UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1994
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 33-7707
CAPITAL GROWTH MORTGAGE INVESTORS, L.P.
(Exact name of registrant as specified in its charter)
Delaware 13-3434580
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) identification No.)
3 World Financial Center, 29th Floor, New York, NY 10285
(Address of principal executive offices) (Zip code)
(212) 526-3237
(Registrant's telephone number, including area code)
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
Balance Sheets
June 30, December 31,
Assets 1994 1993
Second Mortgage loans receivable, net of
unamortized discount of $11,255 in 1994
and $13,414 in 1993 $32,529,203 $68,030,204
Less-valuation allowance (32,529,203) (68,030,204)
0 0
First Mortgage loan receivable 11,065,317 10,528,370
Cash 2,521,266 632,903
Accounts receivable 50,000 50,000
Investments in U.S. Treasury securities 938,666 898,144
Deferred charges, net of accumulated
amortization of $726,953 in 1994 and
$1,253,720 in 1993 259,627 578,500
Total Assets $14,834,876 $12,687,917
Liabilities and Partners' Capital
Liabilities:
Accounts payable and accrued expenses $34,929 $45,981
Due to affiliates 11,070 10,753
Distribution payable 1,492,182 0
Total Liabilities 1,538,181 56,734
Partners' Capital (Deficit):
General Partner (983,819) (968,819)
Limited Partners (7,047,000 units outstanding) 14,280,514 13,600,002
Total Partners' Capital 13,296,695 12,631,183
Total Liabilities and Partners' Capital $14,834,876 $12,687,917
Statements of Operations
Three months ended Six months ended
June 30, June 30,
Income 1994 1993 1994 1993
Interest income $1,660,035 $3,151,690 $3,909,189 $6,238,889
Less - valuation allowance (1,354,698) (1,775,815) (3,317,071) (3,530,737)
Net interest income 305,337 1,375,875 592,118 2,708,152
Mortgage loan recovery
(Note A) 2,018,716 0 2,018,716 0
Gain on sale of U.S.
Treasury securities 0 11,778 0 17,785
Miscellaneous income 2,290 1,720 4,575 2,400
Total Income 2,326,343 1,389,373 2,615,409 2,728,337
Expenses
Amortization of
organization costs and
deferred charges 270,752 74,179 318,873 148,358
General and administrative 31,936 50,781 85,274 129,832
Investment management fee 18,750 18,750 37,500 37,500
Total Expenses 321,438 143,710 441,647 315,690
Net Income $2,004,905 $1,245,663 $2,173,762 $2,412,647
Net Income Allocated:
To the General Partner $ 0 $ 0 $ 0 $ 0
To the Limited Partners 2,004,905 1,245,663 2,173,762 2,412,647
$2,004,905 $1,245,663 $2,173,762 $2,412,647
Per limited partnership unit
(7,047,000 outstanding) $.29 $.17 $.31 $.34
Statement of Partners' Capital For the six months ended June 30, 1994
Limited General Total
Partners' Partner's Partners'
Capital (Deficit) Capital
Balance at December 31, 1993 $13,600,002 $(968,819) $12,631,183
Distributions to foreign
limited partners (16,068) 0 (16,068)
Cash Distribution (1,477,182) (15,000) (1,492,182)
Net income 2,173,762 0 2,173,762
Balance at June 30, 1994 $14,280,514 $(983,819) $13,296,695
Statements of Cash Flows For the six months ended June 30, 1994 and 1993
Cash Flows from Operating Activities: 1994 1993
Net income $2,173,762 $2,412,647
Adjustments to reconcile net income
to net cash provided by (used for)
operating activities:
Gain on sale of U.S.
Treasury securities 0 (17,785)
Mortgage loan recovery (Note A) (2,018,716) 0
Allowance for doubtful accounts 3,317,071 3,530,737
Amortization of organization costs
and deferred charges 318,873 148,358
Amortization of discount on loans (2,159) (5,694)
Increase (decrease) in cash arising
from changes in operating assets
and liabilities:
Mortgage loans receivable (3,851,859) (6,191,280)
Investment in U.S. Treasury securities (40,522) (40,870)
Accounts payable and accrued expenses (11,052) (45,395)
Due to affiliates 317 (466)
Distribution Payable 1,492,182 0
Net cash provided by (used for) operating
activities 1,377,897 (209,748)
Cash Flows from Investing Activities:
Proceeds from sale of U.S. Treasury
securities 0 151,121
Proceeds from retirement of loan 2,018,716 0
Net cash provided by investing activities 2,018,716 151,121
Cash Flows from Financing Activities:
Distributions - income tax withholdings
for foreign partners (16,068) (6,862)
Cash Distribution (1,492,182) 0
Net cash used for financing activities (1,508,250) (6,862)
Net increase (decrease) in cash 1,888,363 (65,489)
Cash, beginning of period 632,903 140,669
Cash, end of period $2,521,266 $75,180
Notes to the Financial Statements
The unaudited interim financial statements should be read in conjunction with
the Partnership's annual 1993 audited financial statements within Form 10-K.
