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 JUNE 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
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
265 Franklin Street, Boston, Massachusetts 02110
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(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
June 30, 1998 and March 31, 1998 (Unaudited)
(In thousands)
ASSETS
June 30 March 31
------- --------
Operating investment properties:
Land $ 7,351 $ 7,351
Building and improvements 40,660 40,616
--------- ---------
48,011 47,967
Less accumulated depreciation (14,540) (14,044)
--------- ---------
33,471 33,923
Investments in unconsolidated joint ventures,
at equity 30,031 30,237
Cash and cash equivalents 6,140 6,202
Escrowed cash 533 398
Accounts receivable 296 236
Prepaid expenses 14 31
Deferred rent receivable 711 737
Net advances to consolidated ventures 422 -
Deferred expenses, net 486 510
--------- ---------
$ 72,104 $ 72,274
========= =========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 598 $ 427
Net advances from consolidated ventures - 115
Tenant security deposits 119 111
Bonds payable 2,171 2,171
Mortgage notes payable 19,295 19,369
Other liabilities 331 331
Partners' capital 49,590 49,750
--------- ---------
$ 72,104 $ 72,274
========= =========
See accompanying notes.
<PAGE>
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended June 30, 1998 and 1997 (Unaudited)
(In thousands, except per Unit data)
1998 1997
---- ----
Revenues:
Rental income and expense reimbursements $ 1,256 $ 1,352
Interest and other income 113 100
-------- -------
1,369 1,452
Expenses:
Property operating expenses 315 421
Depreciation and amortization 522 519
Interest expense 477 473
Real estate taxes 136 136
General and administrative 120 94
-------- -------
1,570 1,643
-------- -------
Operating loss (201) (191)
Partnership's share of unconsolidated
ventures' income 341 54
-------- -------
Net income (loss) $ 140 $ (137)
======== =======
Net income (loss) per 1,000 Limited
Partnership Units $ 1.03 $ (1.01)
======== =======
Cash distributions per 1,000 Limited
Partnership Units $ 2.21 $ 2.21
======== =======
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 three months ended June 30, 1998 and 1997 (Unaudited)
(In thousands)
General Limited
Partners Partners
-------- --------
Balance at March 31, 1997 $ (539) $ 51,752
Cash distributions (3) (297)
Net loss (2) (135)
-------- ---------
Balance at June 30, 1997 $ (544) $ 51,320
======== =========
Balance at March 31, 1998 $ (554) $ 50,304
Cash distributions (3) (297)
Net income 1 139
-------- ---------
Balance at June 30, 1998 $ (556) $ 50,146
========= =========
See accompanying notes.
<PAGE>
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended June 30, 1998 and 1997 (Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1998 1997
---- ----
Cash flows from operating activities:
Net income (loss) $ 140 $ (137)
Adjustments to reconcile net income (loss) to
net cash (used in) provided by
operating activities:
Partnership's share of unconsolidated
ventures' income (341) (54)
Depreciation and amortization 522 519
Amortization of deferred financings costs 10 10
Changes in assets and liabilities:
Escrowed cash (135) (63)
Accounts receivable (60) (104)
Prepaid expenses 17 15
Deferred rent receivable 26 25
Deferred expenses (12) (2)
Accounts payable and accrued expenses 171 223
Advances (to) from consolidated ventures (537) 38
Tenant security deposits 8 (47)
-------- --------
Total adjustments (331) 560
-------- --------
Net cash (used in) provided by
operating activities (191) 423
-------- --------
Cash flows from investing activities:
Distributions from unconsolidated ventures 740 456
Additional investments in unconsolidated ventures (193) (513)
Additions to operating investment properties (44) (26)
-------- --------
Net cash provided by (used in) investing
activities 503 (83)
-------- --------
Cash flows from financing activities:
Distributions to partners (300) (300)
Repayment of principal on long term debt (74) (168)
-------- --------
Net cash used in financing activities (374) (468)
-------- --------
Net decrease in cash and cash equivalents (62) (128)
Cash and cash equivalents, beginning of period 6,202 5,322
-------- --------
Cash and cash equivalents, end of period $ 6,140 $ 5,194
======== ========
Cash paid during the period for interest $ 467 $ 463
======== ========
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 June 30, 1998 and March 31, 1998 and revenues and expenses
for each of the three-month periods ended June 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 three months ended
June 30, 1998 and 1997 is $58,000 and $59,000, 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-month
periods ended June 30, 1998 and 1997 is $4,000 and $6,000, 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 June 30, 1998 and 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.
Subsequent to the end of the first quarter, 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 sales
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.
Summarized operations of the unconsolidated joint ventures, for the
periods indicated, are as follows.
<PAGE>
Condensed Combined Summary of Operations
For the three months ended March 31, 1998 and 1997
(in thousands)
1998 1997
---- ----
Revenues:
Rental revenues and expense recoveries $ 2,613 $2,363
Interest and other income 21 25
------- ------
2,634 2,388
Expenses:
Property operating expenses 663 805
Real estate taxes 426 503
Interest expense 207 204
Depreciation and amortization 824 790
------- ------
2,120 2,302
------- ------
Net income $ 514 $ 86
======== ======
Net income:
Partnership's share of combined income $ 355 $ 68
Co-venturers' share of combined income 159 18
------- ------
$ 514 $ 86
======= ======
Reconciliation of Partnership's Share of Operations
For the three months ended June 30, 1998 and 1997
(in thousands)
1998 1997
---- ----
Partnership's share of operations,
as shown above $ 355 $ 68
Amortization of excess basis (14) (14)
------- -------
Partnership's share of unconsolidated
ventures' income $ 341 $ 54
======= =======
4. Operating Investment Properties
-------------------------------
The Partnership's balance sheets at June 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.
