<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 1997
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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.)
3424 Peachtree Road N.E., Suite 800, Atlanta, Georgia 30326
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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 September 30, 1997 and
December 31, 1996
Consolidated statements of operations for the three and
nine months ended September 30, 1997 and 1996
Consolidated statement of partners' capital for the nine
months ended September 30, 1997
Consolidated statements of cash flows for the nine months
ended September 30, 1997 and 1996
Notes to consolidated financial statements
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II - OTHER INFORMATION
Items 1 through 6
Signatures
<PAGE> 3
ML/EQ REAL ESTATE PORTFOLIO, L.P.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
ASSETS
REAL ESTATE INVESTMENTS:
Rental properties, net of accumulated depreciation of
$18,670,285 in 1997 and $15,898,604 in 1996............ $113,810,363 $129,359,200
Rental properties held for sale (Note 4).................. 15,389,863 --
Mortgage loan receivable.................................. 6,000,000 6,000,000
------------ ------------
Total real estate investments..................... 135,200,226 135,359,200
------------ ------------
OTHER ASSETS:
Cash and cash equivalents................................. 13,354,668 27,310,460
Accounts receivable and accrued investment income, net of
allowance for doubtful accounts of $1,104,220 in 1997
and $748,994 in 1996................................... 3,768,638 3,532,898
Deferred rent concessions................................. 2,300,611 2,178,371
Guaranty fee, net of accumulated amortization of
$2,334,399 in 1997 and $2,133,211 in 1996 (Notes 2 and
3)..................................................... 1,408,316 1,609,504
Deferred leasing costs, net of accumulated amortization of
$809,349 in 1997 and $604,828 in 1996.................. 1,046,753 1,167,420
Prepaid expenses and other assets......................... 1,566,640 683,920
Interest receivable....................................... 50,905 120,195
Due from affiliates (Note 2).............................. 2,434 5,260
------------ ------------
Total other assets................................ 23,498,965 36,608,028
------------ ------------
TOTAL ASSETS...................................... $158,699,191 $171,967,228
============ ============
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Accounts payable and accrued real estate expenses......... $ 2,428,595 $ 2,254,677
Accrued capital expenditures.............................. 561,156 1,120,796
Security deposits and unearned rent....................... 768,278 525,578
Due to affiliates (Note 2)................................ 320,631 608,207
Distributions declared.................................... -- 813,634
Other liabilities......................................... 358,304 --
------------ ------------
Total liabilities................................. 4,436,964 5,322,892
------------ ------------
MINORITY INTEREST IN THE VENTURE............................ 30,534,478 32,894,839
------------ ------------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 3)
PARTNERS' CAPITAL:
General partners.......................................... 2,375,566 2,144,349
Initial limited partner................................... 6,274 6,747
Limited partners (5,424,225 BACs issued and
outstanding)........................................... 121,345,909 131,598,401
------------ ------------
Total partners' capital........................... 123,727,749 133,749,497
------------ ------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL........... $158,699,191 $171,967,228
============ ============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
ML/EQ REAL ESTATE PORTFOLIO, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------- -------------------------
1997 1996 1997 1996
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUE:
Rental income............................... $6,220,326 $5,233,540 $19,067,500 $14,816,221
Lease termination income.................... -- -- 132,840 62,171
Interest on loans receivable................ 153,750 1,030,690 461,250 2,753,488
---------- ---------- ----------- -----------
Total revenue....................... 6,374,076 6,264,230 19,661,590 17,631,880
---------- ---------- ----------- -----------
OPERATING EXPENSES:
Real estate operating expenses.............. 2,580,122 1,998,146 7,270,894 5,946,954
Depreciation and amortization............... 1,073,171 984,346 3,214,801 2,892,802
Real estate taxes........................... 823,307 606,913 2,478,275 1,690,027
Property management fees (Note 2)........... 133,967 116,360 420,380 347,502
---------- ---------- ----------- -----------
Total operating expenses............ 4,610,567 3,705,765 13,384,350 10,877,285
---------- ---------- ----------- -----------
INCOME FROM PROPERTY OPERATIONS............... 1,763,509 2,558,465 6,277,240 6,754,595
OTHER INCOME (EXPENSE):
Interest and other nonoperating income...... 344,877 319,112 1,104,311 874,995
