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 December 31, 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
-----------------------------------------------------
(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, 1998 and March 31, 1998 (Unaudited)
(In thousands)
ASSETS
December 31 March 31
----------- --------
Operating investment properties:
Land $ 2,342 $ 7,351
Building and improvements 5,437 40,616
---------- ---------
7,779 47,967
Less accumulated depreciation (2,207) (14,044)
---------- ---------
5,572 33,923
Investments in unconsolidated joint
ventures, at equity 30,234 30,237
Cash and cash equivalents 12,652 6,202
Escrowed cash 76 398
Accounts receivable 299 236
Prepaid expenses 2 31
Deferred rent receivable 145 737
Deferred expenses, net 90 510
---------- ---------
$ 49,070 $ 72,274
========== =========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 348 $ 427
Net advances from consolidated ventures 154 115
Tenant security deposits - 111
Bonds payable - 2,171
Mortgage notes payable 9,171 19,369
Other liabilities - 331
Partners' capital 39,397 49,750
---------- ---------
$ 49,070 $ 72,274
========== =========
See accompanying notes.
<PAGE>
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and nine months ended December 31, 1998 and 1997 (Unaudited)
(In thousands, except per Unit data)
Three Months Ended Nine Months Ended
December 31, December 31,
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
Revenues:
Rental income and expense
reimbursements $ 2,102 $1,152 $ 4,725 $3,714
Interest and other income 227 104 513 304
------- ------ ------- ------
2,329 1,256 5,238 4,018
Expenses:
Property operating expenses 633 379 1,267 1,083
Depreciation and amortization 693 506 1,744 1,556
Interest expense 1,436 507 2,392 1,455
Real estate taxes 197 129 470 400
General and administrative 194 217 452 506
------- ------ ------- ------
3,153 1,738 6,325 5,000
------- ------ ------- ------
Operating loss (824) (482) (1,087) (982)
Gains on sale of operating
investment properties 10,456 - 10,456 -
Consolidated venture
partners' share
of operations (331) - (331) -
Partnership's share of gain
on sale of unconsolidated
operating investment
property - - 5,848 -
Partnership's share of
unconsolidated
ventures' income 194 176 396 398
------- ------ ------- ------
Net income (loss) $ 9,495 $ (306) $15,282 $ (584)
======= ======= ======= ======
Net income (loss) per 1,000
Limited Partnership Unit $ 69.93 $ (2.25) $ 112.55 $(4.30)
======= ======= ======== ======
Cash distributions per 1,000
Limited Partnership Unit $147.21 $ 2.21 $ 190.63 $ 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, 1998 and 1997 (Unaudited)
(In thousands)
General Limited
Partners Partners
-------- --------
Balance at March 31, 1997 $ (539) $ 51,752
Cash distributions (9) (891)
Net loss (6) (578)
-------- ---------
Balance at December 31, 1997 $ (554) $ 50,283
======== =========
Balance at March 31, 1998 $ (554) $ 50,304
Cash distributions (9) (25,626)
Net income 152 15,130
-------- ---------
Balance at December 31, 1998 $ (411) $ 39,808
======== =========
See accompanying notes.
