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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
---------------------
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM TO
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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)
(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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ML/EQ REAL ESTATE PORTFOLIO, L.P.
CONTENTS
<TABLE>
<S> <C>
PART I -- FINANCIAL INFORMATION
Item 1 -- Financial Statements:
Consolidated balance sheets at March 31, 1995 and December 31,
1994...........................................................
Consolidated statements of operations for the three months ended
March 31, 1995 and 1994........................................
Consolidated statement of partners' capital for the three months
ended March 31, 1995...........................................
Consolidated statements of cash flows for the three months ended
March 31, 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>
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ML/EQ REAL ESTATE PORTFOLIO, L.P.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1995 AND DECEMBER 31, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1995 1994
------------ ------------
<S> <C> <C>
ASSETS
Real Estate Investments (Note 4):
Rental properties........................................... $120,182,710 $119,650,903
Less accumulated depreciation............................... (10,444,856) (9,875,416)
------------ ------------
Net rental properties....................................... 109,737,854 109,775,487
Zero coupon mortgage note receivable........................ 24,730,409 24,115,465
Mortgage loan receivable.................................... 6,000,000 6,000,000
------------ ------------
Total real estate investments....................... 140,468,263 139,890,952
------------ ------------
Other Assets:
Cash and short-term investments............................. 19,189,857 21,538,416
Rental income receivable.................................... 3,340,708 1,996,909
Guaranty fee, net of accumulated amortization of $1,663,772
in 1995 and $1,596,709 in 1994 (Notes 3 and 5)........... 2,078,943 2,146,006
Deferred rent concessions................................... 1,830,859 1,752,428
Interest income receivable.................................. 133,578 84,521
Other....................................................... 740,872 600,030
------------ ------------
Total other assets.................................. 27,314,817 28,118,310
------------ ------------
Total Assets.................................................. $167,783,080 $168,009,262
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accrued liabilities......................................... $ 1,921,948 $ 1,938,448
Security deposits and unearned rent......................... 806,694 486,284
Accrued capital expenditures................................ 329,179 2,948,006
Due to affiliates (Note 3).................................. 318,693 605,618
Distributions declared...................................... -- 813,671
------------ ------------
Total liabilities................................... 3,376,514 6,792,027
------------ ------------
Minority Interest in the Venture (Note 2)..................... 32,141,577 31,742,095
------------ ------------
Partners' Capital:
General partners............................................ 1,934,519 1,795,026
Initial limited partner..................................... 6,564 6,442
Limited partners (5,424,225 BACs issued and outstanding).... 130,323,906 127,673,672
------------ ------------
Total partners' capital............................. 132,264,989 129,475,140
------------ ------------
Total Liabilities and Partners' Capital....................... $167,783,080 $168,009,262
=========== ===========
</TABLE>
See notes to consolidated financial statements.
1
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ML/EQ REAL ESTATE PORTFOLIO, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
-----------------------
1995 1994
---------- ----------
<S> <C> <C>
Revenue:
Rental income....................................................... $5,186,498 $1,780,672
Lease termination rental income..................................... 1,254,062 --
Interest on zero coupon mortgage note receivable.................... 614,944 556,711
Interest on mortgage loan receivable................................ 153,750 153,750
Interest on short-term investments.................................. 274,195 124,296
---------- ----------
Total Revenue............................................... 7,483,449 2,615,429
---------- ----------
Operating Expenses:
Depreciation........................................................ 750,094 468,440
Real estate operating expenses...................................... 1,991,127 295,531
Real estate taxes................................................... 611,223 220,648
Property management fees............................................ 107,945 38,017
Amortization........................................................ 67,063 67,063
General and administrative, including $299,501 and $250,221 at March
31, 1995 and 1994, respectively, to affiliates (Note 3).......... 366,666 281,771
---------- ----------
Total Operating Expenses.................................... 3,894,118 1,371,470
---------- ----------
Income Before Minority Interest....................................... 3,589,331 1,243,959
Minority Interest in Net Income of Consolidated Venture............... (799,482) (313,751)
---------- ----------
Net Income............................................................ $2,789,849 $ 930,208
========= =========
Allocation of Net Income:
General partners.................................................... $ 139,493 $ 46,510
Initial limited partner............................................. 122 41
Limited partners.................................................... 2,650,234 883,657
---------- ----------
Total....................................................... $2,789,849 $ 930,208
========= =========
Net Income Per Limited Partner BAC.................................... $ 0.49 $ 0.16
========= =========
Weighted Average BACs Outstanding..................................... 5,424,225 5,424,225
========= =========
</TABLE>
See notes to consolidated financial statements.
