<PAGE> 1
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 0-17684
ML/EO Real Estate Portfolio, L.P.
- - - --------------------------------------------------------------------------------
(Exact name of registrant as specified in its governing instrument)
Delaware 58-1739523
- - - --------------------------------------------------------------------------------
(State of Organization) (I.R.S. Employer Identification No.)
3414 Peachtree Road, N.E., Atlanta, Georgia 30326-1162
- - - --------------------------------------------------------------------------------
(Address of principal executive office) (Zip Code)
(Registrant's telephone number, including area code) (404) 239-5002
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
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ML/EQ REAL ESTATE PORTFOLIO, L.P.
CONTENTS
PART I -- FINANCIAL INFORMATION
<TABLE>
<S> <C> <C> <C>
Item 1 -- Financial statements:
Consolidated balance sheets at June 30, 1994 and December 31, 1993...........
Consolidated statements of operations for the three and six months ended June
30, 1994 and 1993..........................................................
Consolidated statement of partners' capital for the six months ended June 30,
1994.......................................................................
Consolidated statements of cash flows for the six months ended June 30, 1994
and 1993...................................................................
Notes to consolidated financial statements...................................
Item 2 -- Management's Discussion and Analysis of Financial Condition and Results
of Operations..............................................................
</TABLE>
PART II -- OTHER INFORMATION
<TABLE>
<S> <C> <C> <C>
Items 1 through 6............................................................
Signatures...................................................................
</TABLE>
<PAGE> 3
ML/EQ REAL ESTATE PORTFOLIO, L.P.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1994 AND DECEMBER 31, 1993
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1994 1993
------------ ------------
<S> <C> <C>
ASSETS
REAL ESTATE INVESTMENTS (Note 4):
Rental properties............................................. $ 71,521,937 $ 70,939,638
Less accumulated depreciation................................. (8,577,809) (7,688,554)
------------ ------------
Net rental properties......................................... 62,944,128 63,251,084
Zero coupon mortgage note receivable.......................... 22,945,257 21,831,834
Other real estate assets...................................... 37,017,363 37,017,363
Mortgage loans receivable..................................... 6,000,000 6,000,000
------------ ------------
Total real estate investments......................... 128,906,748 128,100,281
------------ ------------
OTHER ASSETS:
Cash and short-term investments............................... 22,770,165 21,825,747
Rental income receivable...................................... 3,221,029 798,839
Interest income receivable.................................... 116,131 120,851
Guaranty fee, net of accumulated amortization of $1,462,583 in
1994 and $1,328,458 in 1993................................ 2,280,131 2,414,257
Deferred rent concessions..................................... 1,570,442 1,513,100
Other......................................................... 225,679 236,697
------------ ------------
Total other assets.................................... 30,183,577 26,909,491
------------ ------------
TOTAL ASSETS.......................................... $159,090,325 $155,009,772
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Due to affiliates (Note 3).................................... $ 519,988 $ 543,014
Distributions declared........................................ 542,448 542,448
Accrued liabilities........................................... 316,880 394,691
Accrued capital expenditures.................................. -- 225,000
Security deposits and unearned rent........................... 398,495 276,298
------------ ------------
Total liabilities..................................... 1,777,811 1,981,451
------------ ------------
MINORITY INTEREST IN THE VENTURE (Note 2)....................... 30,749,716 29,740,464
------------ ------------
PARTNERS' CAPITAL:
General partners.............................................. 1,608,726 1,417,856
Initial limited partner....................................... 6,313 6,174
Limited partners (5,424,225 BACs issued and outstanding)...... 124,947,759 121,863,827
------------ ------------
Total partners' capital............................... 126,562,798 123,287,857
------------ ------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL............... $159,090,325 $155,009,772
=========== ===========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 4
ML/EQ REAL ESTATE PORTFOLIO, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1994 AND 1993
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------------------- --------------------------
1994 1993 1994 1993
