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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, 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/EQ REAL ESTATE PORTFOLIO, L.P.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS GOVERNING INSTRUMENT)
<TABLE>
<S> <C>
NEW YORK 58-1739523
(STATE OF ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
1150 LAKE HEARN DR.; ATLANTA, GEORGIA 30342-1522
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
</TABLE>
(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
<TABLE>
<CAPTION>
PAGE NUMBERS
------------
<C> <S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated balance sheets at September 30, 1994 and
December 31, 1993................................................ 2
Consolidated statements of operations for the three and nine months
ended
September 30, 1994 and 1993...................................... 3
Consolidated statement of partners' capital for the nine months
ended
September 30, 1994............................................... 4
Consolidated statements of cash flows for the nine months ended
September 30, 1994 and 1993...................................... 5
Notes to consolidated financial statements......................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................ 10
PART II. OTHER INFORMATION
Items 1 through 6........................................................... 13
Signatures.................................................................. 14
</TABLE>
1
<PAGE> 3
ML/EQ REAL ESTATE PORTFOLIO, L.P.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1994 AND DECEMBER 31, 1993
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1994 1993
------------- ------------
<S> <C> <C>
ASSETS
Real Estate Investments (Note 4):
Rental properties......................................... $ 105,036,267 $ 70,939,638
Less accumulated depreciation............................. (9,200,809) (7,688,554)
------------- ------------
Net rental properties..................................... 95,835,458 63,251,084
Zero coupon mortgage note receivable...................... 23,530,361 21,831,834
Other real estate assets.................................. 8,500,000 37,017,363
Mortgage loans receivable................................. 6,000,000 6,000,000
------------- ------------
Total real estate investments..................... 133,865,819 128,100,281
------------- ------------
Other Assets:
Cash and short-term investments........................... 20,263,415 21,825,747
Rental income receivable.................................. 3,813,567 798,839
Interest income receivable................................ 67,347 120,851
Guaranty fee, net of accumulated amortization of
$1,529,646 in 1994 and $1,328,458 in 1993.............. 2,213,069 2,414,257
Deferred rent concessions................................. 1,585,324 1,513,100
Prepaid real estate taxes................................. 931,005 205,171
Other..................................................... 29,290 31,526
------------- ------------
Total other assets................................ 28,903,017 26,909,491
------------- ------------
Total Assets................................................ $ 162,768,836 $155,009,772
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Due to affiliates (Note 3)................................ $ 316,662 $ 543,014
Distributions declared.................................... -- 542,448
Accrued liabilities....................................... 2,771,871 394,691
Accrued capital expenditures.............................. 513,125 225,000
Security deposits and unearned rent....................... 845,315 276,298
------------- ------------
Total liabilities................................. 4,446,973 1,981,451
------------- ------------
Minority Interest in the Venture (Note 2)................... 30,935,961 29,740,464
------------- ------------
Partners' Capital:
General partners.......................................... 1,649,881 1,417,856
Initial limited partner................................... 6,350 6,174
Limited partners (5,424,225 BACs issued and
outstanding)........................................... 125,729,671 121,863,827
------------- ------------
Total partners' capital........................... 127,385,902 123,287,857
------------- ------------
Total Liabilities and Partners' Capital..................... $ 162,768,836 $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 NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS ENDED
ENDED SEPTEMBER 30, SEPTEMBER 30,
----------------------- -------------------------
1994 1993 1994 1993
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
Rental income............................. $5,195,847 $1,952,387 $15,768,095 $ 6,022,769
Interest on short-term investments........ 241,812 51,609 609,174 137,337
Interest on zero coupon mortgage
notes receivable....................... 585,104 529,697 1,698,527 3,243,125
Interest on mortgage loans receivable..... 153,750 758,906 461,250 2,276,719
---------- ---------- ----------- -----------
Total Revenue..................... 6,176,513 3,292,599 18,537,046 11,679,950
---------- ---------- ----------- -----------
Operating Expenses:
Depreciation.............................. 623,000 419,453 1,512,255 1,237,547
Real estate taxes......................... 664,610 220,677 1,973,476 683,630
Real estate operating expenses............ 2,242,799 315,151 6,637,902 954,810
Amortization.............................. 67,063 67,062 201,188 202,242
General and administrative, including
$807,065 and $783,716 at September 30,