Asset management fees (Note 2).............. (190,830) (171,793) (566,265) (511,645)
Amortization of guarantee fee............... (67,062) (67,062) (201,188) (201,188)
General and administrative, including
$385,831 and $391,345 at September 30,
1997 and 1996, respectively, to
affiliates (Note 2)...................... (169,350) (168,710) (530,124) (515,169)
---------- ---------- ----------- -----------
Total other expense -- net.......... (82,365) (88,453) (193,266) (353,007)
---------- ---------- ----------- -----------
INCOME BEFORE MINORITY INTEREST............... 1,681,144 2,470,012 6,083,974 6,401,588
MINORITY INTEREST IN NET INCOME OF
CONSOLIDATED VENTURE........................ (415,894) (570,265) (1,459,639) (1,510,967)
---------- ---------- ----------- -----------
NET INCOME.................................... $1,265,250 $1,899,747 $ 4,624,335 $ 4,890,621
========== ========== =========== ===========
ALLOCATION OF NET INCOME:
General partners............................ $ 63,263 $ 94,987 $ 231,217 $ 244,531
Initial limited partner..................... 55 83 202 214
Limited partners............................ 1,201,932 1,804,677 4,392,916 4,645,876
---------- ---------- ----------- -----------
TOTAL............................... $1,265,250 $1,899,747 $ 4,624,335 $ 4,890,621
========== ========== =========== ===========
NET INCOME PER LIMITED PARTNER BAC............ $ 0.22 $ 0.34 $ 0.81 $ 0.86
========== ========== =========== ===========
WEIGHTED AVERAGE BACs OUTSTANDING............. 5,424,225 5,424,225 5,424,225 5,424,225
========== ========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
4
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ML/EQ REAL ESTATE PORTFOLIO, L.P.
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
INITIAL
GENERAL LIMITED LIMITED
PARTNERS PARTNER PARTNERS TOTAL
---------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Balance, December 31, 1996..................... $2,144,349 $6,747 $131,598,401 $133,749,497
Net income..................................... 231,217 202 4,392,916 4,624,335
Distributions.................................. -- (675) (14,645,408) (14,646,083)
---------- ------ ------------ ------------
Balance, September 30, 1997.................... $2,375,566 $6,274 $121,345,909 $123,727,749
========== ====== ============ ============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
ML/EQ REAL ESTATE PORTFOLIO, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Tenant rentals received................................... $19,085,060 $16,091,187
Interest received......................................... 1,634,851 3,675,805
----------- -----------
Cash received from operations............................. 20,719,911 19,766,992
Cash paid for operating activities........................ (11,901,186) (9,581,002)
Cash distributions to minority interest................... (3,820,000) (600,000)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES................... 4,998,725 9,585,990
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases and additions to rental properties.............. (3,410,946) (4,572,971)
Expenditures for deferred leasing costs................... (83,854) (315,561)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES....................... (3,494,800) (4,888,532)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash distributions to limited partners.................... (15,459,717) (1,084,846)
----------- -----------
NET CASH USED IN FINANCING ACTIVITIES....................... (15,459,717) (1,084,846)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (13,955,792) 3,612,612
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 27,310,460 21,738,499
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $13,354,668 $25,351,111
=========== ===========
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
Net Income.................................................. $ 4,624,335 $ 4,890,621
----------- -----------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 3,415,989 3,093,990
Minority interest in Venture operations................... 1,459,639 1,510,967
Cash distributions to minority interest................... (3,820,000) (600,000)
Changes in assets (increase) decrease:
Accounts receivable and accrued investment income......... (235,740) 1,385,660
Deferred rent concessions................................. (122,240) (153,465)
Interest receivable....................................... 69,290 47,322
Prepaid expenses and other assets......................... (882,720) (524,736)
Due from affiliates....................................... 2,826 5,930
Changes in liabilities increase (decrease)
Accounts payable and accrued real estate expenses......... 173,918 255,993
Security deposits and unearned rent....................... 242,700 (19,400)
Due to affiliates......................................... (287,576) (306,892)
Other liabilities......................................... 358,304
----------- -----------
Total adjustments........................................... 374,390 4,695,369
----------- -----------
NET CASH FLOW PROVIDED BY OPERATING ACTIVITIES.............. $ 4,998,725 $ 9,585,990
=========== ===========