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
REVENUE:
Rental income............................ $8,791,576 $2,066,274 $10,572,248 $4,070,382
Interest on short-term investments....... 243,066 41,416 367,362 85,728
Interest on zero coupon mortgage notes
receivable............................ 556,712 1,356,714 1,113,423 2,713,428
Interest on mortgage loans receivable.... 153,750 758,907 307,500 1,517,813
---------- ---------- ----------- ----------
TOTAL REVENUE.................... 9,745,104 4,223,311 12,360,533 8,387,351
---------- ---------- ----------- ----------
OPERATING EXPENSES:
Depreciation............................. 420,815 411,912 889,255 818,094
Real estate taxes........................ 1,088,218 231,094 1,308,866 462,953
Real estate operating expenses........... 4,061,555 317,791 4,395,103 639,659
Amortization............................. 67,062 67,063 134,125 135,180
General and administrative, including
$505,199 and $519,607 at June 30, 1994
and 1993, respectively, to affiliates
(Note 3).............................. 389,134 320,243 670,905 617,737
Bad debt expense on mortgage loans
receivable............................ -- -- -- 1,500,000
---------- ---------- ----------- ----------
TOTAL OPERATING EXPENSES......... 6,026,784 1,348,103 7,398,254 4,173,623
---------- ---------- ----------- ----------
INCOME BEFORE MINORITY INTEREST............ 3,718,320 2,875,208 4,962,279 4,213,728
MINORITY INTEREST IN NET INCOME OF
CONSOLIDATED VENTURE..................... (831,139) (648,204) (1,144,890) (984,749)
---------- ---------- ----------- ----------
NET INCOME....................... $2,887,181 $2,227,004 $ 3,817,389 $3,228,979
========= ========= ========== =========
ALLOCATION OF NET INCOME:
General partners......................... $ 144,360 $ 111,350 $ 190,870 $ 161,449
Initial limited partner.................. 123 97 164 141
Limited partners......................... 2,742,698 2,115,557 3,626,355 3,067,389
---------- ---------- ----------- ----------
TOTAL............................ $2,887,181 $2,227,004 $ 3,817,389 $3,228,979
========= ========= ========== =========
NET INCOME PER LIMITED PARTNER BAC......... $0.51 $0.39 $0.67 $0.57
----- ----- ----- -----
BACs OUTSTANDING........................... 5,424,225 5,424,225 5,424,225 5,424,255
========= ========= ========== =========
</TABLE>
See notes to consolidated financial statements.
3
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ML/EQ REAL ESTATE PORTFOLIO, L.P.
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
FOR THE SIX MONTHS ENDED JUNE 30, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
INITIAL
GENERAL LIMITED LIMITED
PARTNERS PARTNER PARTNERS TOTAL
---------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Balance, December 31, 1993..................... $1,417,856 $ 6,174 $121,863,827 $123,287,857
Net income..................................... 190,870 164 3,626,355 3,817,389
Distributions declared......................... -- (25) (542,423) (542,448)
---------- ------- ------------ ------------
Balance, June 30, 1994......................... $1,608,726 $ 6,313 $124,947,759 $126,562,798
========= ====== =========== ===========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 6
ML/EQ REAL ESTATE PORTFOLIO, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1994 AND 1993
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30,
----------------------------
1994 1993
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Tenant rentals received......................................................... $ 3,541,867 $ 3,960,076
Interest received............................................................... 635,699 1,553,129
----------- -----------
Cash received from operations................................................... 4,177,566 5,513,205
Cash paid for operating activities.............................................. (1,747,764) (1,551,347)
Cash distributions to Minority Interest......................................... (135,637) (760,000)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES......................................... 2,294,165 3,201,858
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property improvements........................................................... (807,299) (363,941)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES............................................. (807,299) (363,941)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash distributions to limited partners.......................................... (542,448) (2,169,790)
----------- -----------
NET CASH USED IN FINANCING ACTIVITIES............................................. (542,448) (2,169,790)
----------- -----------
NET INCREASE IN CASH AND SHORT-TERM INVESTMENTS................................... 944,418 668,127
CASH AND SHORT-TERM INVESTMENTS AT BEGINNING OF PERIOD............................ 21,825,747 7,113,665
----------- -----------
CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD.................................. $22,770,165 $ 7,781,792
=========== ===========