1994 and 1993, respectively, to
affiliates (Note 3).................... 434,081 294,862 1,104,986 912,599
Bad debt expense on mortgage loans
receivable............................. -- 2,000,000 -- 3,500,000
Loss on write down of other real estate
assets (Note 4)........................ 1,000,000 -- 1,000,000 --
---------- ---------- ----------- -----------
Total Operating Expenses.......... 5,031,553 3,317,205 12,429,807 7,490,828
---------- ---------- ----------- -----------
Income Before Minority Interest............. 1,144,960 (24,606) 6,107,239 4,189,122
Minority Interest in Net Income of
Consolidated Venture...................... (321,856) (63,436) (1,466,746) (1,048,185)
---------- ---------- ----------- -----------
Net Income.................................. $ 823,104 $ (88,042) $ 4,640,493 $ 3,140,937
========= ========= ========== ==========
Allocation of Net Income:
General partners.......................... $ 41,155 $ (4,402) $ 232,025 $ 157,047
Initial limited partner................... 37 (4) 201 137
Limited partners.......................... 781,912 (83,636) 4,408,267 2,983,753
---------- ---------- ----------- -----------
Total............................. $ 823,104 $ (88,042) $ 4,640,493 $ 3,140,937
========= ========= ========== ==========
Net Income Per Limited Partner BAC.......... $ 0.14 $ (0.02) $ 0.81 $ 0.55
========= ========= ========== ==========
BACs Outstanding............................ 5,424,225 5,424,225 5,424,225 5,424,225
========= ========= ========== ==========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 5
ML/EQ REAL ESTATE PORTFOLIO, L.P.
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
FOR THE NINE MONTHS ENDED SEPTEMBER 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.................................... 232,025 201 4,408,267 4,640,493
Cash distributions............................ -- (25 ) (542,423) (542,448)
---------- ------- ------------ ------------
Balance, September 30, 1994................... $1,649,881 $6,350 $125,729,671 $127,385,902
========= ======= =========== ===========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 6
ML/EQ REAL ESTATE PORTFOLIO, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
1994 1993
----------- ----------
<S> <C> <C>
Cash Flows from Operating Activities:
Tenant rentals received...................................... $13,250,160 $5,762,420
Interest received............................................ 1,123,928 2,561,633
----------- ----------
Cash received from operations................................ 14,374,088 8,324,053
Cash paid for operating activities........................... (7,776,009) (2,906,764)
Cash distributions to Minority Interest...................... (271,249) (760,001)
----------- ----------
Net Cash Provided by Operating Activities...................... 6,326,830 4,657,288
----------- ----------
Cash Flows from Investing Activities:
Property improvements........................................ (6,804,266) (436,405)
----------- ----------
Net Cash Used in Investing Activities.......................... (6,804,266) (436,405)
----------- ----------
Cash Flows from Financing Activities:
Cash distributions to limited partners....................... (1,084,896) (2,169,790)
----------- ----------
Net Cash Used in Financing Activities.......................... (1,084,896) (2,169,790)
----------- ----------
Net Increase in Cash and Short-Term Investments................ (1,562,332) 2,051,093
Cash and Short-Term Investments at Beginning of Period......... 21,825,747 7,113,665
----------- ----------
Cash and Short-Term Investments at End of Period............... $20,263,415 $9,164,758
========== =========
Reconciliation of Net Income to Net Cash Provided by Operating
Activities:
Net income................................................... $ 4,640,493 $3,140,937
----------- ----------
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization and depreciation................................ 1,713,443 1,439,789
Bad debt expense on mortgage loans receivable................ -- 3,500,000
Loss on write down of other real estate assets............... 1,000,000 --
Minority Interest in Venture operations...................... 1,466,746 1,048,185
Cash distributions to Minority Interest...................... (271,249) (760,001)
Changes in assets (increase) decrease:
Interest accrual on zero coupon mortgage notes............ (1,698,527) (3,243,125)
Rental income receivable.................................. (3,014,728) (32,408)
Interest income receivable................................ 53,504 147,577
Deferred rent concessions................................. (72,224) (236,715)
Other assets.............................................. (723,598) (94,357)
Changes in liabilities increase (decrease):
Due to affiliates......................................... (226,352) (253,893)
Accrued liabilities....................................... 2,890,305 (7,475)
Tenant security deposits and unearned rent................ 569,017 8,774
----------- ----------
Total adjustments.................................... 1,686,337 1,516,351
----------- ----------
Net Cash Flow Provided by Operating Activities................. $ 6,326,830 $4,657,288
========== =========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 7
ML/EQ REAL ESTATE PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 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 September 30, 1994. Such adjustments were of a normal
recurring nature. 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.
