<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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(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, 1996
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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
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ML/EQ Real Estate Portfolio, L.P.
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(Exact name of registrant as specified in its governing instrument)
Delaware 58-1739523
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(State of Organization) (I.R.S. Employer
Identification No.)
1150 Lake Hearn Dr; Atlanta, Georgia 30342-1522
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(Address of principal executive office) (Zip Code)
(Registrant's telephone number, including area code) (404) 239-5002
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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
Item 1 - Financial statements:
Consolidated balance sheets at June 30, 1996 and
December 31, 1995
Consolidated statements of operations for the three
and six months ended June 30, 1996 and 1995
Consolidated statement of partners' capital for the
six months ended June 30, 1996
Consolidated statements of cash flows for the six
months ended June 30, 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
<PAGE> 3
ML/EQ REAL ESTATE PORTFOLIO, L.P.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996 AND DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
REAL ESTATE INVESTMENTS:
Rental properties, net of accumulated depreciation of
$14,207,399 in 1996 and $12,431,678 in 1995.................. $113,829,322 $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........................... 141,327,521 141,462,923
------------ ------------
OTHER ASSETS:
Cash and short-term investments................................. 23,199,416 21,738,499
Accounts receivable and accrued investment income, net of
allowance for doubtful accounts of $584,355 in 1996 and
$460,313 in 1995............................................. 2,649,027 3,446,102
Deferred rent concessions....................................... 2,049,997 2,030,727
Guaranty fee, net of accumulated amortization of $1,999,086 in
1996 and $1,864,960 in 1995 (Notes 2 and 3).................. 1,743,630 1,877,755
Deferred leasing costs, net of accumulated amortization of
$496,376 in 1996 and $393,867 in 1995........................ 733,492 713,979
Prepaid expenses and other assets............................... 216,580 495,509
Interest receivable............................................. 147,572 150,233
Due from affiliates (Note 2).................................... 26,792 9,033
------------ ------------
Total other assets...................................... 30,766,506 30,461,837
------------ ------------
TOTAL ASSETS............................................ $172,094,027 $171,924,760
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Accounts payable and accrued real estate expenses............... $ 1,716,269 $ 2,221,132
Due to affiliates (Note 2)...................................... 600,267 609,615
Security deposits and unearned rent............................. 578,160 477,737
Distributions declared.......................................... 542,423 542,423
Accrued capital expenditures.................................... 140,994 2,647,092
------------ ------------
Total liabilities....................................... 3,578,113 6,497,999
------------ ------------
MINORITY INTEREST IN THE VENTURE.................................. 33,187,775 32,547,073
------------ ------------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 3)
PARTNERS' CAPITAL:
General partners................................................ 2,182,600 2,033,056
Initial limited partner......................................... 6,781 6,650
Limited partners (5,424,225 BACs issued and outstanding)........ 133,138,758 130,839,982
------------ ------------
Total partners' capital................................. 135,328,139 132,879,688
------------ ------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL................. $172,094,027 $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 AND SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------------- ------------------------
1996 1995 1996 1995
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
REVENUE:
Rental income.............................. $4,716,876 $5,493,609 $9,582,681 $10,676,004
Lease termination income................... 35,657 122,166 62,171 1,376,228
Interest on loans receivable............... 977,848 153,750 1,722,798 922,444
---------- ---------- ---------- -----------
Total revenue...................... 5,730,381 5,769,525 11,367,650 12,974,676
---------- ---------- ---------- -----------
OPERATING EXPENSES:
Real estate operating expenses............. 1,939,586 1,903,525 3,948,808 3,894,652
Depreciation and amortization.............. 976,069 695,635 1,908,456 1,445,730
Real estate taxes.......................... 570,507 626,292 1,083,114 1,237,515
Property management fees (Note 2).......... 119,034 150,789 231,142 258,734
---------- ---------- ---------- -----------
Total operating expenses........... 3,605,196 3,376,241 7,171,520 6,836,631
---------- ---------- ---------- -----------
INCOME FROM PROPERTY OPERATIONS.............. 2,125,185 2,393,284 4,196,130 6,138,045
OTHER INCOME (EXPENSE):
Interest and other nonoperating income..... 281,416 305,293 555,883 583,591
Asset management fees...................... (169,926) (170,391) (339,852) (338,910)
Amortization of guarantee fee.............. (67,063) (67,063) (134,126) (134,125)
General and administrative, including
