<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 September 30, 1995
------------------
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)
Delaware 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)
(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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<PAGE> 2
ML/EQ REAL ESTATE PORTFOLIO, L.P.
CONTENTS
PART I - FINANCIAL INFORMATION
Item 1 - Financial statements:
Consolidated balance sheets at September 30, 1995
and December 31, 1994
Consolidated statements of operations for the
three and nine months ended September 30, 1995 and
1994
Consolidated statement of partners' capital for
the nine months ended September 30, 1995
Consolidated statements of cash flows for the nine
months ended September 30, 1995 and 1994
Notes to consolidated financial statements
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II - OTHER INFORMATION
Items 1 through 6
Signatures
<PAGE> 3
ML/EQ REAL ESTATE PORTFOLIO, L.P.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1995 AND DECEMBER 31, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------- ------------
<S> <C> <C>
ASSETS
Real Estate Investments (Note 4):
Rental properties............................................... $ 123,806,892 $119,650,903
Less accumulated depreciation................................... (11,885,696) (9,875,416)
------------- ------------
Net rental properties........................................ 111,921,196 109,775,487
Zero coupon mortgage note receivable, net of valuation allowance
of $3,232,210 in 1995........................................ 21,498,199 24,115,465
Mortgage loan receivable........................................ 6,000,000 6,000,000
------------- ------------
Total real estate investments........................... 139,419,395 139,890,952
------------- ------------
Other Assets:
Cash and short-term investments................................. 20,143,375 21,538,416
Rental income receivable........................................ 2,634,163 1,996,909
Deferred rent concessions....................................... 1,962,352 1,752,428
Guaranty fee, net of accumulated amortization of $1,797,897 in
1995 and $1,596,709 in 1994 (Notes 3 and 5).................. 1,944,818 2,146,006
Interest income receivable...................................... 143,111 84,521
Other........................................................... 938,755 600,030
------------- ------------
Total other assets...................................... 27,766,574 28,118,310
------------- ------------
Total Assets............................................ $ 167,185,969 $168,009,262
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accrued liabilities............................................. $ 1,706,591 $ 1,938,448
Security deposits and unearned rent............................. 806,686 486,284
Accrued capital expenditures.................................... 498,016 2,948,006
Due to affiliates (Note 3)...................................... 305,156 605,618
Distributions declared.......................................... -- 813,671
------------- ------------
Total liabilities....................................... 3,316,449 6,792,027
------------- ------------
Minority Interest in the Venture.................................. 32,046,890 31,742,095
------------- ------------
Commitments and Contingent Liabilities (Note 5)
Partners' Capital:
General partners................................................ 1,953,082 1,795,026
Initial limited partner......................................... 6,580 6,442
Limited partners (5,424,225 BACs issued and outstanding)........ 129,862,968 127,673,672
------------- ------------
Total partners' capital................................. 131,822,630 129,475,140
------------- ------------
Total Liabilities and Partners' Capital................. $ 167,185,969 $168,009,262
=========== ===========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
ML/EQ REAL ESTATE PORTFOLIO, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------- -------------------------
1995 1994 1995 1994
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
Rental income................................. $4,944,210 $5,195,847 $15,620,214 $15,768,095
Lease termination rental income (Note 6)...... 111,205 -- 1,487,433 --
Interest on zero coupon mortgage note
receivable.................................. -- 585,104 614,944 1,698,527
Interest on mortgage loan receivable.......... 153,750 153,750 461,250 461,250
Interest on short-term investments............ 289,381 241,812 872,971 609,174
---------- ---------- ----------- -----------
Total Revenue....................... 5,498,546 6,176,513 19,056,812 18,537,046
---------- ---------- ----------- -----------
Operating Expenses:
