<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
---------------------
<TABLE>
<S> <C> <C>
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934.
</TABLE>
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>
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)
</TABLE>
(404) 239-5002
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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<PAGE> 2
ML/EQ REAL ESTATE PORTFOLIO, L.P.
CONTENTS
PART I -- FINANCIAL INFORMATION
<TABLE>
<S> <C> <C> <C> <C>
Item 1 -- Financial statements:
Consolidated balance sheets at June 30, 1995 and December 31, 1994....
Consolidated statements of operations for the three and six months
ended June 30, 1995 and 1994.......................................
Consolidated statement of partners' capital for the six months ended
June 30, 1995......................................................
Consolidated statements of cash flows for the six months ended June
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...........................................................................
</TABLE>
<PAGE> 3
ML/EQ REAL ESTATE PORTFOLIO, L.P.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1995 AND DECEMBER 31, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1995 1994
------------ ------------
<S> <C> <C>
ASSETS
Real Estate Investments (Note 4):
Rental properties............................................. $122,829,231 $119,650,903
Less accumulated depreciation................................. (11,140,492) (9,875,416)
------------ ------------
Net rental properties......................................... 111,688,739 109,775,487
Zero coupon mortgage note receivable.......................... 24,730,409 24,115,465
Mortgage loan receivable...................................... 6,000,000 6,000,000
------------ ------------
Total real estate investments......................... 142,419,148 139,890,952
------------ ------------
Other Assets:
Cash and short-term investments............................... 21,248,026 21,538,416
Rental income receivable...................................... 2,191,611 1,996,909
Guaranty fee, net of accumulated amortization of $1,730,834 in
1995 and $1,596,709 in 1994 (Notes 3 and 5)................ 2,011,880 2,146,006
Deferred rent concessions..................................... 1,911,618 1,752,428
Interest income receivable.................................... 140,467 84,521
Other......................................................... 207,386 600,030
------------ ------------
Total other assets.................................... 27,710,988 28,118,310
------------ ------------
Total Assets.................................................... $170,130,136 $168,009,262
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accrued liabilities........................................... $ 1,637,437 $ 1,938,448
Distributions declared........................................ 813,634 813,671
Security deposits and unearned rent........................... 715,280 486,284
Due to affiliates (Note 3).................................... 601,670 605,618
Accrued capital expenditures.................................. 474,045 2,948,006
------------ ------------
Total liabilities..................................... 4,242,066 6,792,027
------------ ------------
Minority Interest in the Venture................................ 32,675,691 31,742,095
------------ ------------
Commitments and Contingent Liabilities (Note 5)
Partners' Capital:
General partners.............................................. 2,022,570 1,795,026
Initial limited partner....................................... 6,641 6,442
Limited partners (5,424,225 BACs issued and outstanding)...... 131,183,168 127,673,672
------------ ------------
Total partners' capital............................... 133,212,379 129,475,140
------------ ------------
Total Liabilities and Partners' Capital......................... $170,130,136 $168,009,262
=========== ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE> 4
ML/EQ REAL ESTATE PORTFOLIO, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1995 AND 1994
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------ --------------------------
1995 1994 1995 1994
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
Rental income............................ $5,489,506 $8,791,576 $10,676,004 $10,572,248
Lease termination rental income (Note
6).................................... 122,166 -- 1,376,228 --
Interest on zero coupon mortgage note
receivable............................ -- 556,712 614,944 1,113,423
Interest on mortgage loan receivable..... 153,750 153,750 307,500 307,500
Interest on short-term investments....... 309,395 243,066 583,590 367,362
---------- ---------- ----------- -----------
Total Revenue.................... 6,074,817 9,745,104 13,558,266 12,360,533
---------- ---------- ----------- -----------
Operating Expenses:
Depreciation............................. 695,635 420,815 1,445,730 889,255
Real estate operating expenses........... 1,904,547 3,902,864 3,895,674 4,198,395
Real estate taxes........................ 626,292 1,088,218 1,237,515 1,308,866
Property management fees (Note 3)........ 150,789 158,691 258,734 196,708
Amortization............................. 67,063 67,062 134,125 134,125
General and administrative, including
$601,664 and $505,199 at June 30, 1995
and 1994 respectively, to affiliates
(Note 3).............................. 335,353 389,134 702,019 670,905
---------- ---------- ----------- -----------
Total Operating Expenses......... 3,779,679 6,026,784 7,673,797 7,398,254
---------- ---------- ----------- -----------
Income Before Minority Interest............ 2,295,138 3,718,320 5,884,469 4,962,279
Minority Interest in Net Income of
Consolidated Venture..................... (534,114) (831,139) (1,333,596) (1,144,890)
---------- ---------- ----------- -----------
Net Income................................. $1,761,024 $2,887,181 $ 4,550,873 $ 3,817,389
========= ========= ========== ==========
Allocation of Net Income:
General partners......................... $ 88,051 $ 144,360 $ 227,544 $ 190,870
Initial limited partner.................. 77 123 199 164
Limited partners......................... 1,672,896 2,742,698 4,323,130 3,626,355
---------- ---------- ----------- -----------
Total............................ $1,761,024 $2,887,181 $ 4,550,873 $ 3,817,389
========= ========= ========== ==========
Net Income Per Limited Partner BAC......... $ 0.31 $ 0.51 $ 0.80 $ 0.67
========= ========= ========== ==========
Weighted Average BACs Outstanding.......... 5,424,225 5,424,225 5,424,225 5,424,225
========= ========= ========== ==========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 5
ML/EQ REAL ESTATE PORTFOLIO, L.P.