Other Real Estate Assets
Other real estate assets at September 30, 1994 represent the fair market
value of the underlying collateral of the Bank of Delaware mortgage loan
receivable as such receivable was determined to be an in-substance foreclosure
at December 31, 1993 (See Note 4). Subsequent to the date of such determination,
the Partnership has recorded estimated operating revenues and expenses for the
Bank of Delaware. It is anticipated that the Venture will acquire the Bank of
Delaware building (the "Property") in the fourth
6
<PAGE> 8
ML/EQ REAL ESTATE PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
quarter, 1994 by a deed in lieu of foreclosure. Also determined to be an
in-substance foreclosure at December 31, 1993 was the Northland zero coupon loan
receivable. Recording of operating revenues and expenses for Northland was
delayed until second quarter when estimates became available. Subsequently, on
July 22, 1994, a deed in lieu of foreclosure was executed and accordingly, the
zero coupon loan receivable was reclassified from other real estate assets to
rental properties. Additionally, all other assets and liabilities of Northland
were recorded as of that date.
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 September 30,
1994 and December 31, 1993 the accrued balance of these fees and reimbursements
totaled $316,662 and $543,014, respectively. For each of the nine month periods
ended September 30, 1994 and 1993, the expense for these recurring fees totaled
$807,065 and $783,716, 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 September 30, 1994, the Partnership's rental properties consist of
the following:
<TABLE>
<CAPTION>
SQUARE PERCENTAGE
FEET LEASED
--------- ----------
<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 88%
Northland Mall, Southfield, Michigan............................ 1,292,694 88%
</TABLE>
Zero Coupon Mortgage Notes Receivable
The Venture holds a 71.66% participation interest in a zero mortgage note
and the first mortgage on Brookdale Center located outside of Minneapolis,
Minnesota which secures the note. The Venture acquired its participation
interest in 1988 from Equitable which holds the remaining 28.34% interest. The
Venture's participation interest had a fair value (including accrued interest)
at the time of acquisition of $12,278,885. The borrower is Equitable Real Estate
Shopping Centers L.P. ("ERESC"), a publicly traded limited partnership. The note
has an implicit interest rate of 10.2% compounded semi-annually with the entire
amount of principal and accrued interest totaling $25,345,353 due on June 30,
1995. The note provides that the borrower may elect to pay interest currently;
however, no interest has been paid to date. As part of the Northland Center
transaction (discussed below), the Brookdale mortgage was modified on July 22,
1994 to provide that, if ERESC sells Brookdale Center prior to June 30, 1995,
the outstanding principal and accrued
7
<PAGE> 9
ML/EQ REAL ESTATE PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
interest of the zero note will be paid at the time of sale, together with a
defeasance fee equal to 75% of the amount, if any, by which the sale price for
Brookdale Center exceeds $45 million.
Until July 22, 1994 the Venture also held a 71.66% participation interest
in a zero mortgage note and the first mortgage on Northland Center located
outside of Detroit, Michigan which secures the note. The Venture acquired its
participation interest in 1988 from Equitable which continues to hold the
remaining 28.34% interest. The Venture's participation interest had a fair value
(including accrued interest) at the time of acquisition of $20,774,985. The
borrower was ERESC. The note had an implicit interest rate of 10.2% compounded
semi-annually with the entire amount of principal and accrued interest totaling
$42,882,504 due on June 30, 1995. The note provided that the borrower could
elect to pay interest currently; however, no interest was paid through July 22,
1994.
Management discontinued the accrual of interest on the Northland note
during the quarter ended June 30, 1993 as the accreted value of the mortgage
approximated the underlying value of the Northland Center. The Northland note
and mortgage were accounted for as an in-substance foreclosure at December 31,
1993 and the zero note was reclassified as an other real estate asset. The
Venture recognized a loss of $7,628,000 as of December 31, 1993 to record
Northland Center at its fair market value. This amount included $4,730,000
reserved by the Venture as its share of the $6.6 million to be paid to ERESC on
the transfer of Northland Center (see below).