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 months ended March 31, 1998 and 1997 (in
thousands):
1998 1997
---- ----
Property operating expenses:
Repairs and maintenance $ 78 $ 156
Utilities 41 53
Salaries and related costs 61 60
Insurance 16 16
Management fees 35 47
Administrative and other 84 89
-------- -------
$ 315 $ 421
======== =======
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 June 30, 1998 and March 31, 1998 consist of the following (in
thousands):
June 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
June 30, 1998 and March 31, 1998. $ 9,245 $ 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 March 31, 1998 and December 31,
1997. 6,682 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 March 31, 1998
and December 31, 1997. 3,368 3,380
-------- --------
$ 19,295 $ 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 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 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 loans secured by the Gables and Gateway 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, 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 six 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 subsequent to the quarter-end.
In addition, the Partnership has begun the process of marketing the Hacienda
Business Park property for sale. 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
within the next 2 years.
Subsequent to the end of the first quarter, 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 sales
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 90% leased to four tenants as of June
30, 1998. 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 fourth quarter of fiscal 1998, 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 may provide 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.
The 625 North Michigan Office Building in Chicago, Illinois, was 95%
leased and 87% occupied at June 30, 1998, compared to 88% leased and occupied at
the end of the prior quarter. As discussed further in the Annual Report, 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. The space is now being renovated in preparation for the
tenant's expected occupancy in September 1998. In addition, subsequent to the
quarter-end a lease was signed with an existing tenant that occupies
approximately 8,000 square feet. This tenant will relocated 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 is expected
to be received at the September meeting of the City Council. Now that this
preliminary 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 June 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. During the third quarter of
fiscal 1998, negotiations were finalized with a tenant which will occupy 4,980
square feet. This leasing was partially offset when one tenant occupying 1,018
square feet moved from the Center. During the remainder of calendar year 1998,
only one lease comes up for renewal. The tenant, which occupies 1,557 square
feet, is expected to renew its lease.
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.
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. 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 expected to be completed
by late fall 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 and roofing shingles, 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 92% for
the quarter ended June 30, 1998, compared to 91% for the prior quarter and 84%
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. The property leasing team
discontinued the use of concessions and specials during the current quarter.
At June 30, 1998, the Partnership and its consolidated joint ventures had
available cash and cash equivalents of approximately $6,140,000. 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 June 30, 1998
- --------------------------------
The Partnership reported a net income of $140,000 for the three months
ended June 30, 1998, as compared to net loss of $137,000 for the same period in
the prior year. This favorable change in the Partnership's net operating results
is attributable to an increase in the Partnership's share of unconsolidated
ventures' income which was partially offset by an increase in the Partnership's
operating loss.
The Partnership's share of unconsolidated ventures' income increased by
$287,000 primarily due to increases in combined rental income and declines in
combined property operating expenses and real estate taxes. Rental revenues and
expense recoveries at the 625 North Michigan, Gateway Plaza and Gables
Apartments properties increased by $135,000, $84,000 and $31,000, respectively,
mainly due to increases in the average occupancy levels at each property for the
current three-month period. The decrease in property operating expenses resulted
mainly from declines in repairs and maintenance costs at 625 North Michigan and
declines in salaries and management fees at The Gables Apartments, which
resulted from a change in the property management team and fee structure. Real
estate taxes decreased largely due to a increase in the real estate tax refund
received during the current year at 625 North Michigan as compared to the same
period in fiscal 1998. Increases in depreciation and amortization at 625 North
Michigan and Gateway Plaza partially offset the above favorable results. The
increases were the result of recent capital improvements at both properties.
The Partnership's operating loss increased by $10,000, when compared to
the same period in the prior year, due to a decrease in total revenues of
$83,000 which was partially offset by a decrease in total expenses of $73,000.
The decrease in the Partnership's revenues consisted of a $96,000 decline in
rental income from the consolidated joint ventures which was partially offset by
a $13,000 increase in interest and other income. Rental income decreased mainly
due to declines in rental income at the consolidated Hacienda Park and West
Ashley Shoppes joint ventures which was partially offset by an increase in
rental income at the consolidated Asbury Commons joint venture. Rental income at
Hacienda Park decreased mainly due to the timing in billing of the annual real
estate tax reimbursements. Rental income decreased at West Ashley Shoppes due to
substantial decreases in common area maintenance and real estate tax
reimbursements. Rental income increased at Asbury Commons due to a increase in
average occupancy. Interest and other income increased mainly as a result of an
increase in interest income due to a higher average invested cash reserve
balance during the current three-month period. The decrease in total expenses is
mainly attributable to a decrease in repairs and maintenance expenses at the
consolidated Asbury Commons and Hacienda Park joint ventures of $62,000 and
$11,000, respectively.
<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 subsequent to the
end of 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: August 11, 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 June 30, 1998
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> JUN-30-1998
<CASH> 6,140
<SECURITIES> 0
<RECEIVABLES> 296
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,405
<PP&E> 78,042
<DEPRECIATION> 14,540
<TOTAL-ASSETS> 72,104
<CURRENT-LIABILITIES> 717
<BONDS> 21,466
0
0
<COMMON> 0
<OTHER-SE> 49,590
<TOTAL-LIABILITY-AND-EQUITY> 72,104
<SALES> 0
<TOTAL-REVENUES> 1,710
<CGS> 0
<TOTAL-COSTS> 1,093
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 477
<INCOME-PRETAX> 140
<INCOME-TAX> 0
<INCOME-CONTINUING> 140
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 140
<EPS-PRIMARY> 1.03
<EPS-DILUTED> 1.03
</TABLE>