Depreciation.................................. 745,203 623,000 2,190,933 1,512,255
Real estate operating expenses................ 2,061,109 2,146,939 5,956,783 6,345,334
Real estate taxes............................. 586,559 664,610 1,824,074 1,973,476
Property management fees (Note 3)............. 114,908 95,860 373,642 292,568
Amortization.................................. 67,063 67,063 201,188 201,188
General and administrative, including $906,814
and $807,065 at September 30, 1995 and 1994,
respectively, to affiliates (Note 3)........ 335,043 434,081 1,037,062 1,104,986
Provision for impairment on zero coupon
mortgage (Note 4)........................... 3,232,210 -- 3,232,210 --
Loss on write-down of other real estate assets
(Note 4).................................... -- 1,000,000 -- 1,000,000
---------- ---------- ----------- -----------
Total Operating Expenses............ 7,142,095 5,031,553 14,815,892 12,429,807
---------- ---------- ----------- -----------
Income (Loss) Before Minority Interest........ (1,643,549) 1,144,960 4,240,920 6,107,239
Minority Interest in Net (Income) loss of
Consolidated Venture........................ 253,800 (321,856) 1,079,796 (1,466,746)
---------- ---------- ----------- -----------
Net Income (Loss)............................. $(1,389,749) $ 823,104 $ 3,161,124 $ 4,640,493
========= ========= ========== ==========
Allocation of Net Income (Loss):
General partners......................... $ (69,488) $ 41,155 $ 158,056 $ 232,025
Initial limited partner.................. (61) 37 138 201
Limited partners......................... (1,320,200) 781,912 3,002,930 4,408,267
---------- ---------- ----------- -----------
Total............................... $1,389,749 $ 823,104 $ 3,161,124 $ 4,640,493
========= ========= ========== ==========
Net Income (Loss) Per Limited Partner BAC..... $ (0.24) $ 0.14 $ 0.55 $ 0.81
Weighted Average BACs Outstanding............. 5,424,225 5,424,225 5,424,225 5,424,225
========= ========= ========== ==========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
ML/EQ REAL ESTATE PORTFOLIO, L.P.
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
INITIAL
GENERAL LIMITED LIMITED
PARTNERS PARTNER PARTNERS TOTAL
---------- ------ ------------ ------------
<S> <C> <C> <C> <C>
Balance, December 31, 1994............. $1,795,026 $6,442 $127,673,672 $129,475,140
Net income............................. 158,056 138 3,002,930 3,161,124
Distributions.......................... -- -- (813,634) (813,634)
---------- ------ ------------ ------------
Balance, September 30, 1995............ $1,953,082 $6,580 $129,862,968 $131,822,630
========= ====== =========== ===========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
ML/EQ REAL ESTATE PORTFOLIO, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
--------------------------
1995 1994
------------ -----------
<S> <C> <C>
Cash Flows From Operating Activities:
Tenant rentals received.......................................... $ 16,580,871 $13,250,160
Interest received................................................ 1,275,631 1,123,928
------------ -----------
Cash received from operations.................................... 17,856,502 14,374,088
Cash paid for operating activities............................... (10,062,605) (7,776,009)
Cash distributions to Minority Interest.......................... (775,000) (271,249)
------------ -----------
Net Cash Provided by Operating Activities.......................... 7,018,897 6,326,830
------------ -----------
Cash Flows From Investing Activities:
Purchases and additions to rental properties..................... (6,786,633) (6,804,266)
------------ -----------
Net Cash Used in Investing Activities.............................. (6,786,633) (6,804,266)
------------ -----------
Cash Flows From Financing Activities:
Cash distributions to limited partners........................... (1,627,305) (1,084,896)
------------ -----------
Net Cash Used in Financing Activities.............................. (1,627,305) (1,084,896)
------------ -----------
Net Decrease in Cash and Short-Term Investments.................... (1,395,041) (1,562,332)
Cash and Short-Term Investments at Beginning of Period............. 21,538,416 21,825,747
------------ -----------
Cash and Short-Term Investments at End of Period................... $ 20,143,375 $20,263,415
=========== ==========
Reconciliation of Net Income to Net Cash Provided by Operating
Activities:
Net income....................................................... $ 3,161,124 $ 4,640,493
------------ -----------
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization and depreciation................................. 2,392,121 1,713,443
Provision for impairment on zero coupon mortgage.............. 3,232,210 --
