<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
<TABLE>
<C> <S>
(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, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM TO
--------------- ---------------
</TABLE>
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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ML/EQ REAL ESTATE PORTFOLIO, L.P.
CONTENTS
PART I FINANCIAL INFORMATION
<TABLE>
<S> <C> <C>
ITEM 1 FINANCIAL STATEMENTS:
Consolidated balance sheets at March 31, 1996 and December 31, 1995.........
Consolidated statements of operations for the three months ended March 31,
1996 and 1995...............................................................
Consolidated statement of partners' capital for the three months ended March
31, 1996....................................................................
Consolidated statements of cash flows for the three months ended March 31,
1996 and 1995...............................................................
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............................................................................
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ML/EQ REAL ESTATE PORTFOLIO, L.P.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1996 AND DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
REAL ESTATE INVESTMENTS:
Rental properties, net of accumulated depreciation of
$13,313,758 in 1996 and $12,431,678 in 1995................ $113,897,864 $113,964,724
Zero coupon mortgage note receivable, net of valuation
allowance (Note 1)......................................... 21,498,199 21,498,199
Mortgage loan receivable...................................... 6,000,000 6,000,000
------------ ------------
Total real estate investments......................... 141,396,063 141,462,923
------------ ------------
OTHER ASSETS:
Cash and short-term investments............................... 20,470,786 21,738,499
Accounts receivable and accrued investment income, net of
allowance for doubtful accounts of $408,239 in 1996 and
$460,313 in 1995........................................... 3,227,541 3,446,102
Deferred rent concessions..................................... 2,032,865 2,030,727
Guaranty fee, net of accumulated amortization of $1,932,022 in
1996 and $1,864,960 in 1995 (Notes 2 and 3)................ 1,810,692 1,877,755
Deferred leasing costs, net of accumulated amortization of
$444,174 in 1996 and $393,867 in 1995...................... 714,669 713,979
Prepaid expenses and other assets............................. 652,828 495,509
Interest receivable........................................... 138,799 150,233
Due from affiliates (Note 2).................................. 12,564 9,033
------------ ------------
Total other assets.................................... 29,060,744 30,461,837
------------ ------------
TOTAL ASSETS.......................................... $170,456,807 $171,924,760
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Accounts payable and accrued real estate expenses............. $ 1,902,080 $ 2,221,132
Accrued capital expenditures.................................. 769,379 2,647,092
Security deposits and unearned rent........................... 426,664 477,737
Due to affiliates (Note 2).................................... 300,615 609,615
Distributions declared........................................ -- 542,423
------------ ------------
Total liabilities..................................... 3,398,738 6,497,999
------------ ------------
MINORITY INTEREST IN THE VENTURE................................ 32,710,804 32,547,073
------------ ------------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 3)
PARTNERS' CAPITAL:
General partners.............................................. 2,106,435 2,033,056
Initial limited partner....................................... 6,714 6,650
Limited partners (5,424,225 BACs issued and outstanding)...... 132,234,116 130,839,982
------------ ------------
Total partners' capital............................... 134,347,265 132,879,688
------------ ------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL............... $170,456,807 $171,924,760
=========== ===========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 4
ML/EQ REAL ESTATE PORTFOLIO, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
-------------------------
1996 1995
---------- ----------
<S> <C> <C>
REVENUE:
Rental income..................................................... $4,865,805 $5,182,394
Lease termination income.......................................... 26,514 1,254,062
Interest on loans receivable...................................... 744,950 768,695
---------- ----------
Total revenue............................................. 5,637,269 7,205,151
---------- ----------
OPERATING EXPENSES:
Real estate operating expenses.................................... 2,009,222 1,991,127
Depreciation and amortization..................................... 932,387 750,094
Real estate taxes................................................. 512,607 611,223
Property management fees (Note 2)................................. 112,108 107,945
---------- ----------
Total operating expenses.................................. 3,566,324 3,460,389
---------- ----------
INCOME FROM PROPERTY OPERATIONS..................................... 2,070,945 3,744,762
OTHER INCOME (EXPENSE):
Interest and other nonoperating income............................ 274,467 278,298
Asset management fees............................................. (169,926) (168,519)
Amortization of guarantee fee..................................... (67,063) (67,063)
General and administrative, including $130,689 and $130,982 at
March 31, 1996 and 1995, respectively, to affiliates (Note
2)............................................................. (177,115) (198,147)
---------- ----------
Total other expense -- net................................ (139,637) (155,431)
---------- ----------
INCOME BEFORE MINORITY INTEREST..................................... 1,931,308 3,589,331
MINORITY INTEREST IN NET INCOME OF CONSOLIDATED VENTURE............. (463,731) (799,482)
---------- ----------
NET INCOME.......................................................... $1,467,577 $2,789,849
========= =========
ALLOCATION OF NET INCOME:
General partners.................................................. $ 73,379 $ 139,493
Initial limited partner........................................... 64 122
Limited partners.................................................. 1,394,134 2,650,234
---------- ----------
TOTAL............................................................... $1,467,577 $2,789,849
========= =========
NET INCOME PER LIMITED PARTNER BAC.................................. $ 0.26 $ 0.49
========= =========
WEIGHTED AVERAGE BACs OUTSTANDING................................... 5,424,225 5,424,225
========= =========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 5
ML/EQ REAL ESTATE PORTFOLIO, L.P.