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Net income...................................................................... $ 3,817,389 $ 3,228,979
----------- -----------
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization and depreciation................................................. 1,023,380 953,274
Bad debt expense on mortgage loans receivable................................. -- 1,500,000
Minority Interest in Venture operations....................................... 1,144,890 984,749
Cash distributions to Minority Interest....................................... (135,637) (760,000)
CHANGES IN ASSETS (INCREASE) DECREASE:
Interest accrual on zero coupon mortgage notes................................ (1,113,423) (2,713,428)
Rental income receivable...................................................... (2,422,190) 81,941
Interest income receivable.................................................... 4,720 (50,412)
Deferred rent concessions..................................................... (57,342) (118,756)
Other assets.................................................................. 11,018 153,503
CHANGES IN LIABILITIES INCREASE (DECREASE):
Due to affiliates............................................................. (23,026) 1,604
Accrued liabilities........................................................... (77,811) 13,896
Tenant security deposits and unearned rent.................................... 122,197 (73,492)
----------- -----------
Total adjustments................................................................. (1,523,224) (27,121)
----------- -----------
NET CASH FLOW PROVIDED BY OPERATING ACTIVITIES.................................... $ 2,294,165 $ 3,201,858
=========== ===========
</TABLE>
SUPPLEMENTAL INFORMATION REGARDING NONCASH
OPERATING ACTIVITIES
The Northland transaction resulted in income and expenses of $7,102,879 and
$4,566,734 respectively. This activity was recorded as a receivable and is
included in rental income receivable.
A note receivable of $150,194 and an offsetting reserve of the same amount
were established in 1994 due to doubtful collections from a tenant, who had
vacated a property.
See notes to consolidated financial statements.
5
<PAGE> 7
ML/EQ REAL ESTATE PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1994
(UNAUDITED)
1. ORGANIZATION
ML/EQ Real Estate Portfolio, L.P., a Delaware limited partnership (the
"Partnership"), was formed on December 22, 1986. The Partnership was formed to
invest in existing income-producing real properties, zero coupon or similar
mortgage notes and fixed rate mortgage loans through a joint venture, EML
Associates (the "Venture"). The Venture was formed on March 10, 1988 with EREIM
LP Associates, an affiliate of The Equitable Life Assurance Society of the
United States ("Equitable"). The Partnership owns an 80% interest in the
Venture.
The Managing General Partner of the Partnership is EREIM Managers Corp.
(the "Managing General Partner"), an affiliate of Equitable, and the Associate
General Partner is MLH Real Estate Associates Limited Partnership (the
"Associate General Partner"), an affiliate of Merrill Lynch, Hubbard Inc. The
initial limited partner is MLH Real Estate Assignor, Inc., an affiliate of
Merrill Lynch, Hubbard Inc.
The Partnership's Amended and Restated Agreement of Limited Partnership
(the "Partnership Agreement") authorized the sale of up to 7,500,000 Beneficial
Assignee Certificates ("BACs") at $20 per BAC. The BACs evidence the economic
rights attributable to limited partnership interests in the Partnership. On
March 10, 1988, the Partnership's initial investor closing occurred, at which
time the Partnership received $92,190,120 representing the proceeds from the
sale of 4,609,506 BACs. On May 3, 1988, the Partnership had its second and final
investor closing. The Partnership received $16,294,380 representing the proceeds
from the sale of an additional 814,719 BACs.
The financial statements reflect all adjustments which are, in the opinion
of management, necessary for a fair presentation of the financial condition of
the Partnership as of June 30, 1994. Such adjustments were of a normal recurring
nature, except for the reflection in the second quarter of six months of
operating activity relating to the Northland Center as described in Note 2.
Certain footnote disclosure which substantially duplicates the footnote
disclosure contained in the financial statements of the Partnership, included in
its Form 10-K for the fiscal year ended December 31, 1993, which is hereby
incorporated by reference, has been omitted.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the
Partnership and the Venture. EREIM LP Associates' 20% ownership in the Venture
is reflected as a Minority Interest on the Partnership's consolidated financial
statements. All significant intercompany accounts are eliminated in
consolidation.
Allocation of Partnership Income
Partnership net income was allocated 99% to the limited partners as a group
and 1% to the general partners until 1990 at which time the Partnership paid the
final portion of the acquisition/syndication fees to the general partners.