Loss on write-down of other real estate assets................ -- 1,000,000
Minority Interest in Venture operations....................... 1,079,796 1,466,746
Cash distributions to Minority Interest....................... (775,000) (271,249)
Changes in assets (increase) decrease:
Interest accrual on zero coupon mortgage note receivable.... (614,944) (1,698,527)
Rental income receivable.................................... (637,254) (3,014,728)
Deferred rent concessions................................... (209,924) (72,224)
Interest income receivable.................................. (58,590) 53,504
Other assets................................................ (338,725) (723,598)
Changes in liabilities increase (decrease):
Accrued liabilities......................................... (231,857) 2,890,305
Tenant security deposits and unearned rent.................. 320,402 569,017
Due to affiliates........................................... (300,462) (226,352)
------------ -----------
Total adjustments........................................ 3,857,773 1,686,337
------------ -----------
Net Cash Flow Provided by Operating Activities..................... $ 7,018,897 $ 6,326,830
=========== ==========
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 7
ML/EQ REAL ESTATE PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
(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 consolidated financial statements of the Partnership included herein
have been prepared by the Partnership pursuant to the rules and regulations of
the Securities and Exchange Commission. In the opinion of Management, the
accompanying unaudited consolidated financial statements reflect all
adjustments, which are of a normal recurring nature, to present fairly the
Partnership's financial position, results of operations and cash flows at the
dates and for the periods presented. These consolidated financial statements
should be read in conjunction with the Partnership's audited financial
statements and notes thereto included in the Partnership's Annual Report on Form
10-K for the year ended December 31, 1994. Interim results of operations are not
necessarily indicative of results to be expected for the fiscal year.
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.
The Venture owns 71.66% of Northland Center which is located in Southfield,
Michigan. Equitable owns the remaining 28.34%. The Venture records its
proportionate share of the assets, liabilities, revenues, and expenses of the
undivided interests in Northland Center.
7
<PAGE> 8
ML/EQ REAL ESTATE PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Accounting for Impairment of a Loan
As of January 1, 1995, the Partnership adopted Statement of Financial
Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan,
as amended. The Partnership measures impairment of the zero coupon mortgage note
receivable and mortgage loan receivable based upon the fair value of the
underlying collateral. If the Venture's portion of the fair value of the
collateral declines below the recorded investment in the loans, impairment will
be recognized through the creation of a valuation allowance. Interest income on
the zero coupon mortgage note receivable is recognized to the extent that the
accreted value of the note does not exceed the value of the underlying
collateral. Interest income on the mortgage loan receivable is recognized as
earned. As of September 30, 1995, the Venture created a valuation allowance of
$3,232,210 for the zero coupon mortgage note (see Note 4). The mortgage loan
receivable is not considered impaired as of September 30, 1995.
Reclassifications
Certain prior year amounts have been reclassified to conform with the
September 1995 presentation.
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,
1995, and December 31, 1994, the accrued balance of these fees and
reimbursements totaled $305,156 and $605,618, respectively. For each of the nine
month periods ended September 30, 1995 and 1994, the expense for these recurring
fees totaled $906,814 and $807,065, respectively. These amounts are included in
the statements of operations as components of general and administrative
expense.
Properties are managed and leased by either third-party managing and
leasing agents or by affiliates of Equitable Real Estate, Compass Management and
Leasing, Inc. ("Compass") and Compass Retail, Inc. ("Compass Retail"). Property
management fees are generally established at specified percentages of 1% to 5%
of gross receipts of the properties as defined in the management agreements.
Property management fees for properties managed by Compass and Compass Retail
were $324,112 and $85,551 for the nine months ended September 30, 1995 and 1994,
respectively.