$260,415 and $262,755 at June 30, 1996
and 1995, respectively, to affiliates
(Note 2)................................ (169,344) (165,985) (346,459) (364,132)
---------- ---------- ---------- -----------
Total other expense -- net......... (124,917) (98,146) (264,554) (253,576)
---------- ---------- ---------- -----------
INCOME BEFORE MINORITY INTEREST.............. 2,000,268 2,295,138 3,931,576 5,884,469
MINORITY INTEREST IN NET INCOME OF
CONSOLIDATED VENTURE....................... (476,971) (534,114) (940,702) (1,333,596)
---------- ---------- ---------- -----------
NET INCOME................................... $1,523,297 $1,761,024 $2,990,874 $ 4,550,873
========= ========= ========= ==========
ALLOCATION OF NET INCOME:
General partners........................... $ 76,165 $ 88,051 $ 149,544 $ 227,544
Initial limited partner.................... 67 77 131 199
Limited partners........................... 1,447,065 1,672,896 2,841,199 4,323,130
---------- ---------- ---------- -----------
TOTAL.............................. $1,523,297 $1,761,024 $2,990,874 $ 4,550,873
========= ========= ========= ==========
NET INCOME PER LIMITED
PARTNER BAC................................ $ 0.27 $ 0.31 $ 0.52 $ 0.80
========= ========= ========= ==========
WEIGHTED AVERAGE BACs
OUTSTANDING................................ 5,424,225 5,424,225 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 SIX MONTHS ENDED JUNE 30, 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..................................... 149,544 131 2,841,199 2,990,874
Distributions declared......................... -- -- (542,423) (542,423)
---------- ------- ------------ ------------
Balance, June 30, 1996......................... $2,182,600 $ 6,781 $133,138,758 $135,328,139
========= ====== =========== ===========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 6
ML/EQ REAL ESTATE PORTFOLIO, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Tenant rentals received..................................................... $10,523,080 $11,927,335
Interest received........................................................... 2,281,342 835,144
----------- -----------
Cash received from operations............................................... 12,804,422 12,762,479
Cash paid for operating activities.......................................... (6,202,416) (6,006,256)
Cash distributions to minority interest..................................... (300,000) (400,000)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES..................................... 6,302,006 6,356,223
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases and additions to rental properties................................ (4,171,321) (5,556,462)
Expenditures for deferred leasing costs..................................... (127,345) (276,480)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES......................................... (4,298,666) (5,832,942)
----------- -----------
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 INCREASE (DECREASE) IN CASH AND SHORT-TERM
INVESTMENTS................................................................. 1,460,917 (290,390)
CASH AND SHORT-TERM INVESTMENTS, BEGINNING OF PERIOD.......................... 21,738,499 21,538,416
----------- -----------
CASH AND SHORT-TERM INVESTMENTS, END OF PERIOD................................ $23,199,416 $21,248,026
=========== ===========
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Net Income.................................................................... 2,990,874 4,550,873
----------- -----------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization............................................... 2,042,582 1,579,855
Minority interest in Venture operations..................................... 940,702 1,333,596
Cash distributions to minority interest..................................... (300,000) (400,000)
Changes in assets (increase) decrease:
Interest accrual on zero coupon mortgage note receivable.................. -- (614,944)
Accounts receivable and accrued investment income......................... 797,075 (194,702)
Deferred rent concessions................................................. (19,270) (159,190)
Interest receivable....................................................... 2,661 (55,946)
Prepaid expenses and other assets......................................... 278,929 392,644
Due from affiliates....................................................... (17,759) --
Changes in liabilities increase (decrease):
Accounts payable and accrued real estate expenses......................... (504,863) (301,011)
Security deposits and unearned rent....................................... 100,423 228,996
Due to affiliates......................................................... (9,348) (3,948)
----------- -----------
Total adjustments............................................................. 3,311,132 1,805,350
----------- -----------
NET CASH FLOW PROVIDED BY OPERATING ACTIVITIES................................ $ 6,302,006 $ 6,356,223
=========== ===========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 7
ML/EQ REAL ESTATE PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 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 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 was 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 were paid to Equitable and the Venture on
account of the Brookdale zero note. The Venture recorded cash received from the
operation of Brookdale Center during this period as interest income. During the
first half of 1996, approximately $1,975,000 was remitted under the terms of the
receivership. The Venture's portion of these payments was approximately
$1,415,000.