Partnership net income is now allocated 95% to the limited partners as a group
and 5% to the general partners, consistent with the provision of the Partnership
Agreement for the allocation of distributable cash.
6
<PAGE> 8
ML/EQ REAL ESTATE PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1994
Other Real Estate Assets
Other real estate assets represent the fair market value of the underlying
collateral of the Northland zero coupon loan receivable and the Bank of Delaware
mortgage loan receivable as such receivables were determined to be in-substance
foreclosures at December 31, 1993 (See Note 4). Subsequent to the date of such
determination, the Partnership has recorded estimated operating revenues and
expenses, excluding depreciation, for the Bank of Delaware. Recording of
operating revenues and expenses for Northland was delayed until second quarter
when estimates became available. Therefore at June 30, 1994, the income
statement reflects six months of activity.
3. TRANSACTIONS WITH AFFILIATES
The general partners (or affiliates) are entitled to receive various
recurring fees for the supervision and administration of Partnership assets and
for providing the guaranty of minimum return to BAC holders and to be reimbursed
for certain expenses incurred on behalf of the Partnership. At June 30, 1994 and
December 31, 1993 the accrued balance of these fees and reimbursements totaled
$519,988 and $543,014, respectively. For each of the six month periods ended
June 30, 1994 and 1993, the expense for these recurring fees totaled $505,199
and $519,607, respectively. These amounts are included in the statements of
operations as components of general and administrative expense.
4. REAL ESTATE INVESTMENTS
Rental Properties
As of June 30, 1994, the Partnership's rental properties consist of the
following:
<TABLE>
<CAPTION>
SQUARE PERCENTAGE
FEET LEASED
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<S> <C> <C>
OFFICE
16 and 18 Sentry Park West, Montgomery County, Pennsylvania... 190,616 76%
INDUSTRIAL
1200 Whipple Road, Union City, California..................... 257,500 100%
701 Maple Lane and 733 Maple Lane, Bensenville, Illinois...... 81,750 71%
7550 Plaza Court, Willowbrook, Illinois....................... 49,500 100%
800 Hollywood Avenue, Itasca, Illinois........................ 50,337 100%
1850 Westfork Drive, Lithia Springs, Georgia.................. 103,505 100%
1345 Doolittle Drive, San Leandro, California................. 326,414 100%
RETAIL
Richland Mall, Richland Township, Pennsylvania................ 182,408 93%
</TABLE>
7
<PAGE> 9
ML/EQ REAL ESTATE PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1994
Zero Coupon Mortgage Notes Receivable
In 1988, the Venture acquired zero coupon mortgage notes with fair value
(including accrued interest) of $33,053,870 which represents the Venture's 71.66
ownership percentage. The Equitable Life Assurance Society of the United States
owns the remaining 28.34%. These notes provide financing for Equitable Real
Estate Shopping Centers L.P. ("ERESC"), a limited partnership, and are secured
by first mortgages on two real estate properties, Northland and Brookdale
Centers located outside Detroit, Michigan and Minneapolis, Minnesota,
respectively. The notes have an implicit interest rate of 10.2% compounded
semi-annually with the entire amount of principal and accrued interest totaling
$68,227,857 due June 1995. Principal and accrued interest due June 1995 on the
Northland and Brookdale zero notes total $42,882,504 and $25,345,353
respectively. The notes provide that the borrowers may elect to pay interest
currently, however, no interest has been paid to date. Management discontinued
the accrual of interest during the quarter ended June 30, 1993 on the Northland
note as the accreted value of the mortgage approximated the underlying value.
Subsequently, the Northland transaction was accounted for as an in-substance
foreclosure at December 31, 1993 and is classified as an other real estate
asset. The Venture recognized a loss of $7,628,000 as of December 31, 1993 to
record Northland Mall at its fair market value. Such loss includes a $4,730,000
provision in anticipation of the Partnership's share of the payment which was
made by the Partnership at closing in connection with the Northland transaction
described below.