The unaudited financial statements include all adjustments consisting of only
normal recurring accruals which are, in the opinion of management, necessary to
present a fair statement of financial position as of June 30, 1994 and the
results of operations, changes in partners' capital, and cash flows for the six
months then ended. Results of operations for the period are not necessarily
indicative of the results to be expected for the full year.
The following significant events have occurred, or material contingencies
exist, and require disclosure in this interim report per Regulation S-X, Rule
10-01, Paragraph (a)(5).
A. 417 Fifth Avenue Loan On or about May 10, 1994 (the "Closing Date"),
pursuant to the Intercreditor Agreement dated August 5, 1993 as amended on
September 22, 1993 (the "Intercreditor Agreement") between the Partnership and
Equitable Life Assurance Society of the United States (the "First Mortgagee"),
the First Mortgagee assigned all of its rights in the office building at 417
Fifth Avenue (the "Office Building") in Midtown Manhattan, New York to Fiel
Organization, Inc., including the First Mortgagee's rights in its first
mortgage on the Office Building (the "First Mortgage") in the original
principal amount of $33,000,000 (the "First Mortgage Loan").
On the Closing Date, the Partnership executed and delivered a
Satisfaction of Mortgage to release the Partnership's $17,500,000
nonrecourse zero coupon second mortgage (the "Second Mortgage") on the
Office Building. Pursuant to the Intercreditor Agreement, the
Partnership received $1,565,079 from the proceeds of the assignment of
the First Mortgage on or about May 11, 1994.
Pursuant to a letter agreement between 417 Fifth Avenue Realty Company
(the "Borrower") and the Partnership dated July 10, 1987, certain
reserve accounts were established by the Borrower in favor of the
Partnership (the "Reserve"). Pursuant to the terms of the Plan of
Reorganization of the Borrower which was confirmed on March 3, 1994,
the Partnership obtained all rights to the proceeds of the Reserve
which amounted to $453,637 on or about the Closing Date.
The accreted value of the loan on the Closing Date was $38,818,072 and
had been fully reserved. The total proceeds received on the Closing
Date of $2,018,716 were recorded as a gain on retirement of the loan.
Part of the retirement proceeds were distributed to the partners. On
July 15, 1994, a cash distribution was paid totalling $1,500,000, of
which $15,000 was paid to the general partner pursuant to the terms of
the Partnership Agreement, and $1,485,000 was paid to the limited
partners, or $.21 per unit. The retirement also resulted in the
write-off of $234,653 of deferred charges related to the original
financing.
Part I, Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Liquidity and Capital Resources
The Partnership's primary assets are its zero coupon mortgage loans. The
Partnership originally held two zero coupon first mortgage loans and two zero
coupon second mortgage loans. During 1993, the loan secured by EQK Green Acres
Mall was repaid together with a prepayment premium. In early 1994, the loan
secured by 417 Fifth Avenue was retired. Below is a discussion of the 417
Fifth Avenue transaction and the status of the Partnership's two remaining
loans secured by Laurel Centre Mall and the Grand Hyatt San Francisco.
417 Fifth Avenue Loan - The Partnership held a zero coupon second mortgage in
the original amount of $17,500,000 funded to 417 Fifth Avenue Realty Company
(the "Borrower"), which owned an eleven-story office building located at 417
Fifth Avenue, New York, New York. The Partnership's loan was subordinate to a
first mortgage held by Equitable Life Assurance Society of the United States
("Equitable") in the original principal amount of $33,000,000.
On February 13, 1992, Equitable delivered a Notice of Default informing the
Borrower that it was in default under the first mortgage note. Equitable
subsequently commenced a foreclosure proceeding and obtained a court order
appointing a receiver to collect the rents of the property and to apply such
rents towards the payment of debt service on the first mortgage and for the
payment of taxes and other operating expenses. On May 1, 1992, the Partnership
delivered a Notice of Default informing the Borrower of its default on the
Partnership's second mortgage loan and commenced its own foreclosure
proceeding. Considering the foregoing and the depressed state of the New York
City real estate market, the General Partner fully reserved the carrying value
of the loan during the third quarter of 1992.
