<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 June 30, 1997
-------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to
------------------------- -----------------------
Commission file number 0-17684
--------
ML/EQ Real Estate Portfolio, L.P.
-------------------------------------------------------------------
(Exact name of registrant as specified in its governing instrument)
Delaware 58-1739523
- --------------------------------------------------------------------------------
(State of Organization) (I.R.S. Employer Identification No.)
3424 Peachtree Road N.E., Suite 800, Atlanta, Georgia 30326
- --------------------------------------------------------------------------------
(Address of principal executive office) (Zip Code)
(Registrant's telephone number, including area code) (404) 239-5002
----------------------------
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
--- ---
<PAGE> 2
ML/EQ REAL ESTATE PORTFOLIO, L.P.
CONTENTS
PART I - FINANCIAL INFORMATION
Item 1 - Financial statements:
Consolidated balance sheets at June 30, 1997 and
December 31, 1996
Consolidated statements of operations for the three and six
months ended June 30, 1997 and 1996
Consolidated statement of partners' capital for the six
months ended June 30, 1997
Consolidated statements of cash flows for the six months
ended June 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
JUNE 30, 1997 AND DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
REAL ESTATE INVESTMENTS:
Rental properties, net of accumulated depreciation of
$17,903,975 in 1997 and $15,898,604 in 1996............ $127,966,237 $129,359,200
Mortgage loan receivable.................................. 6,000,000 6,000,000
------------ ------------
Total real estate investments..................... 133,966,237 135,359,200
------------ ------------
OTHER ASSETS:
Cash and cash equivalents................................. 31,140,627 27,310,460
Accounts receivable and accrued investment income, net of
allowance for doubtful accounts of $851,490 in 1997 and
$748,994 in 1996....................................... 4,069,912 3,532,898
Deferred rent concessions................................. 2,227,863 2,178,371
Guaranty fee, net of accumulated amortization of
$2,267,336 in 1997 and $2,133,211 in 1996 (Notes 2 and
3)..................................................... 1,475,378 1,609,504
Deferred leasing costs, net of accumulated amortization of
$741,088 in 1997 and $604,828 in 1996.................. 977,196 1,167,420
Prepaid expenses and other assets......................... 413,560 683,920
Interest receivable....................................... 144,752 120,195
Due from affiliates (Note 2).............................. 27,213 5,260
------------ ------------
Total other assets................................ 40,476,501 36,608,028
------------ ------------
TOTAL ASSETS...................................... $174,442,738 $171,967,228
============ ============
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Accounts payable and accrued real estate expenses......... $ 1,813,287 $ 2,254,677
Accrued capital expenditures.............................. 122,925 1,120,796
Security deposits and unearned rent....................... 827,895 525,578
Due to affiliates (Note 2)................................ 631,465 608,207
Distributions declared.................................... 14,646,083 813,634
------------ ------------
Total liabilities................................. 18,041,655 5,322,892
------------ ------------
MINORITY INTEREST IN THE VENTURE............................ 33,938,584 32,894,839
------------ ------------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 2)
PARTNERS' CAPITAL:
General partners.......................................... 2,312,303 2,144,349
Initial limited partner................................... 6,219 6,747
Limited partners (5,424,225 BACs issued and
outstanding)........................................... 120,143,977 131,598,401
------------ ------------
Total partners' capital........................... 122,462,499 133,749,497
------------ ------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL........... $174,442,738 $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 SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------------- -------------------------
1997 1996 1997 1996
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUE:
Rental income............................... $6,027,854 $4,716,876 $12,847,174 $ 9,582,681
Lease termination income.................... -- 35,657 132,840 62,171
Interest on loans receivable................ 153,750 977,848 307,500 1,722,798
---------- ---------- ----------- -----------
Total revenue....................... 6,181,604 5,730,381 13,287,514 11,367,650
---------- ---------- ----------- -----------
OPERATING EXPENSES:
Real estate operating expenses.............. 2,157,115 1,939,586 4,690,772 3,948,808
Depreciation and amortization............... 1,072,441 976,069 2,141,630 1,908,456
Real estate taxes........................... 824,406 570,507 1,654,968 1,083,114
Property management fees (Note 2)........... 136,767 119,034 286,413 231,142
---------- ---------- ----------- -----------
Total operating expenses............ 4,190,729 3,605,196 8,773,783 7,171,520
---------- ---------- ----------- -----------
INCOME FROM PROPERTY OPERATIONS............... 1,990,875 2,125,185 4,513,731 4,196,130
OTHER INCOME (EXPENSE):
Interest and other nonoperating income...... 404,262 281,416 759,434 555,883
Asset management fees....................... (188,754) (169,926) (375,435) (339,852)
Amortization of guarantee fee............... (67,063) (67,063) (134,126) (134,126)
General and administrative, including
$256,030 and $260,415 at June 30, 1997
and 1996, respectively, to affiliates
(Note 2)................................. (189,320) (169,344) (360,774) (346,459)
---------- ---------- ----------- -----------
Total other expense -- net.......... (40,875) (124,917) (110,901) (264,554)
---------- ---------- ----------- -----------
INCOME BEFORE MINORITY INTEREST............... 1,950,000 2,000,268 4,402,830 3,931,576
MINORITY INTEREST IN NET INCOME OF
CONSOLIDATED VENTURE........................ (473,500) (476,971) (1,043,745) (940,702)
---------- ---------- ----------- -----------
NET INCOME.................................... $1,476,500 $1,523,297 $ 3,359,085 $ 2,990,874
========== ========== =========== ===========
ALLOCATION OF NET INCOME:
General partners............................ $ 73,825 $ 76,165 $ 167,954 $ 149,544
Initial limited partner..................... 65 67 147 131
Limited partners............................ 1,402,610 1,447,065 3,190,984 2,841,199
---------- ---------- ----------- -----------
TOTAL............................... $1,476,500 $1,523,297 $ 3,359,085 $ 2,990,874
========== ========== =========== ===========
NET INCOME PER LIMITED PARTNER BAC............ $ 0.26 $ 0.27 $ 0.59 $ 0.52
========== ========== =========== ===========
WEIGHTED AVERAGE BACs OUTSTANDING............. 5,424,225 5,424,225 5,424,225 5,424,225
========== ========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
ML/EQ REAL ESTATE PORTFOLIO, L.P.