2
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ML/EQ REAL ESTATE PORTFOLIO, L.P.
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
FOR THE THREE MONTHS ENDED MARCH 31, 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..................................... 139,493 122 2,650,234 2,789,849
---------- ------ ------------ ------------
Balance, March 31, 1995........................ $1,934,519 $6,564 $130,323,906 $132,264,989
========= ====== =========== ===========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 6
ML/EQ REAL ESTATE PORTFOLIO, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1995 1994
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Tenant rentals received........................................... $ 5,338,739 $ 1,971,385
Interest received................................................. 378,888 367,897
----------- -----------
Cash received from operations..................................... 5,717,627 2,339,282
Cash paid for operating activities................................ (3,521,227) (1,232,034)
Cash distributions to Minority Interest........................... (400,000) (135,657)
----------- -----------
Net Cash Provided by Operating Activities........................... 1,796,400 971,591
----------- -----------
Cash Flows from Investing Activities:
Purchases and additions to rental properties...................... (3,331,288) (607,144)
----------- -----------
Net Cash Used in Investing Activities............................... (3,331,288) (607,144)
----------- -----------
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 in Cash and Short-Term Investments..................... (2,348,559) (178,001)
Cash and Short-Term Investments at Beginning of Period.............. 21,538,416 21,825,747
----------- -----------
Cash and Short-Term Investments at End of Period.................... $19,189,857 $21,647,746
========== ==========
Reconciliation of Net Income to Net Cash Provided by Operating
Activities:
Net income........................................................ $ 2,789,849 $ 930,208
----------- -----------
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization and depreciation..................................... 817,157 535,503
Minority Interest in Venture operations........................... 799,482 313,751
Cash distributions to Minority Interest........................... (400,000) (135,637)
Changes in assets (increase) decrease:
Interest accrual on zero coupon mortgage notes................. (614,944) (556,711)
Rental income receivable....................................... (1,343,799) 107,170
Deferred rent concessions...................................... (78,431) (83,090)
Interest income receivable..................................... (49,057) 89,851
Other assets................................................... (140,842) (53,865)
Changes in liabilities increase (decrease):
Accrued liabilities............................................ (16,500) (10,685)
Tenant security deposits and unearned rent..................... 320,410 113,100
Due to affiliates.............................................. (286,925) (278,004)
----------- -----------
Total adjustments......................................... (993,449) 41,383
----------- -----------
Net Cash Flow Provided by Operating Activities...................... $ 1,796,400 $ 971,591
========== ==========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 7
ML/EQ REAL ESTATE PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 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 records it's proportionate share of the assets, liabilities,
revenues, and expenses of the undivided interests in Northland Center.
5
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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 the mortgage loan receivable based upon the fair value of the
underlying collateral. If 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 March 31, 1995.
Reclassifications
Certain prior year amounts have been reclassified to conform with the March
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 March 31, 1995
and December 31, 1994 the accrued balance of these fees and reimbursements
totaled $318,693 and $605,618, respectively. For each of the three month periods
ended March 31, 1995 and 1994, the expense for these recurring fees totaled
$299,501 and $250,221, 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 $107,945 and $38,017 during the first quarter of 1995 and 1994,
respectively.
6
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ML/EQ REAL ESTATE PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. REAL ESTATE INVESTMENTS
Rental Properties
As of March 31, 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 86%
The Bank of Delaware Building, Wilmington, Delaware........... 302,130 60%
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 95%
Northland Center, Southfield, Michigan........................ 1,369,255 86%
</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. The note provides that the borrower
may elect to pay interest currently; however, no interest has been paid to date.