<PAGE>
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended December 31, 1998 and 1997 (Unaudited)
Increase (Decrease) in Cash and Cash Equivalents (In thousands)
1998 1997
---- ----
Cash flows from operating activities:
Net income (loss) $ 15,282 $ (584)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Gains on sale of operating investment
properties (10,456) -
Consolidated venture partners' share
of operations 331 -
Partnership's share of gain on
sale of unconsolidated operating
investment property (5,848) -
Partnership's share of unconsolidated
ventures' income (396) (398)
Depreciation and amortization 1,744 1,556
Amortization of deferred financings costs - 33
Changes in assets and liabilities:
Escrowed cash 322 (8)
Accounts receivable (63) 36
Prepaid expenses 29 (7)
Deferred rent receivable 62 75
Deferred expenses (588) (8)
Accounts payable and accrued expenses (79) 261
Advances from consolidated ventures 39 (483)
Tenant security deposits (111) (61)
--------- ---------
Total adjustments (15,014) 996
--------- ---------
Net cash provided by operating
activities 268 412
--------- ---------
Cash flows from investing activities:
Net proceeds from sales of operating
investment properties 37,776 -
Distributions from unconsolidated ventures 7,238 2,486
Additional investments in unconsolidated
ventures (991) (844)
Additions to operating investment properties (1,862) (181)
--------- ---------
Net cash provided by investing
activities 42,161 1,461
--------- ---------
Cash flows from financing activities:
Distributions to partners (25,635) (900)
Repayment of principal on bonds (146) -
Repayment of principal on long term debt (10,198) (290)
--------- ---------
Net cash used in financing activities (35,979) (1,190)
--------- ---------
Net increase in cash and cash equivalents 6,450 683
Cash and cash equivalents, beginning of period 6,202 5,322
--------- ---------
Cash and cash equivalents, end of period $ 12,652 $ 6,005
========= =========
Cash paid during the period for interest $ 2,392 $ 1,422
========= =========
Supplemental Schedule of Noncash Financing Activities:
Assumption of bonds payable by buyer of
operating investment property $ 2,025 $ -
========= =========
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 December 31, 1998 and March 31, 1998 and revenues and
expenses for each of the three- and nine-month periods ended December 31, 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 nine months ended
December 31, 1998 and 1997 is $176,000 and $172,000, 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 nine-month
periods ended December 31, 1998 and 1997 is $11,000 and $13,000, 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 December 31, 1998, the Partnership had investments in two
unconsolidated joint venture partnerships (three at December 31, 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 December 31, 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 nine months ended September 30, 1998 and 1997
(in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
Revenues:
Rental revenues and
expense recoveries $ 2,298 $2,402 $7,518 $7,153
Interest and other income 9 117 61 356
------- ------ ------ ------
2,307 2,519 7,579 7,509
Expenses:
Property operating expenses 765 619 2,161 2,386
Real estate taxes 561 593 1,551 1,660
Interest expense 91 198 923 594
Depreciation and amortization 672 901 2,399 2,383
------- ------ ------ ------
2,089 2,311 7,034 7,023
------- ------ ------ ------
Operating income 218 208 545 486
Gain on sale of operating
investment property - - 6,433 -
------- ------ ------ ------
Net income $ 218 $ 208 $6,978 $ 486
======= ====== ====== ======
Net income:
Partnership's share
of combined income $ 211 $ 191 $6,289 $ 442
Co-venturers' share
of combined income 7 17 689 44
------- ------ ------ ------
$ 218 $ 208 $6,978 $ 486
======= ====== ====== ======
Reconciliation of Partnership's Share of Operations
For the three and nine months ended December 31, 1998 and 1997
(in thousands)
Three Months Ended Nine Months Ended
December 31, December 31,
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
Partnership's share of
operations, as shown above $ 211 $ 191 $6,289 $ 442
Amortization of excess basis (17) (15) (45) (44)
------- ------- ------ -------
Partnership's share of
unconsolidated ventures'
net income $ 194 $ 176 $6,244 $ 398
======= ======= ====== =======
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 Nine Months Ended
December 31, December 31,
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
Partnership's share of
unconsolidated
ventures' income $ 194 $ 176 $ 396 $ 398
Partnership's share of
gain on sale of
unconsolidated
operating investment
property - - 5,848 -
------- ------- -------- ------
$ 194 $ 176 $ 6,244 $ 398
======= ======= ======== ======
<PAGE>
4. Operating Investment Properties
-------------------------------
The Partnership's balance sheet at December 31, 1998 includes one
operating investment property (three at March 31, 1998) owned by a joint venture
in which the Partnership has a controlling interest; West Ashley Shoppes
Associates. The Partnership's policy is to report the operations of the
consolidated joint ventures on a three-month lag. The West Ashley Shoppes
Shopping Center consists of approximately 135,000 square feet of leasable retail
space located in Charleston, South Carolina.