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 7
ML/EQ REAL ESTATE PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(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, 1996, 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. GENERAL
On June 10, 1997 The Equitable Life Assurance Society of the United States
("Equitable"), the indirect parent of EREIM Managers Corp. (the "Managing
General Partner"), sold its wholly owned subsidiary, Equitable Real Estate
Investment Management, Inc. ("ERE"), to a subsidiary of Lend Lease Corporation
Limited ("Lend Lease"). The Managing General Partner was not included in the
sale and continues to be a wholly owned indirect subsidiary of Equitable. To
maintain the ongoing continuity of the Partnership's operation, ERE was retained
by the Managing General Partner, at the Managing General Partner's expense, to
continue providing the same services with respect to the Partnership, EML
Associates (the "Venture") and the properties that ERE has historically provided
to the Managing General Partner. ERE currently operates in conjunction with
another Lend Lease affiliate under the name ERE Yarmouth. The sale did not
affect the ownership of EREIM LP Associates, the guarantor under the Guaranty
Agreement, as ERE has no interest therein. The obligations of EREIM LP
Associates under the Guaranty Agreement and of Equitable under the Keep Well
Agreement were not affected by the sale.
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 September 30,
1997 and December 31, 1996, the accrued balance of these fees and reimbursements
totaled $320,631 and $608,207, respectively. For each of the nine month periods
ended September 30, 1997 and 1996, the expense for these recurring fees totaled
$952,096 and $902,989, respectively. Of the total fees, asset management fees
paid by the Managing General Partner to ERE Yarmouth were $566,265 and $511,645
for the nine months ended September 30, 1997 and 1996, 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 third-party managing and leasing
agents, including Compass Management and Leasing, Inc. ("Compass") and Compass
Retail, Inc. ("Compass Retail"), affiliates of ERE Yarmouth. As discussed in
note 1, until June 10, 1997, ERE, the predecessor company to ERE Yarmouth, was
an affiliate of Equitable. 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.
7
<PAGE> 8
ML/EQ REAL ESTATE PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Property management fees for properties managed by Compass and Compass Retail
were $296,401 and $299,435 for the nine months ended September 30, 1997 and
1996, 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, a joint venture in which the Partnership holds an 80%
interest and invests in income-producing real properties and a fixed-rate
mortgage loan, to Compass and Compass Retail were $107,913 and $62,059 for each
of the nine month periods ended September 30, 1997 and 1996, 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 $1,256,638 and
$1,288,456 for each of the nine month periods ended September 30, 1997 and 1996,
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
$7,476 and $88,331 for each of the nine month periods ended September 30, 1997
and 1996, 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, a general partnership between Equitable and EREIM LP
Corp., a wholly owned subsidiary of Equitable, 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 September 30, 1997 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 September 30, 1997 is limited to
$228,963,170, 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 of the Partnership totaled
$108,484,500. As of September 30, 1997, the cumulative 9.75% simple annual
return was $99,554,795. As of September 30, 1997, cumulative distributions by
the Partnership to the BAC Holders totaled $31,796,793 of which $26,307,492 is
attributable to income from operations and $5,489,301 is attributable to sales
of Venture assets, principal payments on
8
<PAGE> 9
ML/EQ REAL ESTATE PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
4. RENTAL PROPERTIES HELD FOR SALE
In October 1997, the Partnership executed a binding purchase and sale
agreement whereby Talisman Brookdale L.L.C. agreed to purchase Brookdale Center
for $24,830,000, of which the Venture's portion is approximately $17,793,000.
The Venture, in which the Partnership holds an 80% interest, holds a 71.66%
participation interest in Brookdale Center. The Partnership anticipates making a
special distribution of the net proceeds shortly after the transaction is
complete. Based on the amendment to the Joint Venture Agreement effective as of
January 1, 1997, EREIM LP Associates agreed to defer, without interest, its
right to receive 20% of the Venture's distribution of sale and financing
proceeds, thereby entitling the Partnership to receive currently 100% of the
sale and financing proceeds attributable to the sale. A closing is anticipated
to occur prior to year end, subject to customary closing conditions. At
September 30, 1997, Brookdale Center was classified as held for sale; no gain or
loss was recorded as a result of the reclassification.