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
INITIAL
GENERAL LIMITED LIMITED
PARTNERS PARTNER PARTNERS TOTAL
---------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995..................... $2,033,056 $ 6,650 $130,839,982 $132,879,688
Net income..................................... 73,379 64 1,394,134 1,467,577
---------- ------- ------------ ------------
Balance, March 31, 1996........................ $2,106,435 $ 6,714 $132,234,116 $134,347,265
========= ====== =========== ===========
</TABLE>
See notes to consolidated financial statements.
4
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ML/EQ REAL ESTATE PORTFOLIO, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Tenant rentals received........................................... $ 5,057,669 $ 5,334,601
Interest received................................................. 1,030,851 383,026
----------- -----------
Cash received from operations..................................... 6,088,520 5,717,627
Cash paid for operating activities................................ (3,769,880) (3,521,227)
Cash distributions to minority interest........................... (300,000) (400,000)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES........................... 2,018,640 1,796,400
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases and additions to rental properties...................... (2,692,933) (3,192,002)
Expenditures for deferred leasing costs........................... (50,997) (139,286)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES............................... (2,743,930) (3,331,288)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash distributions to limited partners............................ (542,423) (813,671)
----------- -----------
NET CASH USED IN FINANCING ACTIVITIES............................... (542,423) (813,671)
----------- -----------
NET DECREASE IN CASH AND SHORT-TERM INVESTMENTS..................... (1,267,713) (2,348,559)
CASH AND SHORT-TERM INVESTMENTS, BEGINNING OF PERIOD................ 21,738,499 21,538,416
----------- -----------
CASH AND SHORT-TERM INVESTMENTS, END OF PERIOD...................... $20,470,786 $19,189,857
========== ==========
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING
ACTIVITIES:
Net income........................................................ $ 1,467,577 $ 2,789,849
----------- -----------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.................................. 999,450 817,157
Minority interest in Venture operations........................ 463,731 799,482
Cash distributions to minority interest........................ (300,000) (400,000)
Changes in assets (increase) decrease:
Interest accrual on zero coupon mortgage note................ -- (614,944)
Accounts receivable and accrued investment income............ 218,561 (1,343,834)
Deferred rent concessions.................................... (2,138) (78,431)
Prepaid expenses and other assets............................ (157,319) (114,702)
Interest receivable.......................................... 11,434 (49,022)
Due from affiliates.......................................... (3,531) (26,140)
Changes in liabilities increase (decrease):
Accounts payable and accrued real estate expenses............ (319,052) (16,500)
Security deposits and unearned rent.......................... (51,073) 320,410
Due to affiliates............................................ (309,000) (286,925)
----------- -----------
Total adjustments................................................... 551,063 (993,449)
----------- -----------
NET CASH FLOW PROVIDED BY OPERATING ACTIVITIES...................... $ 2,018,640 $ 1,796,400
========== ==========
</TABLE>
See notes to consolidated financial statements.
5
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ML/EQ REAL ESTATE PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(UNAUDITED)
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, 1995, as certain footnote disclosures which
would substantially duplicate those contained in such audited financial
statements have been omitted from this report. Interim results of operations are
not necessarily indicative of results to be expected for the fiscal year.
1. BROOKDALE ZERO NOTE
EML Associates (the "Venture"), a joint venture through which the
Partnership invests in existing income-producing real properties, zero coupon or
similar mortgage notes, and fixed rate mortgage loans, 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 The Equitable Life Assurance Society of the United States ("Equitable")
which holds the remaining 28.34% interest. The Venture's participation interest
had an estimated fair market 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 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 $25,345,353 due on June 30, 1995.