On March 25, 1994, an agreement was reached in connection with the Zero
Notes. The agreement provides for the transfer of the Northland Mall to
Equitable and the Venture in proportion to their respective interests in the
mortgage; the payment of $6.6 million to the owner (which amount is
approximately equal to the net present value of the anticipated cash flow of the
Northland Center for the period from January 1, 1994 through June 30, 1995, the
maturity date of the Zero Notes, subject to closing adjustments); and a
modification of the Brookdale mortgage to provide that if the Brookdale Mall is
sold prior to June 30, 1995, the borrower may prepay the Zero Note and pay a
defeasance fee equal to 75% of the amount, if any, by which the sale price for
the Brookdale Mall exceeds $45 million.
The proposed transaction closed in escrow on June 30, 1994, and the release
from escrow occurred on July 22, 1994. Terms of the transaction relating to
Northland Mall included modification of the agreement with Dayton Hudson, one of
the existing anchor tenants, and the requirement by Equitable and the Venture
that Montgomery Ward be added as an additional anchor store. In addition, the
consent of a majority interest of the limited partners of ERESC was required in
order to proceed with the transaction. Although the limited partners' consent
had not been obtained at June 30, 1994, such consent was obtained shortly
thereafter.
In connection with the transaction, a renovation program has commenced and
is expected to result in expenditures of approximately $6.5 million, of which
the Venture's share is expected to be $4.6 million. In addition, costs expected
to be incurred in connection with tenant leases are presently estimated at
approximately $2.8 million of which the Venture's share is expected to be
approximately $2.0 million. Additional costs are anticipated.
The units of limited partnership securities of ERESC are listed on the New
York Stock Exchange. ERESC files reports under the Securities and Exchange Act
of 1934 with the Securities and Exchange Commission (File No. 1-9331).
8
<PAGE> 10
ML/EQ REAL ESTATE PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1994
Mortgage Loans Receivable
In 1988, the Venture and Equitable jointly made a $28,000,000 first
mortgage loan to Second Merritt Seven Joint Venture, a Connecticut General
Partnership. The Venture, Equitable and Second Merritt Seven Joint Venture
agreed to a $21,000,000 payoff of the loan secured by the Second Merritt Seven
Joint Venture in the fourth quarter of 1993. The Venture received $10,500,000
for its 50% share of the loan resulting in a realized loss of $3.5 million.
Adequate reserves had been established by the Partnership during 1993 to reflect
the diminution of value of the underlying security for the loan. In receiving
$8,400,000, the Partnership's 80% share of the $10,500,000 payment, the
Partnership realized the carrying value of the mortgage on its books. Management
believes that accepting a payoff was in the best interest of the Venture, given
the prospects for the property in a difficult leasing environment.
In 1989, the Venture made a $6,000,000 first mortgage loan to the Wilcon
Company. The loan is collateralized by an apartment complex in Weston,
Massachusetts. The loan bears interest at 10.25% per annum with interest only of
$51,250 due monthly to the maturity date of February 1999. In 1989, the Venture
made a $9,500,000 first mortgage loan to Three Hundred Delaware Avenue
Associates. The loan is collateralized by a seventeen-story office building in
Wilmington, Delaware. The loan bears interest at 10.375% per annum with interest
only of $82,135 due monthly to the maturity date of March 1999. The owners of
the Bank of Delaware Building defaulted on the mortgage loan receivable, having
missed their mortgage payments since February 1994. The Partnership accounted
for this transaction as an in-substance foreclosure at December 31, 1993. The
mortgage loan receivable was reclassified to other real estate assets at its
fair market value.
5. GUARANTY AGREEMENT
EREIM LP Associates has entered into a guaranty agreement with the Venture
to provide a minimum return to the Partnership's limited partners on their
contributions. The Venture has assigned its rights under the guaranty agreement
to the Partnership. Payments on the guaranty are due ninety days following the
earlier of the sale or other disposition of all the properties and mortgage
loans and notes or the liquidation of the Partnership. The minimum return will
be an amount which, when added to the cumulative distributions to the limited
partners, will enable the Partnership to provide the limited partners with a
minimum return equal to their capital contributions plus a simple annual return
of 9.75% on their adjusted capital contributions, as defined in the Partnership
Agreement, calculated from the dates of the investor closings. The minimum
return is subject to reduction in the event that certain taxes, other than local
property taxes, are imposed on the Partnership or the Venture, and is also
subject to certain other limitations set forth in the prospectus. As of June 30,
1994, the cumulative minimum return (computed at 9.75% simple interest per annum
on the limited partners' capital contributions) was $66,305,648 plus the limited
partners' adjusted capital contributions. The guaranty amount is the minimum
return reduced by the semi-annual distributions of cash to the limited partners
of the Partnership. As of June 30, 1994, the cumulative amount of cash
distributions paid, other than cash distributions paid as a result of sale or
financing proceeds, was $11,662,621.