On July 22, 1994, ERESC transferred Northland Center to the Venture and
Equitable in proportion to their respective interests in the Northland mortgage.
Following the transfer, Northland Center was reclassified from other real estate
assets to rental properties. The transfer was effective as of January 1, 1994,
and income and expenses were adjusted as of that date. The Venture and Equitable
paid the owner $6.6 million at the time of transfer (an amount which is
approximately equal to the net present value of the anticipated cash flow from
Northland Center, subject to closing adjustments for the period from January 1,
1994 through June 30, 1995, the date the Northland mortgage would have matured).
As part of the transaction, the Brookdale mortgage was modified as discussed
above.
In connection with the transfer of Northland Center, the Venture and
Equitable modified the agreement with Dayton Hudson, which operates one of the
anchor stores at Northland Center, and entered into an agreement to add
Montgomery Ward as an additional anchor. The Venture and Equitable have also
commenced a renovation program at Northland Center. The construction costs of
the renovations are expected to be approximately $12.0 million, of which the
Venture's share is expected to be approximately $8.6 million. As of September
30, 1994, approximately $1.1 million of these costs had been funded, of which
the Venture's share was approximately $813,000.
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).
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.
8
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ML/EQ REAL ESTATE PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 and the mortgage loan receivable was reclassified to other
real estate assets at its estimated fair market value as of that date. During
the quarter ended September 30, 1994, new estimates became available and the
Venture incurred a loss of $1,000,000 due to valuing the assets relating to
Three Hundred Delaware Avenue Associates at the most recent estimated fair
market value. It is anticipated that the Venture will acquire title to the Bank
of Delaware building in the fourth quarter, 1994 by a deed in lieu of
foreclosure. In connection with the proposed deed in lieu transaction, it is
anticipated that the Venture will also receive $350,000 plus all of the cash in
the Property's operating account (approximately $300,000) as consideration for
the release of the borrower and all its affiliates from any liability associated
with the Property including any environmental liability but excluding any breach
of representations given by the borrower in the deed in lieu agreement. Included
in the release would be any liability arising pursuant to an environmental
indemnity given by the borrower in connection with the mortgage on the Property.
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
September 30, 1994, the cumulative minimum return (computed at 9.75% simple
interest per annum on the limited partners' capital contributions) was
$68,923,436 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 September 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 September 30, 1994, the cumulative amount of cash distributions paid
as a result of sale or financing proceeds received by the Venture was
$1,963,603. 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
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1994, the Partnership had cash and short-term
investments of approximately $1.8 million. Such cash and short-term investments
are available for distribution to the extent not required for participation with
Equitable in the Northland Center renovation program, for general working
capital requirements, or for payments of fees to the General Partners and their
affiliates.
In addition at September 30, 1994, the Venture, in which the Partnership
owns an 80% interest, had approximately $18.5 million in short term investments.
These funds are intended to be utilized primarily to fund the Northland Center
renovation program, to fund capital improvements at the Venture's other
Properties, and to cover general working capital requirements. Remaining funds
are available for distribution to the Venture partners.
Cash received from tenant-related revenues increased approximately $7.5
million in comparison to the same period last year. This change is largely
attributable to the cash flow from Northland Center of approximately $7.7
million. This increase is offset by a decrease in cash flow from 16 Sentry Park
West, due to the decision of a tenant which occupied 70,836 square feet of
space, to not renew a lease which expired December, 1993.
Interest received for the nine months ended September 30, 1994 decreased as
compared to the same period last year due to the early payoff on the mortgage
loan to Second Merritt Seven Joint Venture in the fourth quarter of 1993.
Cash paid for operating activities for the nine months ended September 30,
1994 increased approximately $4.9 million in comparison to the same period last
year. This change is due to Northland's cash outflows of approximately $4.6
million for the nine months ended September 30, 1994 and expenditures of
approximately $230,000 for professional fees incurred in connection with the
Northland transaction.
FINANCIAL CONDITION
As a result of the Northland transaction, the related assets totaling
approximately $27.5 million were reclassified from other real estate assets to
rental properties. Additionally, a capital outlay of $6.6 million representing
the net present value of the anticipated cash flow from Northland Center for the
period from January 1, 1994 through June 30, 1995, the original maturity date of
the zero note, was incurred. The Venture's share of this capital expense was
approximately $4.7 million.
