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 September 30, 1996
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
Incorporation or Organization I.R.S. Employer Identification No.
3 World Financial Center, 29th Floor,
New York, NY Attn.: Andre Anderson 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 At September 30, At December 31,
1996 1995
Assets
Zero coupon second mortgage loan receivable,
net of unamortized discount of $1,539 in
1996 and $4,779 in 1995 $ 41,137,246 $ 37,999,250
Less valuation allowance (11,637,246) (37,999,250)
29,500,000 -
Zero coupon first mortgage loan receivable 13,838,391 12,846,120
Cash and cash equivalents 1,898,304 910,771
Investments in U.S. Treasury securities - 1,073,105
Notes receivable, net of allowance for doubtful
accounts of $2,611,952 in 1996 and 1995 - -
Deferred charges, net of accumulated amortization
of $960,619 in 1996 and $882,731 in 1995 25,961 103,849
Total Assets $ 45,262,656 $ 14,933,845
Liabilities and Partners' Capital
Liabilities:
Accounts payable and accrued expenses $ 26,216 $ 31,496
Due to affiliates 21,931 14,394
Total Liabilities 48,147 45,890
Partners' Capital (Deficit):
General Partner (983,819) (983,819)
Limited Partners (Depository units: 30,000,000
authorized, 7,047,000 issued and outstanding) 46,198,328 15,871,774
Total Partners' Capital 45,214,509 14,887,955
Total Liabilities and Partners' Capital $ 45,262,656 $ 14,933,845
STATEMENT OF PARTNERS' CAPITAL (DEFICIT)
For the nine months ended September 30, 1996
Limited General
Partners Partner Total
Balance at December 31, 1995 $15,871,774 $(983,819) $ 14,887,955
Distributions to foreign
limited partners (2,267) - (2,267)
Net income 30,328,821 - 30,328,821
Balance at September 30, 1996 $46,198,328 $(983,819) $ 45,214,509
STATEMENTS OF OPERATIONS Three months ended Nine months ended
September 30, September 30,
1996 1995 1996 1995
Income
Interest income $ 1,414,596 $1,290,366 $ 4,238,256 $3,836,684
Recovery of (allowance for)
doubtful accounts 28,453,234 (943,140) 26,362,004 (2,827,344)
Net interest income 29,867,830 347,226 30,600,260 1,009,340
Miscellaneous income 1,880 3,330 6,785 5,795
Total Income 29,869,710 350,556 30,607,045 1,015,135
Expenses
Amortization of deferred charges 25,963 25,963 77,888 77,889
General and administrative 94,302 20,288 144,086 75,334
Investment management fee 18,750 18,750 56,250 56,250
Total Expenses 139,015 65,001 278,224 209,473
Net Income $29,730,695 $ 285,555 $30,328,821 $ 805,662
Net Income Allocated:
To the General Partner $ - $ - $ - $ -
To the Limited Partners 29,730,695 285,555 30,328,821 805,662
$29,730,695 $ 285,555 $30,328,821 $ 805,662
Per limited partnership unit
(7,047,000 outstanding) $4.22 $.04 $4.30 $.11
STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 1996 1995
Cash Flows From Operating Activities:
Net income $30,328,821 $ 805,662
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Allowance for (recovery of) doubtful accounts (26,362,004) 2,827,344
Amortization of deferred charges 77,888 77,889
Amortization of discount on loan (3,240) (3,238)
Increase (decrease) in cash arising from changes in
operating assets and liabilities:
Zero coupon mortgage loan interest receivable (4,127,027) (3,722,412)
Investments in U.S. Treasury securities 1,073,105 (67,581)
Accounts payable and accrued expenses (5,280) (5,213)
Due to affiliates 7,537 668
Net cash provided by (used for) operating activities 989,800 (86,881)
Cash Flows from Financing Activities:
Distributions - income tax withholdings
for foreign partners (2,267) -
Net cash used for financing activities (2,267) -
Net increase (decrease) in cash and cash equivalents 987,533 (86,881)
Cash and cash equivalents, beginning of period 910,771 1,018,759
Cash and cash equivalents, end of period $1,898,304 $ 931,878
NOTES TO THE FINANCIAL STATEMENTS
The unaudited interim financial statements should be read in conjunction with
the Partnership's annual 1995 audited financial statements within Form 10-K.