Midwest defaulted on its obligation to repay the Brookdale zero note in
full on the maturity date. Notice of default was given to Midwest. For book
purposes, beginning with the second quarter of 1995, Management discontinued the
accrual of interest on the Brookdale zero note as the accreted value of the
mortgage approximated the estimated fair market value of the Brookdale Center.
Under the terms of the mortgage agreement, however, the Venture continued to
accrue interest off the books at the effective implicit rate of 10.2% until June
30, 1995. On July 1, 1995, the Venture began to accrue interest off the books on
the Brookdale zero note at the default rate of 19.0%. Equitable and the Venture
commenced foreclosure proceedings and a court appointed receiver was named. The
receiver is responsible for collecting rent proceeds from the tenants at
Brookdale Center and applying the proceeds to payments of operating costs at
Brookdale Center. Any remaining funds are to be paid to Equitable and the
Venture on account of the Brookdale zero note. The Venture records cash received
from the operation of Brookdale Center on a cash basis as interest income.
During the first quarter of 1996, approximately $825,000 was remitted under the
terms of the receivership. The Venture's portion of these payments was
approximately $591,000.
As of September 30, 1995, an internal review of the Brookdale Center was
performed for the Venture. Based on this review, the estimated fair market value
of the Brookdale Center was $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 Brookdale Center, or $21,498,199.
6
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ML/EQ REAL ESTATE PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Venture and Equitable (collectively referred to as "Lender") have
agreed in principle to a workout arrangement with Midwest on the Brookdale zero
note. Under the proposed plan Midwest would file for Chapter 11 bankruptcy
protection and, with the support of the Venture and Equitable, submit a plan of
reorganization to the Bankruptcy Court for approval providing as follows:
- The Brookdale zero note will remain in default. Lender will terminate the
foreclosure process, and the current receiver for the property will remain
in place as the property manager.
- In the bankruptcy case, Lender will fund any necessary capital and
leasing costs approved by Midwest and Lender through a super-priority,
non-recourse, debtor-in-possession loan by Lender.
- Midwest will market the property for sale to potential third-party
purchasers through November 15, 1996.
- Until a third-party sale occurs or a deed in lieu of foreclosure is
delivered, Lender will receive as adequate protection payments in the
bankruptcy case all positive cash flow generated from the property in
excess of property-related expenses and certain administrative costs of
the bankruptcy not to exceed $25,000.
- The net proceeds generated through a sale of the property to a
third-party purchaser, after payment of the costs of sale and repayment of
the amounts owed to Lender under the debtor-in-possession financing, first
shall be paid on a pari passu basis $750,000 to Midwest and $30,000,000 to
Lender, second shall be split 50-50 between Midwest and Lender up to a
total of $6,000,000, and third shall thereafter be remitted to Midwest.
- If Midwest receives and wishes to accept a third-party offer to purchase
the property for a price that will produce net sales proceeds of less than
$30,750,000, then Lender shall have the option either to consent to such
sale or purchase the property for an amount equal to $500,000 plus 2.5% of
the amount by which the purchase price under the third-party offer exceeds
$20,000,000.
- If no third-party offer is received by November 15, 1996, or if a
third-party purchaser has failed to close its acquisition of the property
by December 1, 1996, both Midwest and Lender will have the right to cause
the property to be conveyed to Equitable and the Venture as joint tenants.
The purchase price for the property shall be $500,000, and the property
shall be conveyed to Equitable and the Venture subject to, among other
things, the mortgage securing the Brookdale zero note and the mortgage
securing Lender's debtor-in-possession financing.
- Lender will be granted certain limited rights of first refusal to
purchase the property, and Lender will be granted various rights to
discuss with third-parties the possible renovation of the property should
Lender acquire ownership of the property.