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
FOR THE SIX MONTHS ENDED JUNE 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..................................... 227,544 199 4,323,130 4,550,873
Distributions declared......................... -- -- (813,634) (813,634)
---------- ------- ------------ ------------
Balance, June 30, 1995......................... $2,022,570 $ 6,641 $131,183,168 $133,212,379
========= ====== =========== ===========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 6
ML/EQ REAL ESTATE PORTFOLIO, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1994
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1995 1994
----------- -----------
<S> <C> <C>
Cash Flows From Operating Activities:
Tenant rentals received..................................................... $11,927,335 $ 3,541,867
Interest received........................................................... 835,144 635,699
----------- -----------
Cash received from operations............................................... 12,762,479 4,177,566
Cash paid for operating activities.......................................... (6,006,256) (1,747,764)
Cash distributions to Minority Interest..................................... (400,000) (135,637)
----------- -----------
Net Cash Provided By Operating Activities..................................... 6,356,223 2,294,165
----------- -----------
Cash Flows From Investing Activities:
Purchases and additions to rental properties................................ (5,832,942) (807,299)
----------- -----------
Net Cash Used in Investing Activities......................................... (5,832,942) (807,299)
----------- -----------
Cash Flows From Financing Activities:
Cash distributions to limited partners...................................... (813,671) (542,448)
----------- -----------
Net Cash Used in Financing Activities......................................... (813,671) (542,448)
----------- -----------
Net (Decrease) Increase in Cash And Short-Term Investments.................... (290,390) 944,418
Cash And Short-Term Investments At Beginning Of Period........................ 21,538,416 21,825,747
----------- -----------
Cash And Short-Term Investments At End Of Period.............................. $21,248,026 $22,770,165
============ ============
Reconciliation Of Net Income To Net Cash Provided By Operating Activities:
Net Income.................................................................. $ 4,550,873 $ 3,817,389
----------- -----------
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization and depreciation............................................... 1,579,855 1,023,380
Minority Interest in Venture operations..................................... 1,333,596 1,144,890
Cash distributions to Minority Interest..................................... (400,000) (135,637)
Changes in assets (increase) decrease:
Interest accrual on zero coupon mortgage note receivable.................. (614,944) (1,113,423)
Rental income receivable.................................................. (194,702) (2,422,190)
Deferred rent concessions................................................. (159,190) (57,342)
Interest income receivable................................................ (55,946) 4,720
Other assets.............................................................. 392,644 11,018
Changes in liabilities increase (decrease):
Accrued liabilities....................................................... (301,011) (77,811)
Tenant security deposits and unearned rent................................ 228,996 122,197
Due to affiliates......................................................... (3,948) (23,026)
----------- -----------
Total adjustments.................................................... 1,805,350 (1,523,224)
----------- -----------
Net Cash Flow Provided By Operating Activities................................ $ 6,356,223 $ 2,294,165
============ ============
</TABLE>
SUPPLEMENTAL INFORMATION REGARDING NONCASH OPERATING ACTIVITIES
The Northland foreclosure transaction in 1994 resulted in income and
expenses of $7,102,879 and $4,566,734 respectively. This activity was recorded
as a receivable and was included in rental income receivable at June 30, 1994.
A note receivable of $150,194 and an offsetting reserve of the same amount
was established in 1994 due to doubtful collections from a tenant who had
vacated a property.
See notes to consolidated financial statements.
4
<PAGE> 7
ML/EQ REAL ESTATE PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 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.
5
<PAGE> 8
ML/EQ REAL ESTATE PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1995
(UNAUDITED)
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 the 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. Neither the zero coupon mortgage note receivable nor the mortgage loan
receivable is considered impaired as of June 30, 1995.
Reclassifications
Certain prior year amounts have been reclassified to conform with the June
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 June 30, 1995 and
December 31, 1994 the accrued balance of these fees and reimbursements totaled
$601,670 and $605,618, respectively. For each of the six month periods ended
June 30, 1995 and 1994, the expense for these recurring fees totaled $601,664
and $505,199, 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 $229,364 and $43,271 for the six months ended June 30, 1995 and 1994,
respectively.