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
FOR THE SIX MONTHS ENDED JUNE 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..................................... 167,954 147 3,190,984 3,359,085
Distributions declared......................... -- (675) (14,645,408) (14,646,083)
---------- ------ ------------ ------------
Balance, June 30, 1997......................... $2,312,303 $6,219 $120,143,977 $122,462,499
========== ====== ============ ============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
ML/EQ REAL ESTATE PORTFOLIO, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Tenant rentals received................................... $12,695,826 $10,523,080
Interest received......................................... 1,042,377 2,281,342
----------- -----------
Cash received from operations............................. 13,738,203 12,804,422
Cash paid for operating activities........................ (7,538,087) (6,202,416)
Cash distributions to minority interest................... -- (300,000)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES................... 6,200,116 6,302,006
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases and additions to rental properties.............. (1,610,279) (4,171,321)
Expenditures for deferred leasing costs................... 53,964 (127,345)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES....................... (1,556,315) (4,298,666)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash distributions to limited partners.................... (813,634) (542,423)
----------- -----------
NET CASH USED IN FINANCING ACTIVITIES....................... (813,634) (542,423)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 3,830,167 1,460,917
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 27,310,460 21,738,499
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $31,140,627 $23,199,416
=========== ===========
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
Net Income................................................ $ 3,359,085 $ 2,990,874
----------- -----------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 2,275,756 2,042,582
Minority interest in Venture operations................... 1,043,745 940,702
Cash distributions to minority interest................... -- (300,000)
Changes in assets (increase) decrease:
Accounts receivable and accrued investment income......... (537,013) 797,075
Deferred rent concessions................................. (49,492) (19,270)
Interest receivable....................................... (24,557) 2,661
Prepaid expenses and other assets......................... 270,360 278,929
Due from affiliates....................................... (21,953) (17,759)
Changes in liabilities increase (decrease):
Accounts payable and accrued real estate expenses......... (441,390) (504,863)
Security deposits and unearned rent....................... 302,317 100,423
Due to affiliates......................................... 23,258 (9,348)
----------- -----------
Total adjustments........................................... 2,841,031 3,311,132
----------- -----------
NET CASH FLOW PROVIDED BY OPERATING ACTIVITIES.............. $ 6,200,116 $ 6,302,006
=========== ===========
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 7
ML/EQ REAL ESTATE PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 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. 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 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 June 30, 1997 and
December 31, 1996 the accrued balance of these fees and reimbursements totaled
$631,465 and $608,207, respectively. For each of the six month periods ended
June 30, 1997 and 1996, the expense for these recurring fees totaled $631,465
and $600,267, 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. Property management fees for properties
managed by Compass and Compass Retail were $202,477 and $200,825 for the six
months ended June 30, 1997 and 1996, respectively.
7
<PAGE> 8
ML/EQ REAL ESTATE PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $32,122 and $50,316 for each
of the six month periods ended June 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 $839,610 and $898,021 for
each of the six month periods ended June 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
$77,394 for each of the six month periods ended June 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 June 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 June 30, 1997 is limited to $243,587,944,
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 June 30, 1997, the cumulative 9.75% simple annual return was
$97,023,653. As of June 30, 1997, cumulative distributions by the Partnership to
the BAC Holders totaled $17,151,385 of which $11,662,084 is attributable to
income from operations and $5,489,301 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
8
<PAGE> 9
ML/EQ REAL ESTATE PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to provide the specified minimum return, any shortfall will be funded by the
guarantor, up to the above described maximum.