8
<PAGE> 9
ML/EQ REAL ESTATE PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. REAL ESTATE INVESTMENTS
Rental Properties
As of September 30, 1995, the Partnership's rental properties consist of
the following:
<TABLE>
<CAPTION>
RENTABLE PERCENTAGE
SQUARE FEET LEASED
----------- ----------
<S> <C> <C>
OFFICE
16 and 18 Sentry Park West, Montgomery County,
Pennsylvania.............................................. 190,616 80%
The Bank of Delaware Building, Wilmington, Delaware......... 314,313 56%
INDUSTRIAL
1200 Whipple Road, Union City, California................... 257,500 100%
701 Maple Lane and 733 Maple Lane, Bensenville, Illinois.... 81,750 100%
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.............. 182,507 88%
Northland Center, Southfield, Michigan...................... 1,358,372 87%
</TABLE>
Zero Coupon Mortgage Notes Receivable
The Venture holds a 71.66% participation interest in a zero coupon mortgage
note. The property that secures this first mortgage note is Brookdale Center
which is located outside of Minneapolis, Minnesota. 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
Midwest Real Estate Shopping Center L.P. ("Midwest"), a publicly traded limited
partnership, (formerly Equitable Real Estate Shopping Centers, L.P.). The note
has an implicit interest rate of 10.2% compounded semiannually, and it matured
on June 30, 1995. The face amount of the note is $35,368,572, and the Venture's
portion of the entire amount of principal and accrued interest at maturity
totaled $25,345,353.
The accrual of interest relating to the Brookdale note was discontinued on
the Venture's books beginning with the second quarter of 1995 as the accreted
value of the mortgage approximated the underlying value of the Brookdale Center.
The Venture's share of the note plus accrued interest at that time was
$24,730,409. Midwest defaulted on its obligation to repay the Brookdale Note in
full when it matured on June 30, 1995. Notice of default has been given to
Midwest. Equitable and the Venture have commenced foreclosure by advertisement
proceedings and a court-appointed receiver has been named. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
A recently completed internal review of the property, performed for the
Venture as of September 30, 1995, estimated the fair market value of Brookdale
Center to be $30,000,000. The Venture recorded a valuation
9
<PAGE> 10
ML/EQ REAL ESTATE PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
allowance of $3,232,210 to value the note at an amount equal to the Venture's
participation interest in the note multiplied by the estimated fair market value
of the Center, or $21,498,199. This valuation allowance is presented on the
consolidated balance sheets as a decrease in assets and partners' capital and on
the consolidated statements of operations as a provision for impairment on zero
coupon mortgage.
Until July 22, 1994, the Venture also held a 71.66% participation interest
in a zero coupon mortgage note on Northland Center which is located outside of
Detroit, Michigan. The Venture acquired its participation interest in 1988 from
Equitable which held 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 Midwest. The note had an implicit
interest rate of 10.2% compounded semiannually with the Venture's portion of 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.
The accrual of interest relating to the Northland note was discontinued on
the Venture's books during the quarter ended June 30, 1993, as the accreted
value of the mortgage approximated the underlying value of the Northland Center.
The Northland mortgage note was accounted for as an in-substance foreclosure at
December 31, 1993, and the zero coupon mortgage 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 Midwest on the transfer of Northland Center (see below).
On July 22, 1994, Midwest transferred Northland Center to the Venture and
Equitable in proportion to their respective undivided interests in the Northland
mortgage. Following the transfer, which was retroactive as of January 1, 1994,
Northland Center was reclassified from other real estate assets to rental
properties and income and expenses were recorded from that date. The Venture
records its proportionate share of the assets, liabilities, revenues, and
expenses of the undivided interests in Northland Center in accordance with the
tenancy in common arrangements in the Participation Agreement between the
Venture and Equitable. The Venture and Equitable paid the owner $6.6 million at
the time of transfer (an amount which was determined to approximate 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).
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 also
commenced a renovation program at Northland Center. The renovations were
completed during the second quarter of 1995 at a total cost of approximately
$11.0 million, of which the Venture's share is approximately $7.9 million.