The unaudited financial statements include all adjustments which are, in the
opinion of management, necessary to present a fair statement of financial
position as of September 30, 1996 and the results of operations for the three
and nine months ended September 30, 1996 and 1995, the statements of cash flows
for the nine months ended September 30, 1996 and 1995 and the statement of
partners' capital (deficit) for the nine months ended September 30, 1996.
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 subsequent to fiscal year 1995,
and require disclosure in this interim report per Regulation S-X, Rule 10-01,
Paragraph (a)(5).
The Union Square Loan:
The Partnership holds a zero-coupon mortgage loan (the "Hotel Loan") previously
made to the owner of the Grand Hyatt San Francisco hotel (the "Borrower"), the
general partner of which is an affiliate of the general partner of the
Partnership. The Hotel Loan is secured by a second mortgage encumbering the
Grand Hyatt San Francisco Hotel (the "Hotel"). The Hotel Loan currently
accrues interest at the rate of 11% per annum and matures on January 2, 1997,
at which time the accreted balance in the total aggregate amount of $42,207,709
will be due and payable to the Partnership.
In September 1996, the Borrower announced that it had entered into exclusive
negotiations to sell the Hotel to one prospective purchaser. In November 1996,
the Borrower, consistent with the possible outcome that had been discussed in a
letter dated September 9, 1996, from the general partner of the Partnership to
the Partnership's Unitholders, agreed to sell the Hotel to an affiliate of
California Hyatt Corporation, the current operator of the Hotel ("Hyatt"), for
$126,900,000 in cash and the assumption of certain debt owed to an affiliate of
the prospective buyer. The foregoing sale is subject to certain conditions
described in a purchase and sale agreement that has now been entered into
between the Borrower and Hyatt. The closing of such sale is expected to occur
no later than March 31, 1997. Based upon the negotiated selling price, the
Borrower would have sufficient proceeds to pay the first mortgage ("First
Mortgage Loan") balance of approximately $89.7 million as of December 31, 1996.
The remaining proceeds would, however, be insufficient to pay the entire
balance of the Hotel Loan. In the event that the sale of the Hotel cannot be
consummated by January 2, 1997, the date the First Mortgage Loan and the Hotel
Loan mature, the Partnership has been advised that the Borrower expects to seek
the agreement of the holder of the First Mortgage Loan to renegotiate any
maturing debt, or to otherwise forbear from exercising any remedies in respect
of the Hotel, in order to permit, if necessary, the sale of the Hotel to be
consummated after such maturity date. If no such agreement can be reached, or
the sale of the Hotel were not to be consummated, there can be no assurance
that a satisfactory alternative will be reached.
In connection with any material transactions entered into between the
Partnership and any affiliate, the Partnership's Amended and Restated Agreement
of Limited Partnership requires that the general partner of the Partnership
retain an independent adviser to render an opinion to the effect that such
transaction is fair, from a financial point of view, and at least as favorable
to the Partnership as such transaction would be if entered into with an
unaffiliated entity in similar circumstances. Accordingly, the Partnership
engaged a nationally-recognized independent investment bank (the "Partnership's
Independent Advisor") to negotiate with the Borrower regarding the proposed
sale of the Hotel and to render the required opinion.
On behalf of the Partnership, the Partnership's Independent Advisor negotiated,
with a similar representative engaged by the Borrower, an allocation that was
incorporated in an agreement dated as of November 1, 1996 (the "Allocation
Agreement") and rendered the required opinion. Pursuant to the terms of the
Allocation Agreement, the Partnership has agreed (a) subject to certain
limitations, to temporarily forbear during the pendency of the sale of the
Hotel from pursuing foreclosure action on the Hotel Loan, and (b) to accept
approximately $30,000,000 in full satisfaction of all of the Borrower's
obligations to the Partnership (including unsecured debt obligations and the
obligation to reimburse the Partnership for certain costs). The Partnership's
acceptance of such terms has been conditioned on, among other things, the sale
of the Hotel being consummated by March 31, 1997, and the net proceeds from the
sale being used first to repay in full all indebtedness outstanding under the
First Mortgage Loan. Assuming the sale of the Hotel closes, the Partnership
will, as a result, receive distributable proceeds of approximately $4 per unit.