6
<PAGE> 9
ML/EQ REAL ESTATE PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1995
(UNAUDITED)
4. REAL ESTATE INVESTMENTS
Rental Properties
As of June 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 87%
The Bank of Delaware Building, Wilmington, Delaware......... 314,313 55%
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 which 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 with the
Venture's portion of the entire amount of principal and accrued interest
totaling $25,345,353 due on June 30, 1995.
Management discontinued the accrual of interest on the Brookdale note
beginning with the second quarter of 1995 as the accreted value of the mortgage
approximated the underlying value of the Brookdale Center. 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".
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
7
<PAGE> 10
ML/EQ REAL ESTATE PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1995
(UNAUDITED)
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.
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
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 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 June 30,
1995, approximately $11.0 million of these costs had been expended, of which the
Venture's share was approximately $7.9 million. Approximately $392,000 in
capital costs have been accrued but not paid as of June 30, 1995 of which the
Venture's share is approximately $281,000.
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 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.
8
<PAGE> 11
ML/EQ REAL ESTATE PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1995
(UNAUDITED)
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, 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. 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, as defined in the Partnership
Agreement, calculated from the dates of the investor closings. Adjusted capital
contributions are the limited partners' original cash contributions less
distributions of sale or financing proceeds, and funds in reserves, as defined
in the Partnership Agreement. The limited partners' original cash contributions
have been adjusted by that portion of distributions paid through June 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 set forth in the prospectus. 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 June 30, 1995 is limited to $248,040,714, 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.
Capital contributions by the BAC Holders totaled $108,484,500. As of June
30, 1995, the cumulative 9.75% simple annual return was $76,697,012. As of June
30, 1995, cumulative distributions by the Partnership to the BAC Holders totaled
$14,439,271, of which $11,662,084 is attributable to income from operations and
$2,777,187 is attributable to sales of Venture assets, principal payments on
Mortgage Loans and other capital events. A distribution of capital proceeds in
the amount of $813,634 was declared on June 30, 1995. To the
9
<PAGE> 12
ML/EQ REAL ESTATE PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1995
(UNAUDITED)
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.
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.
10
<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 June 30, 1995, 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 working capital and
administration expenses.
In addition, at June 30, 1995, the Venture, in which the Partnership owns
an 80% interest, had approximately $19.4 million in short-term investments.
These funds are intended to be utilized primarily to fund the remainder of the
Northland Center renovation program, 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.
Management is nearing the completion of 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 program are expected to be $4.0 million over the next three years, of
which $2.0 million is expected to be incurred in 1995 and $1.0 million is
expected to be incurred in each of the years 1996 and 1997. Included in the
estimated $4.0 million of expenditures related to The Bank of Delaware
renovation program is approximately $2.1 million for asbestos abatement expected
to be incurred evenly over the next three years. 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 six months ended June
30, 1995 increased approximately $8.4 million in comparison to the same period
last year. This increase is primarily attributable to operating cash flows from
Northland Center and The Bank of Delaware Building for the six month period
ended June 30, 1995 of approximately $7.2 million and $800,000, respectively.
Cash attributable to the operations of Northland Center and The Bank of Delaware
Building for the six month period ended June 30, 1994 was not received until the
deed in lieu of foreclosure transactions were consummated on July 22, 1994 and
November 15, 1994, respectively. The remainder of this increase is due to a
decrease in rental income receivable.
Interest received for the six month period ended June 30, 1995 did not
change significantly compared to interest received for the six month period
ended June 30, 1994.
Cash paid for operating activities for the six months ended June 30, 1995
increased approximately $4.3 million in comparison to the same period last year.
This change is primarily due to operating cash outflows at Northland Center and
The Bank of Delaware Building for the six months ended June 30, 1995 of
approximately $3.8 million and $600,000, respectively. No cash was paid for
operating activities relating to Northland Center or The Bank of Delaware
Building during the six months ended June 30, 1994 due to the fact that the deed
in lieu of foreclosure transactions were not consummated until July 22, 1994 and
November 15, 1994, respectively. This increase is offset by an increase in
accrued operating expenses.
11
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
Financial Condition
The decrease in liabilities of approximately $2.6 million at June 30, 1995,
as compared to December 31, 1994, is attributable to payment of approximately
$2.6 million in accrued construction costs at Northland Center.
Results of Operations
Decreases in income and expenses for the second quarter of 1995 as compared
to the second quarter of 1994 are largely attributable to Northland Center.
Northland Center was accounted for as an in-substance foreclosure at December
31, 1993. As such, the income and expenses of Northland Center should have been
included in income beginning January 1994. Reliable estimates were not available
until the second quarter of 1994. Therefore, the recording of the operating
activity for Northland Center was delayed until the second quarter of 1994. At
that time, six months of activity was recorded.