As of June 30, 1994, the cumulative amount of cash distributions paid as a
result of sale or financing proceeds received by the Venture was $1,421,155. To
the extent that future cash distributions to the limited partners are
insufficient to provide the specified minimum return, any shortfall will be
funded by the guarantor.
9
<PAGE> 11
PART II
<TABLE>
<S> <C>
Item 1. LEGAL PROCEEDINGS
Response: None
Item 2. CHANGES IN SECURITIES
Response: None
Item 3. DEFAULT UPON SENIOR SECURITIES
Response: None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Response: None
Item 5. OTHER INFORMATION
Response: None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
Response:
a) Exhibits:
10. Material Contracts
(1) Agreement between the Equitable Life Assurance
Society of the United States and Equitable Real Estate
Shopping Centers L.P. (including the First Amendment to
the Agreement, Termination and Release, and exhibits
thereto relating to the Northland transaction.
(Incorporated by reference to Exhibit 10.1 of the Report
on Form 10-Q for the quarter ended March 31, 1994 filed
by Equitable Real Estate Shopping Centers L.P. (File No.
1-9331)).
(2) Second Amendment to Agreement between The Equitable
Life Assurance Society of the United States and Equitable
Real Estate Shopping Centers L.P. relating to the
Northland transaction. (Incorporated by reference to
Exhibit 10.1 of the Report on Form 10-Q for the quarter
ended June 30, 1994 filed by Equitable Real Estate
Shopping Centers L.P. (File No. 1-9331)).
b) Reports: None
</TABLE>
10
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1994, the Partnership had cash and short-term investments of
approximately $2.4 million. Such cash and short-term investments are available
for distribution to the extent not required for participation with Equitable in
the Northland Center transaction, general working capital requirements, or for
payments of fees to the General Partners and their affiliates.
In addition at June 30, 1994, the Venture, in which the Partnership owns an
80% interest, had approximately $20.4 million in short-term investments. These
funds are intended to be utilized primarily to create reserves in connection
with the Northland Center transaction (including funding capital expenditures
and renovation expenses as described below), fund capital improvements at the
Venture's other Properties, and cover general working capital requirements.
Remaining funds are available for distribution to the Venture partners.
Cash received from tenant-related revenues decreased approximately $418,000
in comparison to the same period last year. This decrease is largely
attributable to the decision of a tenant at 16 Sentry Park West, which occupied
70,836 square feet of space, to not renew a lease which expired December, 1993.
Cash paid for operating activities for the six months ended June 30, 1994
increased approximately $196,000 in comparison to the same period last year.
Approximately $84,000 of this increase is due to fees paid to obtain a fairness
opinion from independent advisors in connection with the Northland transaction.
The remainder of this increase is due to a decrease in accrued operating
expenses.
FINANCIAL CONDITION
As a result of the Northland transaction, a receivable of approximately
$2.5 million was established, representing net income from the Northland Mall
for the period January through June 1994. The increase in other assets
(primarily rental income receivable) as of June 30, 1994 as compared to December
31, 1993 of approximately $3.3 million is attributable largely to the
establishment of the Northland Mall receivable. The remaining increase arises
from an increase in cash and short-term investments primarily due to cash flow
provided by operating activities. Liabilities remain approximately the same in
comparison to December 31, 1993.
RESULTS OF OPERATIONS
Rental related income for the six month period ended June 30, 1994
increased $6.7 million compared to the same period last year. This change is
primarily a result of $7.1 million of income representing six months of activity
from the Northland Mall and a decrease in income of approximately $408,000 due
to the loss of the tenant at 16 Sentry Park West.
Real estate related expenses increased approximately $4.7 million compared
to the same period last year. This change is primarily a result of $4.6 million
of expenses representing six months of activity attributable to Northland Mall.