As part of the Northland Center transaction (discussed below), the Brookdale
mortgage was modified on July 22, 1994 to provide that, if Midwest sells
Brookdale Center prior to June 30, 1995, the outstanding principal and accrued
interest of the zero note will be paid at the time of sale, together with a
defeasance fee equal to 75% of the amount, if any, by which the sale price of
Brookdale Center exceeds $45 million. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" for a further discussion of
the Brookdale Center 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
7
<PAGE> 10
ML/EQ REAL ESTATE PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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). As part of the transaction,
the Brookdale mortgage was modified as discussed above.
In connection with the transfer of Northland Center, the Venture and
Equitable modified the agreement with Dayton Hudson, which operates one of the
anchor stores at Northland Center, and entered into an agreement to add
Montgomery Ward as an additional anchor. The Venture and Equitable have also
commenced a renovation program at Northland Center. The construction costs of
the renovations are expected to be approximately $12.0 million, of which the
Venture's share is expected to be approximately $8.6 million. As of March 31,
1995, approximately $9.5 million of these costs had been expended, of which the
Venture's share was approximately $6.8 million. Approximately $460,000 in
capital costs have been accrued but not paid as of March 31, 1995 of which the
Venture's share is approximately $330,000.
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 pay-off 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
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ML/EQ REAL ESTATE PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 1989, the Venture made a $6,000,000 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 a
seventeen-story office building 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 owners of The Bank of Delaware Building
defaulted on the mortgage loan receivable 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 March 31, 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 March 31, 1995 is limited to $248,047,773, 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 March
31, 1995, the cumulative 9.75% simple annual return was $74,127,455. As of March
31, 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. To the extent that future cash
distributions to the limited partners are insufficient to provide the specified
minimum return, any shortfall will be funded by the guarantor.
9
<PAGE> 12
ML/EQ REAL ESTATE PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 the first quarter of 1995 was approximately
$1.3 million. This agreement released Kohl's from any remaining obligation under
the original lease agreement. The Partnership has recognized these proceeds as
rental income receivable and lease termination income at March 31, 1995.
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 March 31, 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 March 31, 1995, the Venture, in which the Partnership owns
an 80% interest, had approximately $17.2 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 contemplated
for 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 $900,000. 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 increased approximately $3.4
million in comparison to the same period last year. This increase is
attributable to operating cash flows from Northland Center and The Bank of
Delaware Building in the first quarter of 1995 of approximately $3.0 million and
$400,000, respectively. Cash attributable to the operations of Northland Center
and The Bank of Delaware Building for the first quarter of 1994 was not received
until the deed in lieu of foreclosure transactions were consummated on July 22,
1994 and November 15, 1994, respectively.
Interest received for the three months ended March 31, 1995 remained
approximately the same in comparison to the same period last year.
Cash paid for operating activities for the three months ended March 31,
1995 increased approximately $2.3 million in comparison to the same period last
year. This change is primarily due to Northland Center's operating cash outflows
of approximately $2.2 million for the three months ended March 31, 1995. No cash
was paid for operating activities relating to Northland Center in the first
quarter of 1994 due to the fact that the deed in lieu of foreclosure transaction
was not consummated until July 22, 1994.
FINANCIAL CONDITION
The decrease in liabilities of approximately $3.4 million at March 31,
1995, as compared to December 31, 1994, is primarily attributable to payment of
approximately $2.6 million in accrued construction costs at
11
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
Northland Center, the semiannual payment of distributions to BAC holders and
limited partners of $813,671, and the semiannual payment of fees to affiliates
of $291,322 in the first quarter of 1995. This decrease is offset by an increase
in unearned rent at Northland Center of approximately $306,000.
RESULTS OF OPERATIONS
Increases in income and expenses of the Venture for the first quarter of
1995 as compared to the first quarter of 1994 are largely attributable to
Northland Center and The Bank of Delaware Building. Northland Center and The
Bank of Delaware Building were accounted for as in-substance foreclosures at
December 31, 1993. As such, the income and expenses of Northland Center and The
Bank of Delaware Building should have been included in income of the Venture
beginning January 1994. Reliable estimates for Northland Center were not
available to the Venture until the second quarter of 1994. Therefore, the
recording of the operating activity for Northland Center was delayed until the
second quarter of 1994 when six months of activity was recorded. Estimates of
income net of expenses for The Bank of Delaware Building obtained in the first
quarter 1994 were immaterial to the financial statements as a whole.
