<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 March 31, 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
----- -----
<PAGE> 2
ML/EQ REAL ESTATE PORTFOLIO, L.P.
CONTENTS
PART I - FINANCIAL INFORMATION
<TABLE>
<S> <C>
Item 1 - Financial statements:
Consolidated balance sheets at March 31, 1994 and
December 31, 1993
Consolidated statements of operations for the three months
ended March 31, 1994 and 1993
Consolidated statement of partners' capital for the three
months ended March 31, 1994
Consolidated statements of cash flows for the three months
ended March 31, 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
Items 1 through 6
Signatures
<PAGE> 3
ML/EQ REAL ESTATE PORTFOLIO, L.P.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1994 AND DECEMBER 31, 1993
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1994 1993
--------------- ---------------
<S> <C> <C>
REAL ESTATE INVESTMENTS (Note 4):
Rental properties $ 71,321,782 $ 70,939,638
Less accumulated depreciation (8,156,994) (7,688,554)
------------ ------------
Net rental properties 63,164,788 63,251,084
Zero coupon mortgage notes receivable 22,388,545 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 128,570,696 128,100,281
------------ ------------
OTHER ASSETS:
Cash and short-term investments 21,647,746 21,825,747
Rental income receivable 691,669 798,839
Interest income receivable 31,000 120,851
Guaranty fee, net of accumulated amortization of
$1,395,521 in 1994 and $1,328,458 in 1993 (Note 3 and 5) 2,347,194 2,414,257
Deferred rent concessions 1,542,657 1,513,100
Other 344,095 236,697
------------ ------------
Total other assets 26,604,362 26,909,491
------------ ------------
TOTAL ASSETS $155,175,057 $155,009,772
============ ============
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Due to affiliates (Note 3) $ 265,010 $ 543,014
Distributions declared - 542,448
Accrued liabilities 384,006 394,691
Accrued capital expenditures - 225,000
Security deposits and unearned rent 389,398 276,298
------------ ------------
Total liabilities 1,038,414 1,981,451
------------ ------------
MINORITY INTEREST IN THE VENTURE (Note 2) 29,918,578 29,740,464
------------ ------------
PARTNERS' CAPITAL:
General partners 1,464,366 1,417,856
Initial limited partner 6,215 6,174
Limited partners (5,424,225 BACs issued and outstanding) 122,747,484 121,863,827
------------ ------------
Total partners' capital 124,218,065 123,287,857
------------ ------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $155,175,057 $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 MONTHS ENDED MARCH 31, 1994 AND 1993
(unaudited)
<TABLE>
<CAPTION>
For the three months
ended March 31,
----------------------
REVENUE: 1994 1993
------------ --------------
<S> <C> <C>
Rental income $1,780,672 $2,004,108
Interest on short-term investments 124,296 44,312
Interest on zero coupon mortgage notes receivable 556,711 1,356,714
Interest on mortgage loans receivable 153,750 758,906
---------- ----------
TOTAL REVENUE 2,615,429 4,164,040
---------- ----------
OPERATING EXPENSES:
Depreciation 468,440 406,181
Real estate taxes 220,648 231,859
Real estate operating expenses 333,548 321,868
Amortization 67,063 68,117
General and administrative, including $250,221 and $258,368 at
March 31, 1994 and 1993, respectively, to affiliates (Note 3) 281,771 297,494
Bad debt expense on mortgage loans receivable (Note 4) - 1,500,000
---------- ----------
TOTAL OPERATING EXPENSES 1,371,470 2,825,519
---------- ----------
INCOME BEFORE MINORITY INTEREST 1,243,959 1,338,521
MINORITY INTEREST IN NET INCOME OF
CONSOLIDATED VENTURE (313,751) (336,546)
---------- ----------
NET INCOME $ 930,208 $1,001,975
========== ==========
ALLOCATION OF NET INCOME:
General partners $ 46,510 $ 50,099
Initial limited partner 41 44
Limited partners 883,657 951,832
---------- ----------
TOTAL $ 930,208 $1,001,975
========== ==========
NET INCOME PER LIMITED PARTNER BAC $ 0.16 $ 0.18
=========== ==========
WEIGHTED AVERAGE BACs OUTSTANDING 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 THREE MONTHS ENDED MARCH 31, 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 46,510 41 883,657 930,208
---------- ------ ------------- -------------
Balance, March 31, 1994 $1,464,366 $6,215 $122,747,484 $124,218,065
========= ====== =========== ===========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 6
ML/EQ REAL ESTATE PORTFOLIO, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1994 AND 1993