Mortgage Loans Receivable
In 1988, the Venture and Equitable jointly invested in a $28,000,000
nonrecourse 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 by 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
10
<PAGE> 11
ML/EQ REAL ESTATE PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
in a realized loss of $3.5 million. Adequate reserves had been established by
the Partnership during the first and third quarters of 1993 to reflect the
diminution in 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 pay-off 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 nonrecourse 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 nonrecourse first mortgage loan to
Three Hundred Delaware Avenue Associates. This loan was collateralized by the
Bank of Delaware Building, a seventeen-story office building located in
Wilmington, Delaware. The loan was bearing interest at 10.375% per annum with
interest only of $82,135 due monthly to the maturity date of March 1999. The
mortgagor defaulted on the mortgage loan and the Venture accounted for this
transaction as an in-substance foreclosure at December 31, 1993. Accordingly,
the mortgage loan receivable was reclassified to other real estate assets at its
estimated fair market value as of that date and the Venture began recording
operating revenues and expenses of the building. In the third quarter of 1994,
the Venture recognized a loss of $1,000,000 due to valuing the Bank of Delaware
Building to the most recent estimated fair market value. Subsequently, on
November 15, 1994, the Venture acquired title to the Bank of Delaware Building
by a deed in lieu of foreclosure. Accordingly, the Bank of Delaware Building was
reclassified from other real estate assets to rental properties. In connection
with the deed in lieu transaction, the Venture received a $350,000 cash payment
plus the property's operating cash account which reduced the loss on the
transaction to approximately $380,000.
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 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 calculated from the dates of
the investor closings. Adjusted capital contributions are the limited partners'
original cash contributions reduced by distributions of sale or financing
proceeds and by certain funds in reserves, as more particularly described in the
Partnership Agreement. The limited partners' original cash contributions have
been adjusted by that portion of distributions paid through September 30, 1995,
resulting from cash available to the Partnership as a result of sale or
financing proceeds paid to the Venture. 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. Based upon the assumption that the last property is sold on
December 31, 2002, upon expiration of the term of the Partnership, the maximum
liability of EREIM LP Associates to the Venture under the guaranty agreement as
of September 30, 1995 is limited to $246,666,599, plus the value of EREIM LP
Associates' interest in the Venture less any amounts contributed by EREIM LP
Associates to the Venture to fund cash deficits.
11
<PAGE> 12
ML/EQ REAL ESTATE PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Capital contributions by the BAC Holders totaled $108,484,500. As of
September 30, 1995, the cumulative 9.75% simple annual return was $79,288,285.
As of September 30, 1995, cumulative distributions by the Partnership to the BAC
Holders totaled $15,252,905, of which $11,662,084 is attributable to income from
operations and $3,590,821 is attributable to sales of Venture assets, principal
payments on Mortgage Loans and other capital events. 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, up to
the above described maximum.
6. LEASE TERMINATION INCOME
Pursuant to an agreement with Kohl's Department Stores, Inc. ("Kohl's"), a
former tenant at Northland Center, Equitable agreed to accept $1,750,000 in
connection with the termination of the Kohl's lease on behalf of the tenancy in
common arrangement between the Venture and Equitable. The Venture's portion of
the termination payment received in 1995 was approximately $1.3 million. This
agreement released Kohl's from any remaining obligation under the original lease
agreement. The Partnership recognized these proceeds as lease termination
income.
12
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following analysis of the consolidated results of operations and
financial condition of the Partnership should be read in conjunction with the
consolidated financial statements and the related notes to consolidated
financial statements included elsewhere herein.
Liquidity and Capital Resources
As of September 30, 1995, the Partnership had cash and short-term
investments of approximately $2.0 million. Such cash and short-term investments
are available for distribution to the extent not required for working capital
and administration expenses.
In addition at September 30, 1995, the Venture, in which the Partnership
owns an 80% interest, had approximately $18.1 million in cash and short term
investments. These funds are intended to be utilized primarily to fund the
renovation work expected on the Bank of Delaware Building, to fund possible
costs incurred to increase tenancy at Richland Mall, and to fund other general
working capital requirements. These funds, in addition to reserves from future
operations, may also be used in connection with actions taken relating to the
Brookdale zero coupon mortgage note, including costs of legal action as well as
improvements deemed to be necessary in the event a foreclosure is effected.