5. LEGAL PROCEEDINGS
The Partnership is a defendant in a consolidated action brought in the
Court of Chancery of the State of Delaware entitled IN RE: ML/EQ Real Estate
Partnership Litigation. The consolidated action results from two related cases.
Scher v. ML/EQ Real Estate Portfolio, L.P., et al., was served on the
Partnership on July 14, 1997. On September 8, 1997, the Partnership was named as
a defendant in Folette v. ML/EQ Real Estate Portfolio, L.P., et al., a
substantially similar complaint, also brought in the Court of Chancery of the
State of Delaware. The cases were consolidated pursuant to a stipulation between
the parties by order of the court on October 3, 1997. In addition to the
Partnership, the complaint names as defendants EREIM Managers Corp., Equitable,
ERE, EREIM L.P. Corp. and EREIM LP Associates.
The Plaintiffs purport to sue on behalf of a class of all limited partners
of the Partnership who purportedly have been or will be adversely affected by
the conduct of the defendants. The complaint alleges that the defendants have
caused the Venture to accumulate excessive cash rather than distribute it to the
limited partners, and that defendants' motive in so doing was (i) to manipulate
the Partnership's cash flow so as to limit certain defendants' exposure under
the guarantee agreement and (ii) to secure for certain defendants additional
fees. The complaint also alleges that defendants have utilized the Venture to
provide liquidity for illiquid assets and to acquire and continue to hold
under-performing properties. The complaint purports to state claims for breach
of fiduciary duties, breach of contract, and aiding and abetting breach of
fiduciary duties. The complaint requests, among other things, money damages in
an unspecified amount and orders that defendants distribute to the purported
class the cash which defendants have allegedly wrongfully failed to distribute
and disgorge all earnings, profits, interests and other benefits which they have
realized on account of their allegedly wrongful conduct. The Partnership
intends to defend vigorously against these claims. On November 6, 1997,
defendants asserted the complaint, denying any wrongdoing. Additionally,
defendants have noticed a motion to dismiss the case on the pleadings in the
Delaware Court of Chancery. Although the outcome of any litigation cannot be
predicted with certainty, particularly in the early stages of an action, the
Partnership's management believes that the ultimate resolution of the litigation
should not have a material adverse effect on the financial condition of the
Partnership. Due to the early stage of such litigation, the Partnership's
management cannot make an estimate of loss, if any, or predict whether or not
such litigation will have a material adverse effect on the Partnership's results
of operations in any particular period.
9
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following analysis of the consolidated results of operations and
financial condition of the Partnership should be read in conjunction with the
consolidated financial statements and the related notes to consolidated
financial statements included elsewhere herein.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1997, the Partnership had cash and cash equivalents of
approximately $2.0 million. Such cash and cash equivalents are available for
distribution to the extent not required for working capital and administration
expenses. In addition, at September 30, 1997, the Venture, in which the
Partnership owns an 80% interest, had approximately $11.4 million in cash and
cash equivalents. This money was retained for the specific purpose of funding
ongoing capital improvement programs for The Bank of Delaware Building and
Richland Mall and as otherwise required.
The Partnership continues to evaluate appropriate strategies for the
ownership of each of the assets in the portfolio in order to achieve maximum
value. In this regard, we take into account improving capital markets and
investment markets for most types of real estate; local market conditions;
future capital needs, including potential lease exposure for specific
properties; and other issues that impact property performance. Among other
things, this analysis will provide the basis for hold/sell recommendations for
the properties.