On or about August 9, 1993, the Borrower filed a voluntary bankruptcy petition
in the Southern District of New York. Pursuant to an Intercreditor Agreement
dated August 5, 1993 and amended on September 22, 1993, the Partnership agreed
with Equitable to coordinate activities in the bankruptcy and to give the
Partnership an interest in whatever Equitable ultimately realized in the
Property (the "Agreement"). In September 1993, the Partnership agreed to a
consensual plan of reorganization (the "Plan") under the bankruptcy code,
whereby the Borrower agreed to pay Equitable $2.5 million, convey the property
to Equitable, and assign to the Partnership all funds, approximately $450,000,
held in a reserve account. The bankruptcy court approved the Plan in March
1994. The Plan incorporates the Agreement under which the Partnership would
receive approximately 8% of the proceeds subsequent to Equitable receiving $7
million plus certain priority returns as specified in the Agreement. Although
the Partnership's 8% share of net proceeds is significantly less than the
fully accreted amount of the loan, the General Partner believed this agreement
represented the best alternative available to the limited partners since the
value of the Property was less than the amount of the First Mortgage.
On or about May 10, 1994 (the "Closing Date"), pursuant to the Agreement
between the Partnership and Equitable Life Assurance Society of the United
States (the "First Mortgagee"), the First Mortgagee assigned all of its rights
in the office building at 417 Fifth Avenue (the "Office Building") in Midtown
Manhattan, New York to Fiel Organization, Inc., including the First Mortgagee's
rights in its first mortgage on the Office Building (the "First Mortgage") in
the original principal amount of $33,000,000 (the "First Mortgage Loan").
On the Closing Date, the Partnership executed and delivered a Satisfaction of
Mortgage to release the Partnership's $17,500,000 nonrecourse zero coupon
second mortgage (the "Second Mortgage") on the Office Building. Pursuant to
the Agreement, the Partnership received $1,565,079 from the proceeds of the
assignment of the First Mortgage on or about May 11, 1994, representing the
Partnership's share of the net proceeds.
Pursuant to a letter agreement between the Borrower and the Partnership dated
July 10, 1987, certain reserve accounts were established by the Borrower in
favor of the Partnership (the "Reserve"). Pursuant to the terms of the Plan of
Reorganization of the Borrower which was confirmed on March 3, 1994, the
Partnership obtained all rights to the proceeds of the Reserve which amounted
to $453,637 on or about the Closing Date.
The accreted value of the loan on the Closing Date was $38,818,072 and had been
fully reserved. The total proceeds received on the Closing Date of $2,018,716
were recorded as mortgage loan recovery income.
Part of the retirement proceeds were distributed to the partners. On July 15,
1994, a cash distribution was paid totalling $1,500,000, of which $15,000 was
paid to the General Partner pursuant to the terms of the Partnership Agreement,
and $1,485,000 was paid to the Limited Partners, or $.21 per unit. The
retirement also resulted in the write-off of $234,653 of deferred charges
related to the original financing.
Union Square Loan - The Partnership holds a zero coupon second mortgage in the
original amount of $13,325,000 funded to Union Square Hotel Partners L.P.
("Union Square," formerly Shearson Union Square Associates L.P.), which owns
the Grand Hyatt San Francisco Hotel (the "Hotel") located in San Francisco,
California. The Partnership's loan is subordinate to a first mortgage held by
the Bank of Nova Scotia (the "Bank") in the original principal amount of
$70,000,000. On June 30, 1992, Union Square consummated a restructuring of its
financing and property management arrangements with the Bank, the Partnership
and certain other creditors. A detailed description of the terms of the
restructuring is incorporated herein by reference to the Partnership's Current
Report on Form 8-K filed with the Securities and Exchange Commission on July
14, 1992.
The restructuring was designed to reduce the near-term cash demands on Union
Square in order to help the Hotel overcome the recent difficulties in the San
Francisco market. The Hotel has reported improved operating results since the
June 1992 restructuring of its debt and the strengthening of San Francisco
market conditions. Occupancy and room rates were 72.96% and $138.55 in the six
months ended June 30, 1994 compared to 71.28% and $138.12 in the corresponding
period in 1993. The Hotel has generated sufficient cash flow to meet its
quarterly debt service payments due in July and October 1993, and January,
April and July 1994. However, it remains uncertain if the Hotel will generate
sufficient cash flow to fund future minimum debt service payments. Lehman
Brothers Holdings Inc. (formerly Shearson Lehman Brothers Holdings, Inc.), an
affiliate of the Union Square general partner, elected not to renew its
guaranty of the minimum debt service payment under the restructured first mortg
age for the year commencing July 4, 1993. However, since there is no assurance
that cash flow will be sufficient to satisfy future minimum debt service
payments, Lehman indicated that it would evaluate the future need for
additional funding support on a quarterly basis. If required, the Union Square
general partner is prepared to request an additional loan from Lehman to
supplement cash flow from the Hotel.
As part of the restructuring, the Partnership agreed to extend the maturity
date of its loan to January 1999, provided the first mortgagee chooses to
extend its loan to such date. Accordingly, the Partnership may be required to
hold this investment longer than the original January 1997 maturity.
During the third quarter of 1992, the Partnership received an appraisal that
indicated that the Hotel's value was insufficient to collateralize its loan.