(unaudited)
<TABLE>
<CAPTION>
March 31, March 31,
CASH FLOWS FROM OPERATING ACTIVITIES: 1994 1993
------------- -------------
<S> <C> <C>
Tenant rentals received $ 1,971,385 $ 2,053,495
Interest received 367,897 927,100
----------- -----------
Cash received from operations 2,339,282 2,980,595
Cash paid for operating activities (1,232,034) (1,079,549)
Cash distributions to Minority Interest (135,657) (760,000)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 971,591 1,141,046
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property improvements (607,144) (130,061)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (607,144) (130,061)
----------- -----------
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 DECREASE IN CASH AND
SHORT-TERM INVESTMENTS (178,001) (1,158,805)
CASH AND SHORT-TERM INVESTMENTS AT
BEGINNING OF PERIOD 21,825,747 7,113,665
----------- -----------
CASH AND SHORT-TERM INVESTMENTS AT
END OF PERIOD $21,647,746 $ 5,954,860
=========== ===========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 7
ML/EQ REAL ESTATE PORTFOLIO, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1994 AND 1993
(unaudited)
<TABLE>
<CAPTION>
RECONCILIATION OF NET INCOME TO NET CASH March 31, March 31,
PROVIDED BY OPERATING ACTIVITIES: 1994 1993
------------------- ------------------
<S> <C> <C>
Net income $930,208 $1,001,975
------- ---------
Adjustments to reconcile net income
to net cash provided by operating
activities:
Amortization and depreciation 535,503 474,298
Bad debt expense on mortgage loans receivable - 1,500,000
Minority Interest in Venture operations 313,751 336,546
Cash distributions to Minority Interest (135,637) (760,000)
Changes in assets (increase) decrease:
Interest accrual on zero coupon mortgage notes (556,711) (1,356,714)
Rental income receivable 107,170 169,281
Interest income receivable 89,851 123,881
Deferred rent concessions (83,090) (67,705)
Other assets (53,865) 46,699
Changes in liabilities increase (decrease):
Due to affiliates (278,004) (265,842)
Accrued liabilities (10,685) (9,185)
Tenant security deposits and unearned rent 113,100 (52,188)
------- ---------
Total adjustments 41,383 139,071
------- ---------
NET CASH FLOW PROVIDED BY OPERATING
ACTIVITIES $971,591 $1,141,046
======= =========
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 8
ML/EQ REAL ESTATE PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 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 the 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 March 31, 1994. 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 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 (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. The Partnership did not record operating results for
Northland, because no reliable estimates are currently available.
Management believes that such results, once known, will favorable impact
the Partnership's net income.
7
<PAGE> 9
ML/EQ REAL ESTATE PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1994
(unaudited)
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 March 31, 1994 and December 31, 1993 the accrued balance
of these fees and reimbursements totalled $265,010 and $543,014,
respectively. For each of the three month periods ended March 31, 1994
and 1993, the expense for these recurring fees totalled $250,221 and
$258,368, 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 March 31, 1994, the Partnership's rental properties consist of the
following:
<TABLE>
<CAPTION>
Square Lease
Feet Percentage
--------- ----------
<S> <C> <C>
Office
16 and 18 Sentry Park West,
Montgomery County, Pennsylvania 190,616 60%
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 93%
Retail
Richland Mall, Richland Township,
Pennsylvania 182,408 97%
</TABLE>
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. 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 semiannually with the
entire amount of principal and accrued interest totalling $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, it is expected that interest
8
<PAGE> 10
ML/EQ REAL ESTATE PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1994
(unaudited)
4. REAL ESTATE INVESTMENTS (Continued)
payments will be deferred until maturity. Management discontinued the
accrual of interest during the quarter ended June 30, 1993 on the
Northland note as the accreted value of the mortgage approximates the
underlying value.