The increase in total other assets at September 30, 1994 as compared to
December 31, 1993 is due primarily to an increase in rental income receivable
and other assets, which is partially offset by a decrease in cash and short-term
investments. Rental income receivable and other assets have increased as
compared to December 31, 1993 due to the assets undertaken as a result of the
transfer of Northland Center to the Venture. The decrease in cash and short-term
investments as compared to December 31, 1993 is mainly a result of the cash
outlay relating to the Northland Center renovation program of approximately
$813,000 as of September 30, 1994 and two $0.10 per unit cash distributions
which represent return of capital to the partners.
Total liabilities have increased as compared to December 31, 1993 due to
the liabilities undertaken as a result of the transfer of Northland Center to
the Venture.
RESULTS OF OPERATIONS
Rental related income for the nine month period ended September 30, 1994
increased $9.7 million compared to the same period last year. This change is
primarily a result of $10.5 million of income representing nine months of
activity from the Northland Mall and a decrease in income of approximately
$800,000 due to vacancy at 16 Sentry Park West.
10
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
Real estate related expenses excluding depreciation, amortization, bad debt
expense, and loss on write down of other real estate assets increased
approximately $7.2 million compared to the same period last year. This change is
primarily a result of $6.9 million of expenses representing nine months of
operating activity attributable to Northland Center and approximately $230,000
of professional fees incurred in connection with the Northland transaction.
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 also 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
interest more than offsets an increase in interest attributable to the
compounding effect of the Brookdale zero coupon note.
Occupancy of the Venture's properties excluding Northland Center at
September 30, 1994 increased to 92.7% from the occupancy at December 31, 1993 of
91.8%. The occupancy at Northland Center as of September 30, 1994 is 87.5%
bringing total occupancy including Northland Center at September 30, 1994 to
90.3%.
Richland Mall, a community shopping center owned by the Venture, lost three
mall tenants during the quarter ended September 30, 1994. Two of the tenants,
Fashion Colony and We're Toys Too, are in bankruptcy. The third tenant, Kinney
Shoes, has vacated its space, but is continuing to pay rent. As a result,
overall occupancy at the mall dropped during the quarter from 93% to 88%, and
occupancy of the mall stores (excluding space occupied by retail anchors Hess
and Clemen's) dropped during the quarter from 84% to 68%. In an unrelated
development, the Hess department store chain has been purchased by Bon-Ton
department stores. Bon-Ton is similar to Hess in style of merchandise and price
points, and should be a suitable replacement for Hess. Bon-Ton has represented
to property management that they are committed to Richland Mall, and will
continue to operate in Richland Mall. A name change by the anchor is expected
mid-1995. Management is currently reviewing its strategies with respect to
Richland Mall, including leasing and marketing plans, in an effort to improve
occupancy.
On July 22, 1994 the owner of Northland Center, ERESC, transferred the
property to the Venture and Equitable in proportion to their respective
interests in the Northland mortgage. The transfer was effective as of January 1,
1994, and income and expenses were adjusted as of that date. The Venture and
Equitable paid ERESC $6.6 million at the time of transfer (an amount which is
approximately equal to the net present value of the anticipated cash flow from
the Northland Center, subject to closing adjustments, for the period from
January 1, 1994 through June 30, 1995, the date the Northland mortgage would
have matured). As part of the transaction, the Brookdale mortgage was modified
to provide that if Brookdale Center is sold prior to June 30, 1995, the
outstanding principal and accrued interest of the zero note will be paid at the
time of sale together with payment of a defeasance fee equal to 75% of the
amount, if any, by which the sale price for Brookdale Center exceeds $45
million.
In connection with the transfer, the Venture and Equitable modified the
agreement with Dayton Hudson, which operates one of the anchor stores at
Northland Center, and entered into an agreement to add Montgomery Ward as an
additional anchor. The Venture and Equitable have also commenced a renovation
program at Northland Center. The construction costs of the renovations are
expected to be approximately $12.0 million, of which the Venture's share is
expected to be approximately $8.6 million. As of September 30, 1994,
approximately $1.1 million of these costs had been funded, of which the
Venture's share was approximately $813,000.