On December 16, 1996, Brookdale Center was transferred to the Venture and
Equitable, as tenants in common (collectively, the "Owners"), following default
by the borrower on the mortgage note securing the property. The Owners
considered alternative strategies for Brookdale Center and ultimately determined
that the best course of action was to sell the property. In July 1997, the
Owners received an offer to purchase Brookdale Center and subsequently executed
a binding purchase and sale agreement in October whereby Talisman Brookdale
L.L.C. agreed to purchase Brookdale Center for $24,830,000, of which the
Venture's portion is approximately $17,793,000. The Venture, in which the
Partnership holds an 80% interest, holds a 71.66% participation interest in
Brookdale Center. The Partnership anticipates making a special distribution of
the net proceeds shortly after the transaction is complete. Based on the
amendment to the Joint Venture Agreement effective as of January 1, 1997, EREIM
LP Associates agreed to defer, without interest, its right to receive 20% of the
Venture's distribution of sale and financing proceeds, thereby entitling the
Partnership to receive currently 100% of the sale and financing proceeds
attributable to the sale. A closing is anticipated to occur prior to year end,
subject to customary closing conditions.
Given the improving capital markets and the investment climate for
industrial properties, the Partnership has decided to market the four Chicago
Industrial properties for sale. To that end, a brokerage firm has been engaged.
If offers to purchase the properties are within the expected price range, the
Partnership anticipates the properties will be sold.
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
program total $4.4 million, of which $1.6 million was incurred in 1995, $1.2
million was incurred in 1996, and the remaining balance is expected to be
expended through 1999. As of September 30, 1997, approximately $2.9 million of
these costs had been expended.
Included in the estimated $4.4 million of renovation expenditures is
approximately $2.3 million for asbestos abatement, $400,000 for sprinkler
installation, $400,000 for exterior deferred maintenance and $600,000 for
interior and exterior common area cosmetic upgrades. Management expects the
cosmetic upgrades to give the building a fresher, more inviting look. Additional
costs not included in the above figures are estimated tenant improvements of
$3.0 million. The tenant improvement costs are directly associated with actual
leasing and will only be expended as leasing transactions occur in the building.
As of September 30, 1997, approximately $619,000 had been expended for tenant
improvements. The remaining tenant improvement
10
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
costs of approximately $2.4 million are expected to be expended over the next
few years to lease the currently vacant space.
The Venture expects to incur costs of approximately $3.8 million to
increase tenancy at Richland Mall, including $2.1 million for tenant
improvements in connection with leasing approximately 55,000 square feet of
space to Redner's Market. Management has executed a lease with Redner's Market
that will expand the current 26,000 square foot vacant grocery to approximately
55,000 square feet in order to accommodate the tenant's requirements. The
Redner's Market lease is for an initial 20-year term with renewal options
thereafter. The balance of approximately $1.7 million is to be expended in
connection with the relocation of tenants in order to accommodate Redner's, as
well as other work required in connection with the project. Additional funds may
be expended in connection with any future leasing at the property. Of the total
$3.8 million to be expended, approximately $2.3 million of these costs have been
incurred as of September 30, 1997.
Cash received by the Venture from tenant rentals for the nine months ended
September 30, 1997 increased approximately $3.0 million to $19.1 million from
$16.1 million for the nine months ended September 30, 1996. This increase is due
primarily to the reclassification of Brookdale Center from a zero coupon
mortgage note receivable to a rental property in December 1996. Rental income
received from Brookdale Center for the nine months ended September 30, 1997 was
approximately $5.7 million, of which the Venture's portion was approximately
$4.1 million. The increase is offset by a decrease in the receipt of tenant
rentals at Richland Mall during 1997 in connection with the enhancement program
and the timing of receipts at the various other properties.
Interest received for the nine months ended September 30, 1997 decreased
approximately $2.1 million to $1.6 million from $3.7 million for the nine months
ended September 30, 1996. This decrease is due primarily to the receipt of
approximately $3.2 million in 1996, of which the Venture's portion was
approximately $2.3 million, which was remitted under the terms of the
receivership for the Brookdale Zero Note.
FINANCIAL CONDITION
Prepaid expenses and other assets increased approximately $883,000 from
$684,000 at December 31, 1996 to $1.6 million at September 30, 1997. The
increase is primarily due to the payment of real estate taxes at Northland Mall
during the third quarter and the receipt of $500,000 in escrow deposits related
to the sale of Brookdale Center, of which the Venture's portion is approximately
$358,000.
