement, the Partnership received a payment of $100,000 during the fourth
quarter of 1998, and received a final payment of $100,000 during the current
quarter. 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.
The average occupancy level at the Asbury Commons Apartments was 93% for
the quarter ended September 30, 1998, compared to 92% for the prior quarter and
96% 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 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. In order to
attract prospective tenants, the property's management and leasing team has
undertaken a number of marketing efforts which are expected to increase the
number of prospective tenants looking to lease units at the property and retain
as much of the existing resident base as possible. These efforts include the
targeting of potential tenants at area corporations and relocation departments.
In order to minimize tenant turnover, modest rental rate increases of 2% are
being implemented as current leases are renewed. Because of the improvements in
the apartment segment of the real estate market, the Partnership believes that
it is the appropriate time to take advantage of any potential sale opportunities
for Asbury Commons. As part of that plan, the Partnership selected a regional
real estate firm with a strong background in selling apartment properties to
market the property for sale. Sales materials were finalized, and an extensive
marketing campaign began in September 1998. As a result of these sale efforts,
seven offers were received subsequent to quarter end. After completing an
evaluation of these offers and the relative strength of the prospective
purchasers, the Partnership and its co-venture partner will select an offer and
negotiate a purchase and sale agreement. There are no assurances, however, that
a sale transaction will be completed.
At September 30, 1998, the Partnership and its consolidated joint ventures
had available cash and cash equivalents of approximately $5,424,000. 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.
As noted above, the Partnership expects to be liquidated within the next
one to two years. Notwithstanding this, the Partnership believes that it has
made all necessary modifications to its existing systems to make them year 2000
compliant and does not expect that additional costs associated with year 2000
compliance, if any, will be material to the Partnership's results of operations
or financial position.
Results of Operations
Three Months Ended September 30, 1998
- -------------------------------------
As noted above, the unconsolidated Gables Apartments operating investment
property was sold on July 2, 1998. In accordance with the Partnership's policy
to recognize significant lag period transactions in the period in which they
occur, the Partnership accelerated the recognition of the operating results of
Richmond Gables Associates during the quarter ended September 30, 1998 and
recognized a gain of $5,848,000 on the sale of the Gables property. The
Partnership reported net income of $5,647,000 for the three months ended
September 30, 1998, as compared to a net loss of $141,000 for the same period in
the prior year. The primary reason for the favorable change in the Partnership's
net operating results is the $5,848,000 recognized as the Partnership's share of
the gain from the sale of The Gables at Erin Shades Apartments, as discussed
further above. In addition, the Partnership's operating loss decreased by
$247,000 when compared to the same period in the prior year. The Partnership's
operating loss decreased due to increases in rental income at all three
consolidated operating properties and an increase in interest and other income.
Rental income increased mainly due to increases in average occupancy at the
Hacienda Business Park and West Ashley Shoppes properties and an increase in
rental rates at Asbury Commons. Interest income increased due to an increase in
the average amount of cash and cash equivalents on hand compared to the same
period in the prior year. Average outstanding cash balances increased partly due
to the receipt and temporary investment of the proceeds received from the sale
of The Gables at Erin Shades Apartments on July 2, 1998, as discussed further
above.
The gain recognized on the sale of The Gables at Erin Shades Apartments
and the decrease in the Partnership's operating loss were partially offset by an
unfavorable change in the Partnership's share of unconsolidated ventures' income
(losses). The Partnership realized a loss from its share of unconsolidated
ventures' operations of $139,000 during the current three-month period as
compared to income of $168,000 for the same period in the prior year. This
$307,000 unfavorable change in operating results was primarily the result of a
$472,000 prepayment penalty on the Gables debt and various write-offs of
unamortized deferred expenses associated with the sale of The Gables at Erin
Shades Apartments. Net income also decreased at Gateway Plaza due to increases
in amortization expense and professional fees. Net income increased at 625 North
Michigan Avenue due to an increase in rental income and a reduction in repairs
and maintenance expenses due to the completion of the elevator modernization
project.
Six Months Ended September 30, 1998
- -----------------------------------
As noted above, the unconsolidated Gables Apartments operating investment
property was sold on July 2, 1998. In accordance with the Partnership's policy
to recognize significant lag period transactions in the period in which they
occur, the Partnership accelerated the recognition of the operating results of
Richmond Gables Associates during the quarter ended September 30, 1998 and
recognized a gain of $5,848,000 on the sale of the Gables property. The
Partnership reported net income of $5,787,000 for the six months ended September
30, 1998, as compared to a net loss of $278,000 for the same period in the prior
year. The primary reason for the favorable change in the Partnership's net
operating results is the $5,848,000 recognized as the Partnership's share of the
gain from the sale of The Gables at Erin Shades Apartments, as discussed further
above. In addition, the Partnership's operating loss decreased by $237,000 when
compared to the same period in the prior year. The Partnership's operating loss
decreased due to higher rental income from the consolidated joint ventures, an
increase in interest and other income and a decrease in general and
administrative expenses. Rental income increased at the consolidated West Ashley
Shoppes due to an increase in occupancy and at the consolidated Asbury Commons
Apartments due to an increase in rental rates. Interest income increased due to
an increase in the average amount of cash and cash equivalents on hand compared
to the same period in the prior year. Average outstanding cash balances
increased partly due to the receipt and temporary investment of the proceeds
received from the sale of The Gables at Erin Shades Apartments on July 2, 1998,
as discussed further above. General and administrative expenses decreased due to
a reduction in certain required professional fees when compared to the prior
year.
The gain recognized on the sale of The Gables at Erin Shades Apartments
and the decrease in the Partnership's operating loss were partially offset by a
decrease in the Partnership's share of unconsolidated ventures' income. The
Partnership's share of unconsolidated ventures' income decreased by $20,000 when
compared to the same period in the prior year. This was primarily the result of
a $472,000 prepayment penalty on the Gables debt and various write-offs of
unamortized deferred expenses associated with the sale of The Gables at Erin
Shades Apartments. Net income increased at 625 North Michigan Avenue and Gateway
Plaza mainly due to increases in rental income at both properties and a
reduction in repairs and maintenance expenses at 625 North Michigan Avenue due
to the completion of the elevator modernization project.
<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:
A Current Report on Form 8-K dated July 2, 1998 was filed during the
current quarter to report the sale of The Gables at Erin Shades Apartments and
is hereby incorporated herein by reference.
<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 6, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Partnership's unaudited financial statements for the quarter ended September 30,
1998 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> SEP-30-1998
<CASH> 5,424
<SECURITIES> 0
<RECEIVABLES> 909
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,053
<PP&E> 78,827
<DEPRECIATION> 15,034
<TOTAL-ASSETS> 72,019
<CURRENT-LIABILITIES> 657
<BONDS> 21,337
0
0
<COMMON> 0
<OTHER-SE> 49,694
<TOTAL-LIABILITY-AND-EQUITY> 72,019
<SALES> 0
<TOTAL-REVENUES> 8,959
<CGS> 0
<TOTAL-COSTS> 2,216
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 956
<INCOME-PRETAX> 5,787
<INCOME-TAX> 0
<INCOME-CONTINUING> 5,787
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,787
<EPS-PRIMARY> 42.62
<EPS-DILUTED> 42.62
</TABLE>