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 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
6
<PAGE> 8
ML/EQ REAL ESTATE PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
participation interest in the note multiplied by the estimated fair market value
of Brookdale Center, or $21,498,199.
In April, 1996 the Venture and Equitable (collectively referred to as
"Lender") agreed in principle to a workout arrangement with Midwest on the
Brookdale zero note under which Midwest would file for Chapter 11 bankruptcy
protection and, with the support of Lender, submit a plan of reorganization to
the Bankruptcy Court for approval. The workout arrangement was memorialized in a
nonbinding letter agreement dated April 11, 1996 (the "Letter Agreement")
between Midwest and Equitable and approved by the Board of Directors of EREIM
Managers Corp., the general partner of the Partnership, on behalf of the
Venture.
On June 20, 1996 Midwest filed a voluntary petition for Chapter 11
bankruptcy protection, staying the Brookdale foreclosure proceeding and
terminating the receivership arrangement. However, as contemplated by the Letter
Agreement, Midwest subsequently obtained Bankruptcy Court approval to retain the
management company that had served as receiver prior to the bankruptcy filing as
Brookdale's property manager. In addition, the Bankruptcy Court, with the
agreement of Midwest and Lender, entered a cash collateral order, as
contemplated by the Letter Agreement, pursuant to which all positive cash flow
generated by the property in excess of property-related expenses and certain
administrative costs of the bankruptcy, not to exceed $25,000, will be paid to
the Lender during the bankruptcy.
Under the Bankruptcy Code, Midwest has the exclusive right for one hundred
twenty days after filing for bankruptcy to propose a plan of reorganization to
the Bankruptcy Court for approval. Midwest has not yet filed a plan but is
expected to do so soon. Although no assurances can be given, the Venture expects
that the plan, when filed, will be consistent with the Letter Agreement. If so,
the material provisions of the plan would be as follows:
- The Brookdale zero note will remain in default.
- Midwest will market the property for sale to potential third-party
purchasers through November 15, 1996.
- 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.
- 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
7
<PAGE> 9
ML/EQ REAL ESTATE PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, during the bankruptcy,
various rights to discuss with third-parties the possible renovation of
the property should Lender acquire ownership of the property.
The Venture and Equitable have entered into an agreement between themselves
to support Midwest's plan of reorganization as outlined in the Letter Agreement,
to make all decisions regarding the plan of reorganization jointly, and to share
all expenses, on a pro rata basis, in connection with the bankruptcy and all
undertakings jointly agreed upon by the Venture and Equitable in accordance with
their participation interests in the Brookdale zero note.
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 June 30, 1996 and
December 31, 1995 the accrued balance of these fees and reimbursements totaled
$600,267 and $609,615, respectively. For each of the six month periods ended
June 30, 1996 and 1995, the expense for these recurring fees totaled $600,267
and $601,664, respectively. These amounts are included in the statements of
operations as asset management fees and 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 $200,825 and $229,364 for the six months ended June 30, 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
incurred by the Venture and payable to Compass and Compass Retail were $50,316
and $39,583 for each of the six month periods ended June 30, 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
$898,021 and $863,144 for each of the six month periods ended June 30, 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
$77,394 and $66,236 for each of the six month periods ended June 30, 1996 and
1995, respectively. The construction management fees have been capitalized as a
portion of the construction projects to which they relate.
8
<PAGE> 10
ML/EQ REAL ESTATE PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Compass Retail performed certain due diligence work with regard to the
workout arrangement with Midwest on the Brookdale zero note. Consulting fees
paid to Compass Retail for due diligence work were $72,047, of which the
Venture's portion was $51,630, for the six month period ended June 30, 1996. The
consulting fees have been included in the statements of operations as a
component of real estate operating expenses.
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 ninety days following the
earlier of the sale or other disposition of all the properties and mortgage
loans and notes or the liquidation of the Partnership.
The minimum return will be an amount which, when added to the cumulative
distributions to the limited partners, will enable the Partnership to provide
the limited partners with a minimum return equal to their capital contributions
plus a simple annual return of 9.75% on their adjusted capital contributions
calculated from the dates of the Partnership's 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 June 30, 1996, 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, 1996 is limited to $245,755,859, 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, 1996, the cumulative 9.75% simple annual return was $86,934,078. As of June
30, 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. A distribution of capital proceeds in
the amount of $542,423 was declared on June 30, 1996. 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
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, 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 June 30, 1996, the Venture, in which the Partnership owns
an 80% interest, had approximately $21.2 million in short-term investments.