On November 20, 1998, Hacienda Park Associates, a joint venture in which
the Partnership had a controlling interest, sold the Hacienda Business Park
property to an unrelated third party for $25 million. The property consisted of
four separate office/R&D buildings comprising approximately 185,000 square feet,
located in Pleasanton, California. The Partnership received net proceeds of
approximately $20,861,000 after deducting closing costs of approximately
$278,000, net closing proration adjustments of approximately $89,000, the
repayment of the existing first mortgage note of approximately $3,769,000 and
accrued interest of approximately $3,000.
On December 21, 1998, Atlanta Asbury Partnership, a joint venture in which
the Partnership had a controlling interest, sold the Asbury Commons to an
unrelated third party for $13.345 million. The Asbury Commons Apartments is a
204-unit residential apartment complex located in Atlanta, Georgia. The
Partnership received net proceeds of approximately $5,613,000 after deducting
closing costs of approximately $291,000, closing proration adjustments of
approximately $90,000, the repayment of the existing mortgage note of
approximately $6,598,000, accrued interest of approximately $10,000 and a
prepayment penalty of approximately $743,000.
The Partnership's policy is to report the operations of the consolidated
joint ventures on a three-month lag. However, the Partnership's policy is also
to record significant lag-period transactions in the period in which they occur.
Accordingly, the Partnership accelerated the recognition of the operating
results of Hacienda Park Associates and Atlanta Asbury Partnership during the
quarter ended December 31, 1998 and recorded gains of $9,051,000 and $1,405,000,
respectively, on the sales of the operating investment properties. The following
is a combined summary of property operating expenses for Saratoga Center and
EG&G Plaza (through the date of sale in 1998), Asbury Commons Apartments
(through the date of sale in 1998) and the West Ashley Shoppes Shopping Center
for the three and nine months ended September 30, 1998 and 1997 (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1998 1997 1998 1997
---- ---- ---- ----
Property operating expenses:
Repairs and maintenance $ 192 $ 128 $ 374 $ 361
Utilities 77 57 161 169
Salaries and related costs 137 48 251 127
Insurance 39 17 72 50
Management fees 59 36 134 118
Administrative and other 129 93 275 258
------- ------- ------ ------
$ 633 $ 379 $1,267 $1,083
======= ======= ====== ======
5. Bonds Payable
------------
Bonds payable consisted of the Hacienda Park joint venture's share of
liabilities for bonds issued by the City of Pleasanton, California for public
improvements that benefited Hacienda Business Park and the operating investment
property and were secured by liens on the operating investment property. The
bonds for which the operating investment property was subject to assessment bore
interest at rates ranging from 5% to 7.87%, with an average rate of
approximately 7.2%. Principal and interest were payable in semi-annual
installments and due to mature in years 2004 through 2017. As a result of the
sale of the Hacienda Park property on November 20, 1998 (see Note 4), the
liability for the bond assessments was transferred to the buyer of the operating
investment property.
6. Mortgage Notes Payable
----------------------
Mortgage notes payable on the consolidated balance sheets of the
Partnership at December 31, 1998 and March 31, 1998 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, 1998 and March 31,
1998. $ 9,171 $ 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 required 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
March 31, 1998. The loan was repaid
in full during fiscal 1999 from the
proceeds of the sale of the
operating investment property (see
Note 4). - 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 required 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.
The loan was repaid in full during
fiscal 1999 from the proceeds of
the sale of the operating
investment property (see Note 4). - 3,380
------- -------
$ 9,171 $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 partner 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 sale transaction closed during the third quarter. Also, the
Partnership began marketing the Asbury Commons Apartments in the second quarter
of fiscal 1999 and completed a sale of the property at the end of the third
quarter. With regard to the three remaining commercial office and retail
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, and completing
leasing programs currently underway at Gateway Plaza and West Ashley Shoppes.
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.