Total liabilities decreased approximately $886,000 from $5.3 million at
December 31, 1996 to $4.4 million at September 30, 1997. The decrease is
primarily due to the payment of approximately $560,000 of accrued capital
expenditures during 1997 and the semiannual payment of distributions to BAC
holders and limited partners of $813,634 in the first quarter of 1997. The
decrease is offset by an increase in other liabilities due to the receipt of
$500,000 in escrow deposits related to the sale of Brookdale Center, of which
the Venture's portion is approximately $358,000.
RESULTS OF OPERATIONS
Rental income for the three and nine months ended September 30, 1997
increased approximately $987,000 and $4.3 million, respectively, compared to the
three and nine months ended September 30, 1996.
11
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
The increase is due primarily to rental income from Brookdale Center of
approximately $1.9 million and $6.0 million for the three and nine months ended
September 30, 1997, respectively, of which the Venture's portion was
approximately $1.3 million and $4.3 million, respectively. The increase is
partially offset by a decrease in rental income during 1997 at Richland Mall.
Lease termination rental income for the nine months ended September 30,
1997 increased approximately $71,000 compared to the nine months ended September
30, 1996. The increase is due to approximately $133,000 of lease termination
rental income recognized during the first half of 1997 at Richland Mall compared
to approximately $62,000 of lease termination rental income recognized during
the first half of 1996 at Northland Mall and the Sentry Park West Building.
Interest on loans receivable for the three and nine months ended September
30, 1997 decreased approximately $877,000 and $2.3 million, respectively,
compared to the three and nine months ended September 30, 1996. The decline is
due to interest income received on the Brookdale Zero Note of approximately $1.2
million and $3.2 million for the three and nine months ended September 30, 1996,
of which the Venture's portion was approximately $880,000 and $2.3 million,
respectively.
Real estate operating expenses increased approximately $582,000 and $1.3
million, respectively, for the three and nine months ended September 30, 1997
compared to the three and nine months ended September 30, 1996. The increase is
due primarily to real estate operating expenses at Brookdale Center of
approximately $518,000 and $1.8 million for the three and nine months ended
September 30, 1997, of which the Venture's portion was approximately $371,000
and $1.3 million, respectively.
Depreciation and amortization for the three and nine months ended September
30, 1997 increased by approximately $89,000 and $322,000, respectively, compared
to the three and nine months ended September 30, 1996. The increase is primarily
due to depreciation recorded by Brookdale Center of approximately $75,000 and
$297,000 for the three and nine months ended September 30, 1997, of which the
Venture's portion was approximately $53,000 and $213,000, respectively. The
remaining increase is attributable to capital renovations incurred at Northland
Center and the enhancement, stabilization, and renovation program for The Bank
of Delaware Building.
Real estate taxes for the three and nine months ended September 30, 1997
increased approximately $216,000 and $788,000, respectively, compared to the
three and nine months ended September 30, 1996. The increase is primarily due to
the real estate taxes associated with Brookdale Center of approximately $392,000
and $1.2 million for the three and nine months ended September 30, 1997, of
which the Venture's portion was approximately $281,000 and $836,000,
respectively.
The percentage of leased space at the Venture's properties at September 30,
1997 was 78.8% compared to the percentage of leased space at December 31, 1996
of 85.5%. The 6.7% decline is partially due to the termination of leases in
connection with plans to enhance the tenant mix at Richland Mall and tenants
vacating both Brookdale Center and Northland Center upon their lease
expirations. In addition, the Treadway Exports Limited ("Treadway") lease at the
Westfork Drive property expired August 31, 1997. The property was 100% leased to
Treadway. Management is currently marketing the vacant space to prospective
tenants.
12
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
CERTAIN FORWARD-LOOKING INFORMATION
Certain of the statements contained in this Quarterly Report on Form 10-Q
constitute forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. These statements include, without limitation,
statements regarding the sale of Brookdale Center and future capital
expenditures relating to renovation and development activities. These
forward-looking statements are included in this Quarterly Report on Form 10-Q
based on the intent, belief or current expectations of the Partnership. However,
such forward-looking statements are not guarantees of future performance and
involve risks and uncertainties, and actual results may differ materially from
those projected in the forward-looking statements as a result of various
factors. Although the Partnership believes that the expectations reflected in
such forward-looking statements are based upon reasonable assumptions, it can
give no assurance that its expectations will be achieved. Factors that could
cause actual results to differ materially from the Partnership's current
expectations include general local market conditions, the investment climate for
particular property types, individual property issues, construction delays due
to unavailability of materials, weather conditions or other causes, leasing
activities, and the other risks detailed from time to time in the Partnership's
SEC reports, including the report on Form 10-K for the year ended December 31,
1996.