These funds are intended to be utilized primarily to fund the renovation work
expected on The Bank of Delaware Building, to fund possible costs incurred to
increase tenancy at Richland Mall, and to fund other general working capital
requirements. These funds, in addition to reserves from future operations, may
also be used to pay the Venture's pro rata share of costs incurred in connection
with the Brookdale zero coupon mortgage note, including legal costs with respect
to the Midwest bankruptcy proceeding as well as improvements deemed to be
necessary in the event title is transferred to the Venture and Equitable.
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 June 30, 1996, approximately $2.5 million
of these costs had been expended. Included in the estimated $4.3 million of
expenditures related to The Bank of Delaware renovation program 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. No significant leasing has occurred during the six months
ended June 30, 1996.
Cash received from tenant-related revenues for the six months ended June
30, 1996 decreased approximately $1.4 million compared to cash received from
tenant-related revenues for the six months ended June 30, 1995. This decrease is
primarily due to the receipt , in the second quarter of 1995, of approximately
$1.8 million, of which the Venture's portion was approximately $1.3 million,
remitted by Kohl's Department Store, Inc. ("Kohl's"), a former tenant at
Northland Center, pursuant to an agreement in connection with the termination of
Kohl's lease. This agreement released Kohl's from any remaining obligation under
the original lease agreement.
Interest received for the six month period ended June 30, 1996 increased
approximately $1.4 million compared to interest received for the six month
period ended June 30, 1995. This increase is primarily due to the receipt of
approximately $2.0 million, of which the Venture's portion was approximately
$1.4 million, which was remitted under the terms of the receivership for the
Brookdale Zero Note.
10
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
FINANCIAL CONDITION
Accounts receivable and accrued investment income decreased approximately
$800,000 from December 31, 1995 to June 30, 1996. This decrease is primarily due
to the timing of the remittance of rental income. Additionally, in connection
with a bankruptcy settlement at 7550 Plaza Court, approximately $115,000 was
received during the first six months of 1996 as payment for receivables in
arrears. The Bank of Delaware Building billed and collected approximately
$130,000 in escalations during the first six months of 1996 which were accrued
as of December 31, 1995.
Prepaid expenses and other assets decreased approximately $280,000 from
December 31, 1995 to June 30, 1996. This decrease is primarily due to the
amortization of prepaid real estate taxes.
Total liabilities decreased approximately $2.9 million from December 31,
1995 to June 30, 1996. This decrease is primarily due to the payment of accrued
construction costs of approximately $2.5 million during the first six months of
1996. Approximately $300,000 of the decrease is due to the timing of payment of
accounts payable and accrued real estate expenses at Northland Center. The
remainder of the decrease is due to the payment of insurance premiums during the
first half of 1996.
RESULTS OF OPERATIONS
Rental income for the three and six months ended June 30, 1996 decreased
approximately $780,000 and $1.1 million, respectively compared to the three and
six months ended June 30, 1995. This decrease is primarily due to decreased
occupancy at Northland Center, the Bank of Delaware Building, and 7550 Plaza
Court.
Lease termination rental income for the six month period ended June 30,
1996 decreased approximately $1.3 million compared to the six month period ended
June 30, 1995. This decrease is 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, a former tenant at
Northland Center, Equitable agreed to accept approximately $1.8 million 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.
Interest on loans receivable for the three and six months ended June 30,
1996 increased approximately $820,000 and $800,000, respectively, compared to
the three and six months ended June 30, 1995. This increase is primarily due to
the receipt of cash remitted under the terms of receivership for the Brookdale
zero note of approximately $825,000 and $2.0 million for the three and six
months ended June 30, 1996, respectively, of which the Venture's portion was
approximately $590,000 and $1.4 million, respectively. The Venture recorded cash
received under the terms of receivership as interest income. This increase is
offset by accrued interest of approximately $0 and $615,000 on the Brookdale
zero note for the three and six month period ended June 30, 1995, respectively.