The workout arrangement has been memorialized in a letter agreement dated
April 11, 1996, between Midwest and Equitable (the "Letter Agreement"). The
Letter Agreement is by its terms nonbinding unless and until a formal agreement
is executed by each of the parties pursuant to appropriate corporate or other
authorization. The Board of Directors of EREIM Managers Corp., the general
partner of the Partnership, has approved the workout arrangement provided for in
the Letter Agreement on behalf of the Venture. However, the workout arrangement
provided for in the Letter Agreement is subject to certain conditions precedent,
the approval of the Board of Directors of Midwest's general partner, and
confirmation of Midwest's plan of reorganization by a United States Bankruptcy
Court. Management believes that the proposed workout provides an opportunity for
Lender to take title to Brookdale Center sooner than would otherwise be
possible. A decision by Lender to foreclose on Brookdale Center could result in
a non-consenual bankruptcy filing by Midwest which might substantially delay
Lender's efforts to take title to the property. In addition, Midwest has the
right under Minnesota law to redeem Brookdale Center for one year following the
date on which foreclosure occurs. The right of redemption gives a mortgagor the
right to reclaim mortgaged property by paying the loan in full after
foreclosure, handicapping the mortgagee for the duration of the redemption
period, thus negatively impacting its ability to sell or redevelop and
remerchandise the property. The transfer of
7
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ML/EQ REAL ESTATE PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Brookdale Center to Lender pursuant to the proposed reorganization plan would
terminate Midwest's right of redemption. Furthermore, by giving Midwest an
opportunity to market Brookdale Center and to pay off the Brookdale zero note
for the sum of $30,000,000, the proposed plan also offers Lender the possibility
of realizing on its mortgage without having to take title to the property. There
can be no assurance that any definitive formal agreement will be executed by the
parties, that all conditions precedent will be met, that all required approvals
will be obtained, or that confirmation of the plan will be forthcoming.
2. 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, 1996
and December 31, 1995 the accrued balance of these fees and reimbursements
totaled $300,615 and $609,615, respectively. For each of the three month periods
ended March 31, 1996 and 1995, the expense for these recurring fees totaled
$300,615 and $299,501, respectively. These amounts are included in the
statements of operations as asset management fees and 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 the gross receipts of the properties as defined in the management agreements.
Property management fees for properties managed by Compass and Compass Retail
were $98,115 and $93,333 during the first quarter of 1996 and 1995,
respectively.
Leasing commissions are based on a percentage of the rent payable during
the term of the lease as specified in each lease agreement. Leasing commissions
paid by the Venture to Compass and Compass Retail were $50,142 and $17,222
during the first quarter of 1996 and 1995, respectively. Leasing commissions are
capitalized in deferred leasing costs on the balance sheet or expensed in real
estate operating expenses on the statements of operations in accordance with the
Venture's capitalization policy. The Venture reimbursed Compass and Compass
Retail for payroll incurred of $487,052 and $379,757 during the first quarter of
1996 and 1995, respectively. Payroll reimbursements are included in real estate
operating expenses on the statements of operations. Additionally, the Venture
paid construction management fees to Compass and Compass Retail in the amount of
$7,417 and $42,061 during the first quarter of 1996 and 1995, respectively. The
construction management fees have been capitalized as a portion of the
construction projects to which they relate.
3. 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 90 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 distributions of 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
March 31, 1996 resulting
8
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ML/EQ REAL ESTATE PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1996 is limited to $245,769,758, 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, 1996, the cumulative 9.75% simple annual return was $84,404,415. As of March
31, 1996, cumulative distributions by the Partnership to the BAC Holders totaled
$15,795,328, of which $11,662,084 is attributable to income from operations and
$4,133,244 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.
9
<PAGE> 11
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, 1996, 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, 1996, the Venture, in which the Partnership owns
an 80% interest, had approximately $18.5 million in short-term investments.
These funds are intended to be utilized primarily to fund 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 $1.6 million was incurred in
1995, $1.3 million is expected to be incurred in 1996, and $1.4 million is
expected to be incurred in 1997. As of March 31, 1996, approximately $1.9
million of these costs had been expended. Approximately $32,000 in capital costs
have been accrued but not paid as of March 31, 1996. 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.
Interest received for the three months ended March 31, 1996 increased
approximately $648,000 compared to the three months ended March 31, 1995. This
increase is primarily due to the receipt of approximately $825,000, of which the
Venture's portion was approximately $591,000, which was remitted under the terms
of the receivership for the Brookdale Zero Note.
FINANCIAL CONDITION
Total liabilities decreased approximately $3.1 million from December 31,
1995 to March 31, 1996. Approximately $1.9 million of this decrease is
attributable to accrued construction costs of approximately $846,000, $685,000,
and $343,000 at The Bank of Delaware Building, Northland Center, and 16/18
Sentry Park West, respectively, paid during the first quarter 1996. The
remainder of the decrease is due to the semiannual payment of distributions to
BAC holders and limited partners of $542,423 and the semiannual payment of fees
to affiliates of approximately $610,000 in the first quarter of 1996.