Management believes that the transfer of the Northland Center prior to the
maturity of the Northland mortgage, the modification of the Dayton Hudson
agreement, the addition of the Montgomery Ward
11
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
agreement and the commencement of the renovation program at Northland Center are
needed to enhance the value and marketability of the property. In determining
whether the transaction was in the best interest of the Partnership, the
Managing General Partner engaged independent advisors, including special counsel
and Arthur Andersen & Co., S.C. Arthur Andersen rendered an opinion to the
Partnership in connection with the transaction concluding that the transaction
was fair from a financial point of view to the Partnership and the BAC holders.
The borrower on the mortgage secured by the Three Hundred Delaware property
in Wilmington, Delaware has been delinquent on monthly interest payments since
February 1994 and has stated that it will not commit additional funds to
maintain or improve the Bank of Delaware building (the "Property"). Because the
transaction has been accounted for as an in-substance foreclosure at December
31, 1993, Management has estimated income and expenses for the nine month period
ended September 30, 1994. In addition, the Venture has recognized a loss of
$1,000,000 to write the assets to the most recent estimated fair market value.
It is anticipated that the Venture will acquire title to the Bank of Delaware
building in the fourth quarter 1994 by a deed in lieu of foreclosure. In
connection with the proposed deed in lieu transaction, it is anticipated that
the Venture will also receive $350,000 plus all of the cash in the Property's
operating account (approximately $300,000) as consideration for the release of
the borrower and all of its affiliates from any liability associated with the
property including any environmental liability but excluding any breach of
representations given by the borrower in the deed in lieu agreement. Included in
the release would be any liability arising pursuant to an environmental
indemnity given by the borrower in connection with the mortgage on the Property
which covered, among other things, asbestos at the Property. The borrower has
removed or properly encapsulated approximately 65% of the asbestos at the
Property. Management believes, based on the recommendation of an independent
environmental consultant, that an operations and maintenance program is the most
prudent method of managing the remaining asbestos. The cost of the operations
and maintenance program is estimated to be approximately $3,000 for the first
year and approximately $2,000 per annum thereafter. In the event the asbestos is
required to be removed in connection with renovations, demolition or repairs at
the Property, the Venture could incur substantial costs. Other than renovation
work to be performed in connection with a proposed lease for 5,000 square feet,
no such renovations, demolition or repairs are currently required in the areas
containing asbestos. Market conditions may, however, necessitate removal of
asbestos on a selective basis in the future. Management believes that the
transaction is in the best interest of the Partnership because it will allow the
Venture to acquire immediate control of the Property without a prolonged,
contested foreclosure or bankruptcy, or both, which could (1) adversely affect
the leasing efforts at the Property, (2) prevent or impair the collection of
rents by the Venture during the litigation, and (3) cause the Venture to incur
substantial legal fees in acquiring title.
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. If this trend continues, the increase
in real estate operating expenses may exceed increases in rental income.
Investors should read the foregoing discussion in conjunction with the
consolidated financial statements and notes thereto.
12
<PAGE> 14
PART II
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: None
b) Reports: None
13
<PAGE> 15
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: November 14, 1994
14
<PAGE> 16
EXHIBIT INDEX
Exhibit No. Description
- - - ----------- ---------------------------------------------------------------
27 Financial Data Schedule (for SEC filing purposes only)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF ML/EQ REAL ESTATE PORTFOLIO LP FOR THE PERIOD ENDED
SEPTEMBER 30, 1994, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> SEP-30-1994
<CASH> 20,263,415
<SECURITIES> 0
<RECEIVABLES> 3,880,914
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 28,903,017
<PP&E> 105,036,267
<DEPRECIATION> 9,200,809
<TOTAL-ASSETS> 162,768,836
<CURRENT-LIABILITIES> 4,446,973
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 127,385,902
<TOTAL-LIABILITY-AND-EQUITY> 162,768,836
<SALES> 0
<TOTAL-REVENUES> 18,357,046
<CGS> 0
<TOTAL-COSTS> 8,611,378
<OTHER-EXPENSES> 2,818,429
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 6,107,239
<INCOME-TAX> 0
<INCOME-CONTINUING> 4,640,493
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,640,493
<EPS-PRIMARY> .81
<EPS-DILUTED> 0
</TABLE>