Depreciation and amortization for the three and six months ended June 30,
1996 increased by approximately $280,000 and $465,000, respectively compared to
the three and six months ended June 30, 1995. This increase is primarily due to
the depreciation on approximately $11.0 million and $1.8 million of
11
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
capital expenditures at Northland Center which were capitalized in the third
quarter of 1995 and the first six months of 1996, respectively. The remainder of
the increase is due to the depreciation on approximately $2.5 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 of 1995 for the Bank of Delaware Building.
The percentage of leased space at the Venture's properties at June 30, 1996
of 82.8% 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 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, 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 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 was 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 were paid to Equitable and the Venture on
account of the Brookdale zero note. The Venture recorded cash received from the
operation of Brookdale Center during this period on a cash basis as interest
income. During the first half of 1996, approximately $1,975,000 was remitted
under the terms of the receivership. The Venture's portion of these payments was
approximately $1,415,000.
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 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.
In April, 1996 the Venture and Equitable (collectively referred to as
"Lender") agreed in principle to a workout arrangement with Midwest on the
Brookdale zero note under which Midwest would file for Chapter 11 bankruptcy
protection and, with the support of the Lender, submit a plan of reorganization
to the Bankruptcy Court for approval. The workout arrangement was memorialized
in a nonbinding letter agreement dated April 11, 1996 (the "Letter Agreement")
between Midwest and Equitable and approved by the Board of Directors of EREIM
Managers Corp., the general partner of the Partnership, on behalf of the
Venture.
On June 20, 1996 Midwest filed a voluntary petition for Chapter 11
bankruptcy protection, staying the Brookdale foreclosure proceeding and
terminating the receivership arrangement. However, as contemplated by the Letter
Agreement, Midwest subsequently obtained Bankruptcy Court approval to retain the
management company that had served as receiver prior to the bankruptcy filing as
Brookdale's property manager. In addition, the Bankruptcy Court, with the
agreement of Midwest and Lender, entered a cash collateral order, as
contemplated by the Letter Agreement, pursuant to which all positive cash flow
generated by the property in
12
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
excess of property-related expenses and certain administrative costs of the
bankruptcy, not to exceed $25,000, will be paid to the Lender during the
bankruptcy.
Under the Bankruptcy Code, Midwest has the exclusive right for one hundred
twenty days after filing for bankruptcy to propose a plan of reorganization to
the Bankruptcy Court for approval. Midwest has not yet filed a plan but is
expected to do so soon. Although no assurances can be given, the Venture expects
that the plan, when filed, will be consistent with the Letter Agreement. If so,
the material provisions of the plan would be as follows:
- The Brookdale zero note will remain in default.
- Midwest will market the property for sale to potential third-party
purchasers through November 15, 1996.
- 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.
- 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, during the bankruptcy,
various rights to discuss with third-parties the possible renovation of
the property should Lender acquire ownership of the property.
The Venture and Equitable have entered into an agreement between themselves
to support Midwest's plan of reorganization as outlined in the Letter Agreement,
to make all decisions regarding the plan of reorganization jointly, and to share
all expenses, on a pro rata basis, in connection with the bankruptcy and all
undertakings jointly agreed upon by the Venture and Equitable in accordance with
their participation interests in the Brookdale zero note.
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
13
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
filed by Midwest can be inspected and copied at the public reference facilities
maintained by the SEC in Washington, D.C. and at certain 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 stabilized 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> 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
15
<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/Patricia C. Snedeker
--------------------------------
Patricia C. Snedeker
Vice President, Controller
and Treasurer
(Principal Accounting Officer)
Dated: August 14, 1996
16
<PAGE> 18
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -------------------------------------------------------
<S> <C>
27 Financial Data Schedule (for SEC filing purposes only)
</TABLE>
17
<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, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 23,199,416
<SECURITIES> 0
<RECEIVABLES> 3,407,746
<ALLOWANCES> 584,355
<INVENTORY> 0
<CURRENT-ASSETS> 26,239,387
<PP&E> 128,036,721
<DEPRECIATION> 14,207,399
<TOTAL-ASSETS> 172,094,027
<CURRENT-LIABILITIES> 2,999,953
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 135,328,139
<TOTAL-LIABILITY-AND-EQUITY> 172,094,027
<SALES> 0
<TOTAL-REVENUES> 11,923,533
<CGS> 0
<TOTAL-COSTS> 5,263,064
<OTHER-EXPENSES> 1,908,456
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,931,576
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,990,874
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,990,874
<EPS-PRIMARY> .52
<EPS-DILUTED> 0
</TABLE>