RESULTS OF OPERATIONS
Rental income for the three months ended March 31, 1996 decreased
approximately $317,000 compared to the three months ended March 31, 1995
primarily due to decreased occupancy at Northland Center, The Bank of Delaware
Building, and 7550 Plaza Court.
10
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
Lease termination rental income for the three months ended March 31, 1996
decreased approximately $1.2 million compared to the three months ended March
31, 1995 primarily due to approximately $1.3 million of lease termination rental
income which was recognized by the Venture during the first quarter of 1995.
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 Kohl's lease on behalf of the tenancy in
common arrangement between the Venture and Equitable. The Venture's portion of
the termination payment was approximately $1.3 million. This agreement released
Kohl's from any remaining obligation under the original lease agreement.
Depreciation and amortization for the three months ended March 31, 1996
increased approximately $182,000 compared to the three months ended March 31,
1995 primarily due to approximately $11.0 million of capital renovations at
Northland Center which were capitalized at the end of the third quarter of 1995
and approximately $1.9 million which has been capitalized by the Venture in
connection with the enhancement, stabilization, and renovation program which was
established at the end of the second quarter 1995 for The Bank of Delaware
Building.
Real estate taxes for the three months ended March 31, 1996 decreased
approximately $99,000 compared to the three months ended March 31, 1995
primarily due to a successful tax appeal at The Bank of Delaware Building where
the value on which the tax assessment is based was lowered by approximately $6.0
million.
The percentage of leased space at the Venture's properties at March 31,
1996 of 82.1% is approximately the same as the percentage of leased space at
December 31, 1995 of 82.2%.
Under the terms of the Brookdale zero note, which is secured by the
Brookdale Center, principal and interest in the aggregate amount of $35,368,572,
of which the Venture's portion is $25,345,353, was due on June 30, 1995. Midwest
defaulted on its obligation to repay the Brookdale zero note in full on the
maturity date. Notice of default was given to Midwest. For book purposes,
beginning with the second quarter of 1995, the Venture discontinued the accrual
of interest on the Brookdale zero note as the accreted value of the mortgage
approximated the estimated fair market value of the Brookdale Center. Under the
terms of the mortgage agreement, however, the Venture continued to accrue
interest off the books at the effective implicit rate of 10.2% until June 30,
1995. On July 1, 1995, the Venture began to accrue interest off the books at the
default rate of 19.0%. Additionally, Equitable and the Venture commenced
foreclosure proceedings and a court-appointed receiver was named. The receiver
is responsible for collecting rent proceeds from the tenants at Brookdale Center
and applying the proceeds to payments of operating costs at the Center. Any
remaining funds are to be paid to Equitable and the Venture on account of the
Brookdale zero note. The Venture records cash received from the operation of
Brookdale Center on a cash basis as interest income. During the first quarter of
1996, approximately $825,000 was remitted under the terms of the receivership.
The Venture's portion of these payments was approximately $591,000.
As of September 30, 1995, an internal review of the Brookdale Center was
performed for the Venture. Based on this review, the estimated fair market value
of the Brookdale Center was $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 Brookdale Center, or $21,498,199.
The Venture and Equitable (collectively referred to as "Lender") have
agreed in principle to a workout arrangement with Midwest on the Brookdale zero
note. Under the proposed plan Midwest would file for Chapter 11 bankruptcy
protection and, with the support of the Venture and Equitable, submit a plan of
reorganization to the Bankruptcy Court for approval providing as follows:
- The Brookdale zero note will remain in default. Lender will terminate the
foreclosure process, and the current receiver for the property will remain
in place as the property manager.
11
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
- In the bankruptcy case, Lender will fund any necessary capital and
leasing costs approved by Midwest and Lender through a super-priority,
non-recourse, debtor-in-possession loan by Lender.
- Midwest will market the property for sale to potential third-party
purchasers through November 15, 1996.
- Until a third-party sale occurs or a deed in lieu of foreclosure is
delivered, Lender will receive as adequate protection payments in the
bankruptcy case all positive cash flow generated from the property in
excess of property-related expenses and certain administrative costs of
the bankruptcy not to exceed $25,000.
- The net proceeds generated through a sale of the property to a
third-party purchaser, after payment of the costs of sale and repayment of
the amounts owed to Lender under the debtor-in-possession financing, first
shall be paid on a pari passu basis $750,000 to Midwest and $30,000,000 to
Lender, second shall be split 50-50 between Midwest and Lender up to a
total of $6,000,000, and third shall thereafter be remitted to Midwest.