On November 20, 1998, Hacienda Park Associates, a joint venture in the
Partnership had an interest, sold the Hacienda Business Park property located in
Pleasanton, California, to an unrelated third party for $25 million. The
Hacienda Park property consisted of one building known as Saratoga Center and
two attached buildings known as Gibraltar Center. The Partnership received net
proceeds of approximately $20,862,000 after deducting closing costs of
approximately $278,000, net closing proration adjustments of approximately
$88,000, the repayment of the existing first mortgage note of approximately
$3,769,000 and accrued interest of approximately $3,000. As a result of the sale
of the Hacienda Park property, the Partnership made a special distribution
totalling approximately $19,492,000, or $145 per original $1,000 investment, on
December 4, 1998. Approximately $1,370,000 of the total net proceeds from the
sale of the Hacienda Park property has been added to the Partnership's cash
reserves for potential investment in 625 North Michigan Avenue because of the
recently approved retail development rights for this property. Given the current
strength of the local Pleasanton 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 to
market Hacienda Park for sale. 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 signed on September 21, 1998 with an
unrelated third-party prospective buyer and a non-refundable deposit of
$1,500,000 was made on October 21, 1998. The prospective buyer completed its due
diligence work in early November and closed on this transaction on November 20,
1998, as described above. In accordance with the Partnership's policy of
recording significant lag-period transactions in the period in which they occur,
the Partnership accelerated the recognition of the operating results of Hacienda
Park Associates during the quarter ended December 31, 1998 and recorded a gain
of $9,051,000 on the sale of the operating investment property.
On December 21, 1998, Atlanta Asbury Partnership, a joint venture in which
the Partnership had an interest, sold the property known as the Asbury Commons
Apartments located in Atlanta, Georgia, to an unrelated third party for $13.345
million. The Partnership received net proceeds of approximately $5,613,000 after
deducting closing costs of approximately $291,000, closing proration adjustments
of approximately $90,000, the repayment of the existing mortgage note of
approximately $6,598,000, accrued interest of approximately $10,000 and a
prepayment penalty of approximately $743,000. Despite incurring a sizable
prepayment penalty on the repayment of the outstanding first mortgage loan,
management believed that a current sale of the Asbury Commons 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 a very
favorable sale price. As previously reported, the Partnership had selected a
regional real estate firm with a strong background in selling apartment
properties to market the Asbury Commons 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. After completing an
evaluation of these offers and the relative strength of the prospective
purchasers, the Partnership and its co-venture partner selected an offer and
negotiated a purchase and sale agreement. A purchase and sale agreement was
signed on November 9, 1998, and the buyer made a deposit of $250,000. After the
completion of the buyer's due diligence, the transaction closed as described
above on December 21, 1998. In accordance with the Partnership's policy of
recording significant lag-period transactions in the period in which they occur,
the Partnership accelerated the recognition of the operating results of Atlanta
Asbury Partnership during the quarter ended December 31, 1998 and recorded a
gain of $1,405,000 on the sale of the operating investment property. The
Partnership plans to distribute the net proceeds from the sale of the Asbury
Commons property in the form of a special capital distribution of approximately
$6,453,000, or $48 per original $1,000 investment, to be paid on February 12,
1999, along with the regular quarterly distribution for the quarter ended
December 31, 1998. With the sale of Hacienda Business Park, the Asbury Commons
Apartments and The Gables Apartments, the near-term planned sales of West Ashley
Shoppes and Gateway Plaza Shopping Center, and the resulting reduction in
distributable cash flow to be received by the Partnership, the payment of a
regular quarterly distribution will be discontinued beginning with the quarter
ending March 31, 1999. A final regular quarterly distribution of $2.21 per
original $1,000 investment will be made on February 12, 1999 for the quarter
ended December 31, 1998.
The 625 North Michigan Office Building in Chicago, Illinois, was 96%
leased and 95% occupied at December 31, 1998. During the third quarter, a new
tenant signed a lease and took occupancy of 2,602 square feet of space. In
addition, one tenant occupying 2,115 square feet renewed its lease. During the
second 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 space is still being renovated in preparation
for the tenant's occupancy which is now expected to occur by the end of March
1999. 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 in calendar year 1999. 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 95% leased and occupied as of December 31, 1998.