However, since the sale of the Hotel is subject to the satisfaction of certain
conditions, including, among other things, the Borrower obtaining the approval
of a majority in interest of its outstanding Unitholders, there can be no
assurance that the sale of the Hotel will ultimately be consummated.
Based upon the circumstances as discussed above and in particular the
negotiated sales price of the Hotel, the Partnership has elected to reduce the
valuation allowance reflected on the Partnership's financial statements. As a
result, the second mortgage loan has an indicated value at September 30, 1996
of $29,500,000. The level of the valuation allowance will be assessed on a
quarterly basis.
The Laurel Centre Loan:
The Partnership holds a 24% interest in a zero-coupon mortgage loan (the
"Laurel Centre Loan") previously made to the owner (the "Laurel Borrower") of
the Laurel Centre Mall located in Laurel, Maryland (the "Mall") and secured by
a first mortgage encumbering the Mall. The remaining 76% interest in the
Laurel Centre Loan is held by a real estate mortgage investment conduit
serviced by a third party (the "REMIC"). The Laurel Centre Loan accrued
interest at the rate of 10.2% per annum and was due and payable on October 15,
1996. The fully accreted amount of the Laurel Centre Loan as of October 15,
1996 was $57,894,077. The Laurel Centre Loan is carried on the Partnership's
books as of October 15, 1996, for financial reporting and net asset value
purposes at $13,894,578, which amount represents the Partnership's full 24%
interest in the Laurel Centre Loan.
On or about October 9, 1996, after the Laurel Borrower was unable to refinance
or sell the Mall on terms that would repay the Laurel Centre Loan, the Laurel
Borrower entered into an agreement (the "Agreement") with the Partnership and
the REMIC (together, the "Lenders"), pursuant to which the Lenders, among other
things, (a) indicated their intent to commence a foreclosure action on the
Laurel Centre Loan and appoint a receiver, on or after October 16, 1996, and
(b) agreed to release any claims that they may have to any cash held by the
Laurel Borrower or its partners prior to October 16, 1996. In addition, under
the Agreement, the Laurel Borrower and the Lenders agreed that all cash flow
from the Mall on or after October 16, 1996, shall be paid to the Lenders. On
October 16, 1996, foreclosure proceedings were commenced by the Partnership and
a receiver for the Mall was appointed. Accordingly, the receiver took immediate
possession of the Mall and was authorized, among other things: to manage the
Mall; to collect all rent proceeds from Mall tenants paid on or after October
16, 1996; and to apply such proceeds to the payment of, among other things, the
Mall's management and operating expenses, capital improvements and leasing
expenses, with any remaining funds to be paid to the mortgage lenders; in each
case, in accordance with the terms of the agreement. It is anticipated that
the foreclosure sale will be completed in early December of this year with
title to the Mall being obtained by the Lenders to be held pro rata by
approximately the end of the year.
As a result of the inability of the borrower to pay-off the loan at maturity,
the loan is impaired under Financial Accounting Standard 114, "Accounting by
Creditors for Impairment of a Loan." However, the General Partner believes
that the Partnership will ultimately collect its share of the contractual
amounts due on the loan.
Part 1, 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 by means of a transaction which
resulted in the receipt of proceeds upon sale of that property. Below is a
summary of the status of the Partnership's two remaining loans secured by
Laurel Centre Mall and the Grand Hyatt San Francisco.
Laurel Centre Loan The Partnership holds a 24% interest in a zero coupon first
mortgage loan in the original amount of $5,555,431. The remaining 76% interest
in the loan, originally held by Kemper Investors Life Insurance Company, was
sold to a real estate mortgage investment conduit in 1993. The mortgage note
matured on October 15, 1996, with a fully accreted value of $57,894,077. The
General Partner intends to take all legal steps necessary to protect the
Partnership's interest in the loan.