Rental related income for the three month period ended March 31, 1995
increased approximately $4.7 million in comparison to the same period last year.
The increase is primarily a result of $4.1 million of income representing rental
activity at Northland Center and approximately $400,000 of income representing
rental activity at The Bank of Delaware Building. Of the $4.1 million of income
from Northland Center, approximately $1.3 million is due to the lease
termination payment from Kohl's Department Store.
Interest on short-term investments increased over the same period last year
primarily as a result of an increase in interest rates. Interest income on zero
coupon mortgage notes increased compared to the same period last year due to the
compounding effect of the zero coupon investment on the Brookdale Center
mortgage.
Real estate related expenses excluding depreciation and amortization
increased approximately $2.2 million compared to the same period last year. This
change is primarily a result of $1.8 million of expenses representing three
months of operating activity attributable to Northland Center and approximately
$400,000 of expenses representing three months of operating activity at The Bank
of Delaware Building.
The percentage of leased space at the Venture's properties at March 31,
1995 increased to 88.2% from the percentage of leased space at December 31,
1994 of 87.8%.
The zero coupon mortgage note secured by the Brookdale Center matures in
June 1995. If the indebtedness is not repaid at maturity, the Partnership will
be confronted with a number of options, including foreclosure, a restructuring
of the loan, or an extension of the maturity date. Management continues to
evaluate which of these options will be most beneficial to the Partnership.
Additionally, at December 31, 1994, Midwest Real Estate Shopping Center L.P.
(formerly Equitable Real Estate Shopping Centers, L.P.), the owner of Brookdale
Center ("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. The Venture's share of the zero coupon mortgage note
plus accrued interest at March 31, 1995 is $24,730,409. The same proportionate
share of the estimated fair market value of the underlying collateral is
$25,132,840. As the estimated fair market value of the underlying collateral,
as determined by Midwest's appraiser, is greater than
12
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
the accreted value of the zero coupon mortgage note at March 31, 1995,
Management does not believe the note is impaired, however Management has
determined to cease the accretion of interest beginning with the second quarter
of 1995. Notice has been given to Midwest that, on the basis of its appraisal,
Midwest is obligated under the terms of the Brookdale zero coupon mortgage to
provide on or before June 3, 1995 additional collateral as security for the
Brookdale zero coupon mortgage note in the amount of $3,312,199. As previously
reported, Midwest is currently attempting to sell Brookdale Center.
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.
13
<PAGE> 16
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
None
14
<PAGE> 17
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Partnership has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
ML/EQ Real Estate Portfolio, L.P.
By: EREIM Managers Corp.
Managing General Partner
By: /s/ Claire Snedeker
------------------------------------
Claire Snedeker
Vice President, Controller
and Treasurer
(Principal Accounting Officer)
Dated: May 15, 1995
15
<PAGE> 18
EXHIBIT INDEX
Exhibit No. Description
- ----------- ------------------------------------------------------
27 Financial Data Schedule (for SEC filing purposes only)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF ML/EQ REAL ESTATE PORTFOLIO LP FOR THE PERIOD ENDED
MARCH 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<CASH> 19,189,857
<SECURITIES> 0
<RECEIVABLES> 3,474,286
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 23,405,015
<PP&E> 120,182,710
<DEPRECIATION> 10,444,856
<TOTAL-ASSETS> 167,783,080
<CURRENT-LIABILITIES> 3,376,514
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 132,264,989
<TOTAL-LIABILITY-AND-EQUITY> 167,783,080
<SALES> 0
<TOTAL-REVENUES> 7,483,449
<CGS> 0
<TOTAL-COSTS> 2,710,295
<OTHER-EXPENSES> 817,157
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,589,331
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,789,849
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,789,849
<EPS-PRIMARY> .49
<EPS-DILUTED> 0
</TABLE>