13
<PAGE> 14
PART II
Item 1. Legal Proceedings
The Partnership is a defendant in a consolidated action brought in
the Court of Chancery of the State of Delaware entitled IN RE: ML/EQ Real
Estate Partnership Litigation. The consolidated action results from two related
cases. Scher v. ML/EQ Real Estate Portfolio, L.P., et al., was served on the
Partnership on July 14, 1997. On September 8, 1997, the Partnership was named
as a defendant in Folette v. ML/EQ Real Estate Portfolio, L.P., et al., a
substantially similar complaint, also brought in the Court of Chancery of the
State of Delaware. The cases were consolidated pursuant to a stipulation
between the parties by order of the court on October 3, 1997. In addition to
the Partnership, the complaint names as defendants EREIM Managers Corp.,
Equitable, ERE, EREIM L.P. Corp. and EREIM LP Associates.
The Plaintiffs purport to sue on behalf of a class of all limited
partners of the Partnership who purportedly have been or will be adversely
affected by the conduct of the defendants. The complaint alleges that the
defendants have caused the Venture to accumulate excessive cash rather than
distribute it to the limited partners, and that defendants' motive in so doing
was (i) to manipulate the Partnership's cash flow so as to limit certain
defendants' exposure under the guarantee agreement and (ii) to secure for
certain defendants additional fees. The complaint also alleges that defendants
have utilized the Venture to provide liquidity for illiquid assets and to
acquire and continue to hold under-performing properties. The complaint
purports to state claims for breach of fiduciary duties, breach of contract,
and aiding and abetting breach of fiduciary duties. The complaint requests,
among other things, money damages in an unspecified amount and orders that
defendants distribute to the purported class the cash which defendants have
allegedly wrongfully failed to distribute and disgorge all earnings, profits,
interests and other benefits which they have realized on account of their
allegedly wrongful conduct. The Partnership intends to defend vigorously
against these claims. On November 6, 1997, defendants asserted the complaint,
denying any wrongdoing. Additionally, defendants have noticed a motion to
dismiss the case on the pleadings in the Delaware Court of Chancery. Although
the outcome of any litigation cannot be predicted with certainty, particularly
in the early stages of an action, the Partnership's management believes that the
ultimate resolution of the litigation should not have a material adverse effect
on the financial condition of the Partnership. Due to the early stage of such
litigation, the Partnership's management cannot make an estimate of loss, if
any, or predict whether or not such litigation will have a material adverse
effect on the Partnership's results of operations in any particular period.
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> 15
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Partnership has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
ML/EQ Real Estate Portfolio, L.P.
By: EREIM Managers Corp.
Managing General Partner
By: /s/ Patricia C. Snedeker
-------------------------------------
Patricia C. Snedeker
Vice President, Controller
and Treasurer
(Principal Accounting Officer)
Dated: November 14, 1997
15
<PAGE> 16
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ---------- -----------------------------------------------------
<S> <C>
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
SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 13,354,668
<SECURITIES> 0
<RECEIVABLES> 4,926,197
<ALLOWANCES> 1,104,220
<INVENTORY> 0
<CURRENT-ASSETS> 18,743,285
<PP&E> 147,870,511
<DEPRECIATION> 18,670,285
<TOTAL-ASSETS> 158,699,191
<CURRENT-LIABILITIES> 3,310,382
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 123,727,749
<TOTAL-LIABILITY-AND-EQUITY> 158,699,191
<SALES> 0
<TOTAL-REVENUES> 20,765,901
<CGS> 0
<TOTAL-COSTS> 10,169,549
<OTHER-EXPENSES> 3,214,801
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 6,083,974
<INCOME-TAX> 0
<INCOME-CONTINUING> 4,624,335
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,624,335
<EPS-PRIMARY> .81
<EPS-DILUTED> 0
</TABLE>