On or about October 9, 1996, after the Laurel Borrower was unable to refinance
or sell the Mall on terms that would repay the Laurel Centre Loan, the Laurel
Borrower entered into an agreement (the "Agreement") with the Partnership and
the REMIC (together, the "Lenders"), pursuant to which the Lenders, among other
things, (a) indicated their intent to commence a foreclosure action on the
Laurel Centre Loan and appoint a receiver, on or after October 16, 1996, and
(b) agreed to release any claims that they may have to any cash held by the
Laurel Borrower or its partners prior to October 16, 1996. In addition, under
the Agreement, the Laurel Borrower and the Lenders agreed that all cash flow
from the Mall on or after October 16, 1996, shall be paid to the Lenders. On
October 16, 1996, foreclosure proceedings were commenced by the Partnership and
a receiver for the Mall was appointed. Accordingly, the receiver took immediate
possession of the Mall and was authorized, among other things: to manage the
Mall; to collect all rent proceeds from Mall tenants paid on or after October
16, 1996; and to apply such proceeds to the payment of, among other things, the
Mall's management and operating expenses, capital improvements and leasing
expenses, with any remaining funds to be paid to the mortgage lenders; in each
case, in accordance with the terms of the agreement. It is anticipated that
the foreclosure sale will be completed in early December of this year with
title to the Mall being obtained by the Lenders to be held pro rata by
approximately the end of the year. The Lenders are considering various options
with respect to taking title of the Property.
As a result of the inability of the borrower to pay-off the loan at maturity,
the loan is impaired under Financial Accounting Standard 114, "Accounting by
Creditors for Impairment of a Loan." However, the General Partner believes
that the Partnership will ultimately collect its share of the contractual
amounts due on the loan.
At September 30, 1996, Laurel Centre was 80.5% occupied, compared with 86.5% a
year earlier. Tenant sales at the mall (excluding anchor tenants) totaled
$31.4 million in the first eight months of 1996, compared with $33.0 million in
the first eight months of 1995.
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. (the
"Borrower," 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.
Average occupancy and room rates at the Hotel were 86.5% and $154.54 for the
third quarter of 1996 compared to 81.2% and $141.88 for the corresponding
period in 1995. Although the Hotel has generated sufficient cash flow to meet
its quarterly debt service payments on its first mortgage through October 1996,
there is no assurance the Hotel will be able to fund future minimum debt
service payments, which increase over time.
In September 1996, the Borrower announced that it had entered into exclusive
negotiations to sell the Hotel to one prospective purchaser. In November 1996,
the Borrower, consistent with the possible outcome that had been discussed in a
letter dated September 9, 1996, from the general partner of the Partnership to
the Partnership's Unitholders, agreed to sell the Hotel to an affiliate of
California Hyatt Corporation, the current operator of the Hotel ("Hyatt"), for
$126,900,000 in cash and the assumption of certain debt owed to an affiliate of
the prospective buyer. The foregoing sale is subject to certain conditions
described in a purchase and sale agreement that has now been entered into
between the Borrower and Hyatt. The closing of such sale is expected to occur
no later than March 31, 1997. Based upon the negotiated selling price, the
Borrower would have sufficient proceeds to pay the first mortgage ("First
Mortgage Loan") balance of approximately $89.7 million as of December 31, 1996.
The remaining proceeds would, however, be insufficient to pay the entire
balance of the Hotel Loan. In the event that the sale of the Hotel cannot be
consummated by January 2, 1997, the date the First Mortgage Loan and the Hotel
Loan mature, the Partnership has been advised that the Borrower expects to seek
the agreement of the holder of the First Mortgage Loan to renegotiate any
maturing debt, or to otherwise forbear from exercising any remedies in respect
of the Hotel, in order to permit, if necessary, the sale of the Hotel to be
consummated after such maturity date. If no such agreement can be reached, or
the sale of the Hotel were not to be consummated, there can be no assurance
that a satisfactory alternative will be reached.
In connection with any material transactions entered into between the
Partnership and any affiliate, the Partnership's Amended and Restated Agreement
of Limited Partnership requires that the general partner of the Partnership
retain an independent adviser to render an opinion to the effect that such
transaction is fair, from a financial point of view, and at least as favorable
to the Partnership as such transaction would be if entered into with an
unaffiliated entity in similar circumstances. Accordingly, the Partnership
engaged a nationally-recognized independent investment bank (the "Partnership's
Independent Advisor") to negotiate with the Borrower regarding the proposed
sale of the Hotel and to render the required opinion.