The property's management team reports that the increased customer traffic
levels in the Center have been maintained since the opening of the 13,410 square
foot Gateway 2000 Country Store. During the third quarter, two new tenants
signed leases and took occupancy of 3,943 square feet. Over the next twelve
months, five leases representing a total of 27,486 square feet will expire.
Three tenants, which occupy 6,487 square feet, are expected to renew their
leases, while the other two tenants which occupy 20,999 square feet will not
renew their leases. One of these tenants closed its store at the end of January
1999. This tenant operated the 13,000 square foot Alpine Hut store which has
experienced operational difficulties and will be closing its business. The
property's leasing team is actively working to lease this space and has held
discussions with two prospective tenants to lease 4,289 square feet of the
13,000 square feet. As previously reported, a tenant occupying 6,875 square feet
is also experiencing operational difficulties; however, this tenant is in
compliance with the payment schedule that allows the tenant to fully pay its
current rent while repaying all of the past due amounts by the end of May 1999.
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 property for sale. During the
third quarter, the Partnership selected a national real estate firm that is a
leading seller of this property type to market Gateway Plaza for sale.
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 a period of 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%, where it remains as
of December 31, 1998. As Waccamaw has generated significant additional customer
traffic into the Center, the leasing team has received stronger interest from
prospective tenants for the remaining available 7,650 square feet of shop space.
Subsequent to the quarter end, the leasing team signed a lease for nearly half
of the vacant space with one of these prospects. The tenant, which will occupy
3,150 square feet, will take occupancy next quarter. In addition, the leasing
term is actively negotiating with a tenant which would occupy 1,050 square feet
in one of the two remaining vacant shops. During the third quarter, a two-year
lease renewal was signed with an existing tenant. Over the next 12 months, only
two leases representing a total of 3,500 square feet will expire. One of these
tenants which occupied 1,050 square feet moved from the Center at the end of
January 1999. As previously reported, with an occupancy level of 95% and a
stable base of tenants, the Partnership believes it is an opportune time to sell
West Ashley Shoppes. As part of a plan to market the property for sale, the
Partnership selected a national real estate firm that is a leading seller of
this type of property. Preliminary sales materials were prepared and initial
marketing efforts were undertaken. A marketing package was then finalized and
comprehensive sale efforts began in November 1998.
At December 31, 1998, the Partnership and its consolidated joint ventures
had available cash and cash equivalents of approximately $12,652,000. Such cash
and cash equivalents include the net proceeds from the sale of Asbury Commons
which will be distributed to the Limited Partners on February 12, 1999, as
discussed further above. The remainder of such cash and cash equivalent amounts
will be utilized for the working capital requirements of the Partnership, the
capital needs of the Partnership's three remaining 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 prior to the end
of calendar 1999. 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 December 31, 1998
- ------------------------------------
The Partnership had net income of $9,495,000 for the three months ended
December 31, 1998 as compared to a net loss of $306,000 for the same period in
the prior year. The favorable change in net income (loss) was primarily a result
of the gains realized from the sale of two consolidated operating investment
properties during the current period. As discussed further above, the
Partnership sold the consolidated Hacienda Business Park on November 20, 1998
and realized a gain of $9,051,000. The Partnership also sold the consolidated
Asbury Commons Apartments on December 21, 1998 and realized a gain of
$1,405,000.
The Partnership's share of unconsolidated ventures' income increased by
$18,000 for the three months ended December 31, 1998, when compared to the same
period in the prior year, primarily due to the sale of The Gables at Erin Shades
Apartments on July 2, 1998. The Gables joint venture had an operating loss of
$62,000 during the third quarter of the prior year. In addition, net income
increased at Gateway Plaza during the current quarter by $46,000 due to an
increase in rental income. Rental income increased due to an increase in
occupancy. The increase in net income at Gateway Plaza and decrease in net loss
at The Gables were partially offset by a decrease in net income at 625 North
Michigan which was primarily due to an increase in real estate taxes.