Interest on short-term investments increased over the same period last year
due to an increase in funds being held upon the creation of reserves in
anticipation of cash requirements for the Northland Center transaction, which
includes capital improvements and renovation expenses, and due to a rise in
interest rates. Interest income on the zero coupon mortgage notes decreased
compared to the same period last year due to the non-accrual of interest
commencing June 30, 1993 on the Northland Zero note. This non-accrual of
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interest more than offsets an increase in interest attributable to the
compounding effect of the zero coupon investment on the Brookdale Center
mortgage.
Occupancy of the Venture's properties at June 30, 1994 increased to 93.5%
from the occupancy at December 31, 1993 of 91.8%.
As reported previously in the Partnership's Report on Form 10-K for the
period ended December 31, 1993, Management believes that significant capital
improvements to the Northland Center are needed to enhance the value and
marketability of the property. The owner declined to incur such expenses. On
March 25, 1994, an agreement was reached in connection with the Zero Notes. The
agreement provides for the transfer of the Northland Mall to Equitable and the
Venture in proportion to their respective interests in the mortgage; the payment
of $6.6 million to the owner (which is approximately equal to the net present
value of the anticipated cash flow of the Northland Center for the period from
January 1, 1994 through June 30, 1995, the maturity date of the Zero Notes),
subject to closing adjustments; and a modification of the Brookdale mortgage to
provide that if Brookdale Mall is sold prior to June 30, 1995, the borrower may
prepay the Zero Note and pay a defeasance fee equal to 75% of the amount, if
any, by which the sale price for the Brookdale Mall exceeds $45 million. In
addition, consummation of the transaction is subject to certain modification of
the agreement with Dayton Hudson, one of the existing anchor tenants, the
addition of a Montgomery Ward's as an additional anchor store, as well as
obtaining the consent of the limited partners of the owner and the agreement of
the Venture to participate in the transaction. Renovations and capital
improvements costing approximately $15 million are expected to be undertaken,
which amount will be expended by the Venture and Equitable in proportion to
their respective interests. On April 25, 1994, the Board of Directors of EREIM
Managers Corp., the Managing General Partner of the Partnership approved the
Partnership's participation in the Northland/Brookdale transaction. In
determining whether the proposed transaction is in the best interest of the
Partnership, the Managing General Partner engaged independent advisors including
a special counsel and Arthur Andersen & Co., S.C. Arthur Andersen rendered an
opinion to the Partnership that concluded that the proposed transaction is fair
from a financial point of view to the Partnership and the BAC holders.
Amendments to the March 25, 1994 agreement were approved by the Board of
Directors of EREIM Managers Corp. on June 23, 1994. The transaction was
consummated on July 22, 1994.
In connection with the transaction, a renovation program has commenced and
is expected to result in expenditures of approximately $6.5 million of which the
Venture's share is expected to be $4.6 million. In addition, costs expected to
be incurred in connection with the tenant leases are presently estimated at
approximately $2.8 million of which the Venture's share is expected to be
approximately $2.0 million. Additional costs are anticipated.
The borrower on the mortgage secured by the 300 Delaware property in
Wilmington, Delaware has been delinquent on monthly interest payments since
February 1994. Foreclosure of the property is being seriously considered.
Because the transaction has been accounted for as an in-substance foreclosure at
December 31, 1993, Management has estimated income for the six month period
ended June 30, 1994.
Inflation has been at relatively low levels during the periods presented in
the financial statements and as a result, has not had a significant effect on
the operations of the Partnership, the Venture or their investments. Although
the spread is small, inflation is continuing to exceed the rise in market rental
rates at many of the Venture's properties. In fact, at several of the Venture's
properties, market rental rates are decreasing. If this trend continues, the
increase in real estate operating expenses may exceed increases in rental
income.
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Investors should read the foregoing discussion in conjunction with the
consolidated financial statements and notes thereto.
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.
ML/EQ Real Estate Portfolio, L.P.
By: EREIM Managers Corp.
Managing General Partner
By: /s/ CLAIRE SNEDEKER
------------------------------------
Claire Snedeker
Vice President,
Chief Financial Officer
(Principal Accounting Officer)
Dated: August 15, 1994
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