On behalf of the Partnership, the Partnership's Independent Advisor negotiated,
with a similar representative engaged by the Borrower, an allocation that was
incorporated in an agreement dated as of November 1, 1996 (the "Allocation
Agreement") and rendered the required opinion. Pursuant to the terms of the
Allocation Agreement, the Partnership has agreed (a) subject to certain
limitations, to temporarily forbear during the pendency of the sale of the
Hotel from pursuing foreclosure action on the Hotel Loan, and (b) to accept
approximately $30,000,000 in full satisfaction of all of the Borrower's
obligations to the Partnership (including unsecured debt obligations and the
obligation to reimburse the Partnership for certain costs). The Partnership's
acceptance of such terms has been conditioned on, among other things, the sale
of the Hotel being consummated by March 31, 1997, and the net proceeds from the
sale being used first to repay in full all indebtedness outstanding under the
First Mortgage Loan. Assuming the sale of the Hotel closes, the Partnership
will, as a result, receive distributable proceeds of approximately $4 per unit.
However, since the sale of the Hotel is subject to the satisfaction of certain
conditions, including, among other things, the Borrower obtaining the approval
of a majority in interest of its outstanding Unitholders, there can be no
assurance that the sale of the Hotel will ultimately be consummated.
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, 1996 totaled $40,090,480, representing the accreted value of the loan
at such date.
Based upon the circumstances as discussed above and in particular the
negotiated sales price of the Hotel, the Partnership has elected to reduce the
valuation allowance reflected on the Partnership's financial statements. As a
result, the second mortgage loan has an indicated value at September 30, 1996
of $29,500,000. The level of the valuation allowance will be assessed on a
quarterly basis.
The Partnership's investment in zero coupon Treasury securities and cash
comprise the Partnership's working capital reserve. At September 30, 1996, the
Partnership had zero invested in zero coupon U.S. Treasury securities and cash
of $1,898,304, compared to $1,073,105 and $910,771, respectively, at December
31, 1995. The decrease in U.S. Treasury securities represents their maturity
on August 15, 1996, and the increase in cash is a result of transferring the
mature Treasury securities into cash.
Results of Operations
For the three and nine months ended September 30, 1996, net income totaled
$29,730,695 and $30,328,821 respectively, compared with net income of $285,555
and $805,662, respectively, for the three and nine months ended September 30,
1995.
Total income for the three and nine months ended September 30, 1996 was
$29,869,710 and $30,607,045, respectively, compared with $350,556 and
$1,015,135, respectively, for the corresponding periods in 1995. The increase
in both the three and nine month periods is due to the compounding of interest
on the Laurel Centre loan combined with the recovery of the valuation allowance
on the Union Square mortgage loan to $29,500,000 based upon the negotiated
sales price of the Hotel.
Total expenses for the three and nine months ended September 30, 1996 were
$139,015 and $278,224, respectively, compared with $65,001 and $209,473,
respectively, for the corresponding periods in 1995. The increase for both the
three- and nine-month periods is the result of higher general and
administrative expenses due to higher legal, professional and postage expenses.
Part II Other Information
Items 1-5 Not applicable.
Item 6 Exhibits and reports on Form 8-K.
(a) Exhibits -
(27) Financial Data Schedule
(b) Reports on Form 8-K - No reports on Form 8-K were filed during the
quarter ended September 30, 1996.
An 8-K was filed on November 8, 1996, disclosing information
about both the Union Square and Laurel Centre loans.
SIGNATURES
Pursuant to the requirements of the Securities 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: November 14, 1996 BY: /s/ Kenneth L. Zakin
Director and President
Date: November 14, 1996 BY: /s/ Daniel M. Palmier
Vice President and
Chief Financial Officer
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<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-END> Sep-30-1996
<CASH> 1,898,304
<SECURITIES> 0
<RECEIVABLES> 54,975,637
<ALLOWANCES> 11,637,246
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