Management has established an enhancement/stabilization and renovation
program for the Bank of Delaware Building which was transferred to the Venture
by deed in lieu of foreclosure on November 15, 1994. Estimated costs for this
three year program total $4.3 million, of which $1.9 million is expected to be
incurred in 1995, $1.3 million is expected to be incurred in 1996, and $1.1
million is expected to be incurred in 1997. As of September 30, 1995,
approximately $340,000 of these costs had been expended. Approximately $50,000
in capital costs have been accrued but not paid as of September 30, 1995.
Included in the estimated $4.3 million of renovation expenditures is
approximately $2.3 million for asbestos abatement expected to be incurred evenly
over 1995, 1996, and 1997. Also included in the $4.3 million is $400,000 for
sprinkler installation and $400,000 for exterior deferred maintenance including
recaulking all four sides of the building. The other components of the
renovation program are minor interior common area and exterior plaza cosmetic
upgrades totaling approximately $600,000 to be incurred evenly over 1995 and
1996. Management expects these upgrades to give the building a fresher, more
inviting look. Additional costs not included in the above figures are estimated
tenant improvements of $2.5 million. The tenant improvement costs are directly
associated with actual leasing and will only be expended as leasing transactions
occur in the building.
Cash received from tenant-related revenues for the nine months ended
September 30, 1995, increased approximately $3.3 million in comparison to the
same period last year. The increase is due in part to an agreement between
Kohl's Department Stores, Inc. ("Kohl's") and the Venture regarding the
termination of Kohl's lease which resulted in the receipt of approximately $1.8
million, of which the Venture's portion was approximately $1.3 million. Also
contributing to the increase is approximately $1.1 million in operating cash
flows from the Bank of Delaware Building for the nine month period ended
September 30, 1995. A comparable cash flow was not received in the nine month
period ended September 30, 1994, as the deed in lieu of foreclosure on the Bank
of Delaware Building was not consummated until November 15, 1994. The remainder
of the increase, approximately $900,000, is due to a delay in the receipt of
cash from Northland Center as a result of the July 22, 1994, deed in lieu of
foreclosure.
Interest received for the nine month period ended September 30, 1995, did
not change significantly compared to interest received for the nine month period
ended September 30, 1994.
13
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
Cash paid for operating activities for the nine months ended September 30,
1995, increased approximately $2.3 million in comparison to the same period last
year. The majority of the increase, approximately $1.3 million, is due to a
decrease in accrued operating expenses attributable to Northland Center during
the transition between property managers. The remainder of the increase is due
to approximately $869,000 of operating cash outflows at the Bank of Delaware
Building during the nine months ended September 30, 1995. Comparable cash
outflows were not incurred in the nine month period ended September 30, 1994, as
the deed in lieu of foreclosure on the Bank of Delaware was not consummated
until November 15, 1994.
Financial Condition
The decrease in liabilities of approximately $3.5 million at September 30,
1995, as compared to December 31, 1994, is attributable to the payment of
approximately $2.6 million in accrued construction costs at Northland Center,
the payment of semiannual distributions of $813,671 declared as of December 1994
and paid in February 1995, and the semiannual payment of fees to affiliates of
approximately $591,000. This decrease is offset by the accrual of approximately
$305,000 of fees due to affiliates for the third quarter of 1995 and an increase
in unearned rent at Northland Center of approximately $260,000.
Results of Operations
Rental income for the three months ended September 30, 1995, decreased
approximately $250,000 compared to the three months ended September 30, 1994.
Rental income decreased approximately $833,000 due to decreased occupancy at
Northland Center. This decrease is offset by approximately $351,000 of rental
income for the three months ended September 30, 1995 from the Bank of Delaware
which was transferred to the Venture by deed in lieu of foreclosure on November
15, 1994. The decrease is also offset by an increase in rental income of
approximately $194,000 due to increased occupancy at 701 and 733 Maple Lane and
16 and 18 Sentry Park West. Rental income for the nine months ended September
30, 1995, did not change significantly compared to the same periods in 1994.