Rental income for the three months ended June 30, 1995 was $5,489,506
compared to $8,791,576 for the three months ended June 30, 1994. This decrease
is primarily a result of the fact that $7,058,992 of income, representing six
months of activity at Northland Center, was recorded at the end of the second
quarter of 1994. Of that amount, $3,438,032 was attributable to the first
quarter of 1994. Rental income for the six months ended June 30, 1995 did not
change significantly compared to rental income for the six months ended June 30,
1994.
Lease termination rental income was $122,166 for the three months ended
June 30, 1995 compared to $0 for the same period in 1994. This income was due to
the receipt of a $115,000 lease termination payment from Kinney Shoes, a tenant
at Richland Mall, and a $7,166 lease termination payment from Sunday's Best, a
tenant at Northland Center. Lease termination rental income was $1,376,228 for
the six months ended June 30, 1995 compared to $0 for the same period in 1994.
This income was primarily a result of the receipt of $1,254,062 pursuant to an
agreement between Kohl's Department Store and the Venture regarding the
termination of Kohl's lease.
Interest on the zero coupon mortgage note receivable for the three months
and six months ended June 30, 1995 decreased compared to the same periods in the
prior year. This decrease is primarily a result of the non-accrual of interest,
commencing April 1, 1995, on the Brookdale zero coupon mortgage note.
Interest on short-term investments for the three months and six months
ended June 30, 1995 increased over the same periods last year primarily as a
result of an increase in interest rates.
Depreciation for the three months ended June 30, 1995 was $695,635 compared
to $420,815 for the three months ended June 30, 1994. Depreciation for the six
months ended June 30, 1995 was $1,445,730 compared to $889,255 for the six
months ended June 30, 1994. The increase for the three months and six months
ended June 30, 1995 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 deeds in lieu of
foreclosure. 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 for the three months ended June 30, 1995
were $1,904,547 compared to $3,902,864 for the three months ended June 30, 1994.
This decrease is primarily a result of the fact that
12
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
$3,582,164 of operating expenses, representing six months of activity at
Northland Center, was recorded at the end of the second quarter of 1994. Of that
amount, $1,714,600 was attributable to the first quarter of 1994. Real estate
operating expenses for the six months ended June 30, 1995 did not change
significantly compared to real estate operating expenses for the six months
ended June 30, 1994.
Real estate taxes for the three months ended June 30, 1995 were $626,292
compared to $1,088,218 for the three months ended June 30, 1994. This decrease
is primarily a result of recording $868,377 of real estate taxes, representing
six months of activity at Northland Center, at the end of the second quarter of
1994. Of that amount, $435,860 was attributable to the first quarter of 1994.
Real estate taxes for the six month period ended June 30, 1995 did not change
significantly compared to the six month period ended June 30, 1994.
Property management fees for the three months ended June 30, 1995 remained
approximately the same compared to the same period last year. Property
management fees for the six months ended June 30, 1995 were $258,734 compared to
$196,708 for the six months ended June 30, 1994. This increase is primarily due
to approximately $50,000 of extra fees resulting from the receipt of the lease
termination payment from Kohl's Department Store.
Amortization for the three months and six months ended June 30, 1995 was
relatively unchanged compared to the same periods in the prior year.
General and administrative expenses for the three months and six months
ended June 30, 1995 did not change significantly compared to the same periods in
1994.
The percentage of leased space at the Venture's properties at June 30, 1995
decreased slightly to 87.6% 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.
At December 31, 1994, Midwest reduced the carrying value of the Center by
$9,068,553 to the Center's 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.
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.
13
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
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.
14
<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 BAC's, 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
Current Report on Form 8-K of the Partnership dated June 30, 1995.
<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: August 14, 1995
<PAGE> 19
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- ----------------------------------------------------------------------------------
<S> <C>
27 Financial Data Schedule (for SEC filing purposes only)
</TABLE>
<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 JUNE
30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<CASH> 21,248,026
<SECURITIES> 0
<RECEIVABLES> 2,332,078
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 23,787,490
<PP&E> 122,829,231
<DEPRECIATION> 11,140,492
<TOTAL-ASSETS> 170,130,136
<CURRENT-LIABILITIES> 4,242,066
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 133,212,379
<TOTAL-LIABILITY-AND-EQUITY> 170,130,136
<SALES> 0
<TOTAL-REVENUES> 13,558,266
<CGS> 0
<TOTAL-COSTS> 5,391,923
<OTHER-EXPENSES> 1,579,855
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 5,884,469
<INCOME-TAX> 0
<INCOME-CONTINUING> 4,550,873
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,550,873
<EPS-PRIMARY> .80
<EPS-DILUTED> 0
</TABLE>