The gains realized from the sales of the Hacienda Business Park and Asbury
Commons Apartments and the increase in the Partnership's share of unconsolidated
ventures' income were partially offset by an increase in the Partnership's
operating loss of $342,000 for the current three-month period. The increase in
the Partnership's operating loss was primarily a result of an increase in
interest expense due to the prepayment penalty of $743,000 incurred on the
payoff of the debt secured by the Asbury Commons Apartments, as discussed
further above. The impact of the prepayment penalty on the Partnership's
operating loss was partially offset by the additional operating results of the
Hacienda Business Park and Asbury Commons joint ventures included in the current
period due to the acceleration of the lag-period recognized upon the sale of the
properties, as discussed further above.
Nine Months Ended December 31, 1998
- -----------------------------------
The Partnership had net income of $15,282,000 for the nine months ended
December 31, 1998 as compared to a net loss of $584,000 for the same period in
the prior year. The favorable change in net income (loss) was primarily a result
of the gains realized from the sale of three operating investment properties
during the current period. As discussed further above, the Partnership sold the
consolidated Hacienda Business Park on November 20, 1998 and realized a gain of
$9,051,000. In addition, the Partnership sold the consolidated Asbury Commons
Apartments on December 21, 1998 and realized a gain of $1,405,000. The
Partnership also realized a gain from the sale of the unconsolidated Gables
Apartments, which was sold on July 2, 1998, in the amount of $5,848,000.
The gains realized from the sales of the consolidated Hacienda Business
Park and Asbury Commons Apartments and the unconsolidated Gables Apartments were
partially offset by an increase in the Partnership's operating loss of $105,000
for the current nine-month period. The increase in the Partnership's operating
loss was primarily a result of an increase in interest expense due to the
prepayment penalty of $743,000 incurred on the payoff of the debt secured by the
Asbury Commons Apartments, as discussed further above. The impact of the
prepayment penalty on the Partnership's operating loss was partially offset by
the additional operating results of the Hacienda Park and Asbury Commons joint
ventures included in the current period due to the acceleration of the
lag-period recognized upon the sale of the properties, as discussed further
above.
The Partnership's share of unconsolidated ventures' income decreased by
$2,000 for the nine months ended December 31, 1998 when compared to the same
period in the prior year. This decrease is primarily a result of the $472,000
prepayment penalty incurred on the pay-off of the Gables debt and various
write-offs of unamortized deferred expenses associated with the sale of The
Gables at Erin Shades Apartments. The increase in operating loss at The Gables
was offset by increases in net income at both the 625 North Michigan and Gateway
Plaza joint ventures due to increases in rental income at both of the related
operating investment properties.
<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 November 20, 1998 was filed during the
current quarter to report the sale of the Hacienda Business Park property and is
hereby incorporated herein by reference. In addition, a Current Report on Form
8-K dated December 21, 1998 was filed subsequent to the quarter end to report
the sale of the Asbury Commons 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: February 10, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Partnership's unaudited financial statements for the quarter ended December 31,
1998 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-31-1999
<PERIOD-END> Dec-31-1998
<CASH> 12,652
<SECURITIES> 0
<RECEIVABLES> 444
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 13,029
<PP&E> 38,013
<DEPRECIATION> 2,207
<TOTAL-ASSETS> 49,070
<CURRENT-LIABILITIES> 502
<BONDS> 9,171
0
0
<COMMON> 0
<OTHER-SE> 39,397
<TOTAL-LIABILITY-AND-EQUITY> 49,070
<SALES> 0
<TOTAL-REVENUES> 21,938
<CGS> 0
<TOTAL-COSTS> 3,933
<OTHER-EXPENSES> 331
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,392
<INCOME-PRETAX> 15,282
<INCOME-TAX> 0
<INCOME-CONTINUING> 15,282
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,282
<EPS-PRIMARY> 112.55
<EPS-DILUTED> 112.55
</TABLE>