Lease termination rental income for the three months ended September 30,
1995, increased approximately $111,000 compared to the same period in 1994
primarily due to the receipt of $150,000, of which the Venture's portion was
approximately $108,000, as a lease termination payment from Father and Sons Shoe
Store Co., a tenant at Northland Center. Lease termination rental income for the
nine months ended September 30, 1995, increased approximately $1.5 million
compared to the same period in 1994 primarily due to the receipt of
approximately $1.8 million, of which the Venture's portion was approximately
$1.3 million, pursuant to the agreement between Kohl's Department Store and the
Venture regarding the termination of Kohl's lease at Northland Center.
Interest on the zero coupon mortgage note receivable for the three months
and nine months ended September 30, 1995, decreased approximately $585,000 and
$1.1 million, respectively, compared to the same periods in the prior year. The
decrease is a result of the non-accrual of interest, commencing April 1, 1995,
on the Brookdale zero coupon mortgage note.
Interest on the mortgage loan receivable for the three months and nine
months ended September 30, 1995, was unchanged compared to the same periods in
the prior year.
14
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
Interest on short-term investments for the three month period ended
September 30, 1995, did not change significantly compared to the same period in
1994. Interest on short-term investments for the nine month period ended
September 30, 1995, increased approximately $264,000 over the same period last
year primarily as a result of an increase in interest rates.
Depreciation for the three and nine months ended September 30, 1995,
increased approximately $122,000 and $680,000, respectively, compared to the
three and nine months ended September 30, 1994. The increase is primarily due to
an increase in the Partnership's investment in rental properties resulting from
the transfers of Northland Center and the Bank of Delaware Building to the
Venture by separate deed in lieu of foreclosure transactions. The Partnership
did not begin depreciating these properties until the deed in lieu of
foreclosure transactions were consummated on July 22, 1994, and November 15,
1994, respectively.
Real estate operating expenses and real estate taxes for the three months
and nine months ended September 30, 1995, did not change significantly compared
to the same periods in 1994.
Property management fees for the three month period ended September 30,
1995, did not change significantly compared to the three month period ended
September 30, 1994. Property management fees for the nine month period ended
September 30, 1995, increased approximately $80,000 primarily due to extra fees
resulting from the receipt, in the second quarter of 1995, of the lease
termination payment from Kohl's Department Store.
Amortization for the three months and nine months ended September 30, 1995,
was relatively unchanged compared to the same periods in the prior year.
General and administrative expenses for the three months ended September
30, 1995, decreased approximately $99,000 compared to the three months ended
September 30, 1994, primarily because during the third quarter of 1994 the
Partnership incurred approximately $80,000 of professional fees in connection
with the July 22, 1994, transfer of Northland Center by deed in lieu of
foreclosure. General and administrative expenses for the nine months ended
September 30, 1995, did not change significantly compared to the same period in
1994.
During the third quarter of 1994, the Venture recognized a loss of $1.0
million due to valuing the Bank of Delaware Building to the estimated fair
market value. A comparative loss has not been recognized for the three or nine
month period ended September 30, 1995.
The percentage of leased space at the Venture's properties at September 30,
1995, decreased slightly to 87.1% from the percentage of leased space at
December 31, 1994, of 87.8%.
The zero coupon mortgage note (the "Note") secured by the Brookdale Center
matured on June 30, 1995 and Midwest Real Estate Shopping Center L.P.
("Midwest"), the owner of Brookdale Center (formerly Equitable Real Estate
Shopping Centers, L.P.), defaulted on its obligation to repay the Note in full.
The Venture's portion of the entire amount of principal and accrued interest due
on the maturity date, June 30, 1995, totaled $25,345,353. Notice of default has
been given to Midwest. Equitable and the Venture have commenced foreclosure by
advertisement proceedings and a court-appointed receiver has been named. As
previously reported, Midwest is currently attempting to sell Brookdale Center.