- If Midwest receives and wishes to accept a third-party offer to purchase
the property for a price that will produce net sales proceeds of less than
$30,750,000, then Lender shall have the option either to consent to such
sale or purchase the property for an amount equal to $500,000 plus 2.5% of
the amount by which the purchase price under the third-party offer exceeds
$20,000,000.
- If no third-party offer is received by November 15, 1996, or if a
third-party purchaser has failed to close its acquisition of the property
by December 1, 1996, both Midwest and Lender will have the right to cause
the property to be conveyed to Equitable and the Venture as joint tenants.
The purchase price for the property shall be $500,000, and the property
shall be conveyed to Equitable and the Venture subject to, among other
things, the mortgage securing the Brookdale zero note and the mortgage
securing Lender's debtor-in-possession financing.
- Lender will be granted certain limited rights of first refusal to
purchase the property, and Lender will be granted various rights to
discuss with third-parties the possible renovation of the property should
Lender acquire ownership of the property.
The workout arrangement has been memorialized in a letter agreement dated
April 11, 1996, between Midwest and Equitable (the "Letter Agreement"). The
Letter Agreement is by its terms nonbinding unless and until a formal agreement
is executed by each of the parties pursuant to appropriate corporate or other
authorization. The Board of Directors of EREIM Managers Corp., the general
partner of the Partnership, has approved the workout arrangement provided for in
the Letter Agreement on behalf of the Venture. However, the workout arrangement
provided for in the Letter Agreement is subject to certain conditions precedent,
the approval of the Board of Directors of Midwest's general partner, and
confirmation of a plan of reorganization by a United States Bankruptcy Court.
Management believes that the proposed workout provides an opportunity for Lender
to take title to Brookdale Center sooner than would otherwise be possible. A
decision by Lender to foreclose on Brookdale Center could result in a
non-consenual bankruptcy filing by Midwest which might substantially delay
Lender's efforts to take title to the property. In addition, Midwest has the
right under Minnesota law to redeem Brookdale Center for one year following the
date on which foreclosure occurs. The right of redemption gives a mortgagor the
right to reclaim mortgaged property by paying the loan in full after
foreclosure, handicapping the mortgagee for the duration of the redemption
period, thus negatively impacting its ability to sell or redevelop and
remerchandise the property. The transfer of Brookdale Center to Lender pursuant
to the proposed reorganization plan would terminate Midwest's right of
redemption. Furthermore, by giving Midwest an opportunity to market Brookdale
Center and to pay off the Brookdale zero note for the sum of $30,000,000, the
proposed plan also offers Lender the possibility of realizing on its mortgage
without having to take title to the property. There can be no assurance that any
definitive formal agreement will be executed by the parties, that all conditions
precedent will be met, that all required approvals will be obtained, or that
confirmation of the plan will be forthcoming.
12
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
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> 15
PART II
ITEM 1. LEGAL PROCEEDINGS
Response: None
ITEM 2. CHANGES IN SECURITIES
Response: None
ITEM 3. DEFAULT UPON SENIOR SECURITIES
Response: None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Response: None
ITEM 5. OTHER INFORMATION
Response: None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Response:
a) Exhibits
27 Financial Data Schedule (for SEC filing purposes only)
b) Reports
None
14
<PAGE> 16
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: Claire Snedeker
------------------------------------
Claire Snedeker
Vice President, Controller
and Treasurer
(Principal Accounting Officer)
Dated: May 15, 1996
15
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- - ----------- ---------------------------------------------------------------------------------
<C> <C> <S>
27 -- Financial Data Schedule (for SEC filing purposes only)
</TABLE>
16
<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, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 20,470,786
<SECURITIES> 0
<RECEIVABLES> 3,787,143
<ALLOWANCES> 408,239
<INVENTORY> 0
<CURRENT-ASSETS> 24,502,518
<PP&E> 127,211,622
<DEPRECIATION> 13,313,758
<TOTAL-ASSETS> 170,456,807
<CURRENT-LIABILITIES> 2,972,074
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 134,347,265
<TOTAL-LIABILITY-AND-EQUITY> 170,456,807
<SALES> 0
<TOTAL-REVENUES> 5,911,736
<CGS> 0
<TOTAL-COSTS> 2,633,937
<OTHER-EXPENSES> 932,387
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,931,308
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,467,577
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,467,577
<EPS-PRIMARY> .26
<EPS-DILUTED> 0
</TABLE>