Accordingly, the General Partner fully reserved the carrying value of the loan
during the third quarter of 1992. The valuation allowance for this loan at
June 30, 1994 totals $32,529,203, representing the accreted value of the loan
at such date. All interest on the loan is being fully reserved for as it
accrues. The level of the allowance will be assessed on a quarterly basis. The
General Partner continues to believe that the value of the Partnership's loan
has been impaired and the ultimate collectibility of the Partnership's loan
remains uncertain.
Laurel Centre Loan - The Partnership holds a 24% interest in a zero coupon
first mortgage loan for the original amount of $5,555,431. Like many regional
malls across the country, Laurel Centre, the mall securing the Partnership's
first mortgage loan, has been impacted by adverse retail trends including a low
demand for apparel goods which constitute its tenants' primary sales. At June
30, 1994, Laurel Centre, was 95.2% occupied, compared with 94.1% a year
earlier. Tenant sales at the mall (excluding anchor tenants) totaled $21.4
million in the first five months of 1994, down from $21.6 million in the 1993
period.
Kemper Investors Life Insurance Company ("Kemper") sold its 76% participating
interest in the Laurel Centre loan during 1993 to a real estate mortgage
investment conduit. The sale of Kemper's participating interest to a real
estate conduit may affect the Borrower's ability to restructure the loan. The
most recent appraised value of the property was in excess of the fully accreted
amount of the Partnership's first mortgage loan. However, the ability of the
Partnership to collect its portion of the fully accreted amount at maturity in
October 1996 will be contingent upon an improvement in capital markets for real
estate lending and investment and the borrower's ability to refinance the loan
or sell the property at maturity.
The Partnership's investment in zero coupon Treasury securities and cash
comprise the Partnership's working capital reserve. At June 30, 1994, the
Partnership had $938,666 invested in zero coupon U.S. Treasury securities and
cash of $2,521,266, compared to $898,144 and $632,903, respectively, at
December 31, 1993. The increase in U.S. Treasury securities represents
interest accrued on the securities for the six months ended June 30, 1994. The
increase in the cash balance reflects the proceeds from the retirement of the
417 Fifth Avenue loan and associated reserve accounts. On July 15, 1994, a
cash distribution was paid totalling $1,500,000. The remaining balance in the
Partnership's cash reserve will be retained to meet the Partnership's operating
expenses.
Results of Operations
For the three and six months ended June 30, 1994, net income totalled
$2,004,905 and $2,173,762 respectively, compared with $1,245,663 and $2,412,647
for the corresponding periods in 1993.
Total income for the three and six months ended June 30, 1994 was $2,326,343
and $2,615,409, compared with $1,389,373 and $2,728,337 for the corresponding
periods in 1993. The decrease in the six month results primarily reflects the
prepayment of the EQK/Green Acres mortgage loan on August 19, 1993, which
reduced interest income by $2,176,602. This decrease was offset by the mortgage
loan recovery income received from the 417 Fifth Avenue loan of $2,018,716.
The increase in the three month results is primarily due to recovering
$2,018,716 from the 417 Fifth Avenue loan and was offset by a decrease in
interest income of $1,105,607 as a result of the prepayment of the EQK/Green
Acres loan.
The Partnership realized gains of $11,778 and $17,785 for the three and six
months ended June 30, 1993 from its sale of U.S. Treasury securities. The
Partnership did not sell any securities in the six months ended June 30, 1994.
Total expenses for the three and six months ended June 30, 1994 were $321,438
and $441,647, compared with $143,710 and $315,690 for the corresponding periods
in 1993. The increases primarily resulted from an increase in amortization of
organization costs, reflecting the write-off of $234,653 of loan origination
costs related to the 417 Fifth Avenue loan which was retired on May 10, 1994.
The increase was partially offset by a decrease in general and administrative
expenses which resulted from lower legal costs.
PART II OTHER INFORMATION
Items 1-4 Not applicable
Item 5
Effective May 20, 1994, American Express Company ("American Express")
distributed to holders of record of American Express, shares of Lehman Brothers
Holdings Inc. ("Lehman Brothers") common stock. As a result of this
transaction, the Partnership's General Partner is no longer an affiliate of
American Express. This change is not expected to have any impact on the
Partnership.
Item 6
Exhibits and reports on Form 8-K.
(a) Exhibits - None
(b) Reports on Form 8-K - No reports on Form 8-K were filed during
the quarter ended June 30, 1994.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CAPITAL GROWTH MORTGAGE INVESTORS, L.P.
BY: CG REALTY FUNDING INC. General Partner
Date: August 12, 1994
BY: s/Kenneth L. Zakin/
Title: Director and President
Date: August 12, 1994
BY: s/Daniel M. Palmier/
Title: Chief Financial Officer