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 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); 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 consummation of the transaction is subject to certain conditions,
including modification of the agreement with Dayton Hudson, one of the
existing anchor tenants, the addition of 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. 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.
Such transaction was accounted for as an in-substance foreclosure at
December 31, 1993 and is classified as an other real estate asset. The
Partnership 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 Venture's share of the
payment to be made by the Partnership at closing to terminate the
mortgage. The closing is currently anticipated to occur in 1994.
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). The unaudited financial statements for the quarter ended
March 31, 1994 included in the ERESC Report on Form 10-Q for such
quarter are incorporated herein by reference.
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
9
<PAGE> 11
ML/EQ REAL ESTATE PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1994
(unaudited)
4. REAL ESTATE INVESTMENTS (Continued)
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 in February, March and April 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 current fair market value.
5. GUARANTY AGREEMENT
EREIM LP Associates entered into a guaranty agreement with the Venture
to provide a minimum return to the Partnership's limited partners on
their contributions. The Venture 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 March 31, 1994, the cumulative minimum return
(computed at 9.75% simple interest per annum on the limited partners'
capital contributions) was $63,703,129 plus the limited partners'
original 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 March 31, 1994, the cumulative
amount of cash distributions paid other than cash distributions paid as
a result of sale of financing proceeds was $11,662,621. As of March 31,
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.
10
<PAGE> 12
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
None
b) Reports
None
</TABLE>
11
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
As of March 31, 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 proposed Northland Center transaction,
general working capital requirements or for payments of fees to the General
Partners and their affiliates.
In addition, at March 31, 1994, the Venture, in which the
Partnership owns an 80% interest, had approximately $19.2 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 and cash paid for
operating activities for the three months ended March 31, 1994 remained
approximately the same in comparison to the same period last year.
Financial Condition
The decrease in liabilities of approximately $950,000 at March 31,
1994, as compared to December 31, 1993, is primarily attributable to the
semi-annual payment of distributions to BAC holders and limited partners of
$542,448 and the semi-annual payment of fees to affiliates, $278,004, in the
first quarter.
Results of Operations
Rental related income for the three month period ended March 31,
1994 decreased approximately 11.5% in comparison to the same period last year.
The decrease is primarily due to the decision by a tenant not to renew a
lease which expired in December 1993 for 70,836 square feet of space at the
16/18 Sentry Park West property.
Interest on short-term investments increased over the same period
primarily as a result of an increase of 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.
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 offset 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 March 31, 1994 decreased
slightly to 89.7% from the occupancy at December 31, 1993 of 96.5%.
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 has 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 amount is
approximately equal to the 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); 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 consummation of the transaction is subject to certain conditions,
including modification of the agreement with Dayton Hudson, one of the
existing anchor tenants, the addition of 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
12
<PAGE> 14
transaction. Renovations and capital improvements costing approximately $15
million will 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 special counsel and Arthur
Andersen & Co. 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. Prior to acquiring title to the
Northland Center, Equitable and the Venture may expend funds for capital
improvements and renovations to the Northland Center.
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.
Although Management does not have access to current financial information
regarding operating expenses and income and capital expenditures that may be
required by the owner, because the transaction has been accounted for as an
in-substance foreclosure at December 31, 1993, Management has estimated net
income for the quarter.
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.
Investors should read the foregoing discussion in conjunction with
the consolidated financial statements and notes thereto.
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/ Peter J. Urdanick
-----------------------------
Peter J. Urdanick
Vice President, Controller
and Treasurer
(Principal Accounting Officer)
Dated: May 15, 1994
14