The date set for foreclosure is December 12, 1995. However, the parties are
continuing to discuss the matter, and that date may be extended. At December 31,
1994, Midwest reduced the carrying value of the Center by $9,068,553 to the
Center's
15
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
estimated fair market value of $35,072,000, as determined by a third party
appraiser. Beginning with the second quarter of 1995, Management discontinued
the accrual of interest on the Note as the accreted value of the mortgage
approximated the underlying value of the Brookdale Center. The Venture's share
of the Note plus accrued interest at that time was $24,730,409. The same
proportionate share of the estimated fair market value of the underlying
collateral was $25,132,840. A recently completed internal review of the
property, performed for the Venture as of September 30, 1995, estimated the fair
market value of Brookdale Center to be $30,000,000. The Venture recorded a
valuation allowance of $3,232,210 to value the note at an amount equal to the
Venture's participation interest in the note multiplied by the estimated fair
market value of the Center, or $21,498,199. This valuation allowance is
presented on the consolidated balance sheets as a decrease in assets and
partners' capital and on the consolidated statements of operations as a
provision for impairment on zero coupon mortgage.
Midwest is subject to the informational requirements under the Securities
Exchange Act, and in accordance therewith files reports and other information,
including financial statements, with the Securities and Exchange Commission
(SEC) under Commission File No. 1-9331. Such reports and other information filed
by Midwest can be inspected and copied at the public reference facilities
maintained by the SEC in Washington, D.C. and at certain of its Regional
Offices, and copies may be obtained from the Public Reference Section of the
SEC, Washington, D.C. 20549, at prescribed rates.
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. Over the
past several years, the rate of inflation has exceeded the rate of rental rate
growth in many of the Venture's properties. During the recent real estate
downturn, rental rates dropped, indicating a negative growth rate. This negative
growth appears to have ceased, and rental rates have stopped dropping in many of
the properties' markets. Real recovery in rental rates, if achieved at all, will
likely occur over an extended period of time.
16
<PAGE> 17
PART II
Item 1. Legal Proceedings
There are no pending legal proceedings material to the Partnership to
which the Partnership, the Venture, any of the Properties, or to the knowledge
of the Managing General Partner, the properties that secure the Mortgage loans
are subject.
Several class action suits have been filed against Midwest, the general
partner of Midwest, certain officers of such general partner, Lehman Brothers,
Inc., Equitable, and Equitable Real Estate. The complaints allege, among other
things, that the defendants breached their fiduciary duties and violated
federal securities laws in connection with the initial sale of BACs, the
operation of Midwest, and the sale of Northland Center to the Venture and
Equitable. Neither the Venture nor the Partnership has been named as a party
to any such suits.
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
27 Financial Data Schedule (for SEC filing purposes
only)
b) Reports
None
17
<PAGE> 18
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/ Patricia C. Snedeker
------------------------------
Patricia C. Snedeker
Vice President, Controller
and Treasurer
(Principal Accounting Officer)
Dated: November 14, 1995
18
<PAGE> 19
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -------------------------------------------------------
<S> <C>
27 Financial Data Schedule (for SEC filing purposes only)
</TABLE>
19
<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, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 20,143,375
<SECURITIES> 0
<RECEIVABLES> 2,777,274
<ALLOWANCES> 3,232,210
<INVENTORY> 0
<CURRENT-ASSETS> 23,859,404
<PP&E> 123,806,892
<DEPRECIATION> 11,885,696
<TOTAL-ASSETS> 167,185,969
<CURRENT-LIABILITIES> 3,316,449
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 131,822,630
<TOTAL-LIABILITY-AND-EQUITY> 167,185,969
<SALES> 0
<TOTAL-REVENUES> 19,056,812
<CGS> 0
<TOTAL-COSTS> 8,154,499
<OTHER-EXPENSES> 2,392,121
<LOSS-PROVISION> 3,232,210
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,240,920
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,161,124
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,161,124
<EPS-PRIMARY> .55
<EPS-DILUTED> 0
</TABLE>