4. SUBSEQUENT EVENTS
Legal Proceedings -- The Partnership is a defendant in Scher v. ML/EQ Real
Estate Portfolio, L.P., et al., an action brought in the Court of Chancery of
the State of Delaware. The complaint was served on the Partnership on July 14,
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 Plaintiff purports 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
underperforming 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 has not
yet responded to the complaint but will do so in the time permitted to respond.
The Partnership intends to defend vigorously against these claims. 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.
Brookdale Center -- In early July, the Venture and Equitable received an
offer to purchase Brookdale Center and subsequently signed a nonbinding letter
of intent. To the extent that the potential purchaser has not signed a binding
contract within a reasonable period, the Venture and Equitable expect to
initiate a marketing program for this property.
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 June 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 June 30, 1997, the Venture, in which
the Partnership owns an 80% interest, had approximately $29.1 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,
Richland Mall and Northland Mall, and to potentially fund a major capital
improvement program for Brookdale Center. As a result of the decisions made
regarding Brookdale Center discussed in detail below, the Partnership has
decided to distribute a major portion of the monies previously held. The
Venture will maintain approximately $10 million for future capital needs 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 various alternative strategies for Brookdale Center and ultimately
determined that the best course of action was to sell the property. In early
July, the Owners received an offer to purchase Brookdale Center and subsequently
signed a nonbinding letter of intent. To the extent that the potential purchaser
has not signed a binding contract within a reasonable period, the Owners expect
to initiate a marketing program for this property.
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 June 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, of which approximately $1.8
million has been expended. Also included in the $4.4 million is $400,000 for
sprinkler installation, $400,000 for exterior deferred maintenance and $600,000
for interior and exterior common area cosmetic upgrades. 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
$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 June 30, 1997, approximately $287,000 had been expended for tenant
improvements. The remaining tenant improvement costs of approximately $2.7
million are expected to be expended over the next few years to lease the
currently vacant space.
10
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
The Venture anticipates 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. As of June
30, 1997, approximately $504,000 of these costs have been incurred.
Cash received by the Venture from tenant rentals for the six months ended
June 30, 1997 increased approximately $2.2 million to $12.7 million from $10.5
million for the six months ended June 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 six months ended June 30, 1997 was approximately $4.2
million, of which the Venture's portion was approximately $3.0 million.
Interest received for the six months ended June 30, 1997 decreased
approximately $1.2 million to $1.0 million from $2.3 million for the six months
ended June 30, 1996. This decrease is due primarily to the receipt of
approximately $2.0 million in 1996, 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.
FINANCIAL CONDITION
Total liabilities increased approximately $12.7 million from $5.3 million
at December 31, 1996 to $18.0 million at June 30, 1997. The increase is
attributable to the distribution declared as of June 30, 1997 which was
approximately $13.8 million greater than the distribution declared as of
December 31, 1996. This increase is partially offset by a decrease of
approximately $1.0 million attributable to accrued capital expenditures paid
during the first half of 1997.
RESULTS OF OPERATIONS
Rental income for the three and six months ended June 30, 1997 increased
approximately $1.3 million and $3.3 million, respectively, compared to the three
and six months ended June 30, 1996. The increase is due primarily to rental
income from Brookdale Center of approximately $2.0 million and $4.1 million for
the three and six months ended June 30, 1997, respectively, of which the
Venture's portion was approximately $1.4 million and $2.9 million, respectively.
Lease termination rental income for the six months ended June 30, 1997
increased approximately $71,000 compared to the six months ended June 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 six months ended June 30,
1997 decreased approximately $824,000 and $1.4 million, respectively, compared
to the three and six months ended June 30, 1996. The decline is due to interest
11
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
income received on the Brookdale Zero Note of approximately $825,000 and $2.0
million for the three and six months ended June 30, 1996, of which the
Venture's portion was approximately $590,000 and $1.4 million, respectively.
Real estate operating expenses increased approximately $218,000 and
$742,000, respectively, for the three and six months ended June 30, 1997
compared to the three and six months ended June 30, 1996. The increase is due
primarily to real estate operating expenses at Brookdale Center of approximately
$625,000 and $1.3 million for the three and six months ended June 30, 1997, of
which the Venture's portion was approximately $448,000 and $946,000,
respectively. The increase in real estate operating expenses at Brookdale Center
is partially offset by a decrease in utility and HVAC expense at Northland Mall
due primarily to a new contract with the local electric company, the initiation
of an energy conservation program and additional HVAC repairs and maintenance
expense incurred in 1996.
Depreciation and amortization for the three and six months ended June 30,
1997 increased by approximately $96,000 and $233,000, respectively, compared to
the three and six months ended June 30, 1996. The increase is primarily due to
depreciation recorded by Brookdale Center of approximately $112,000 and $222,000
for the three and six months ended June 30, 1997, of which the Venture's portion
was approximately $80,000 and $159,000, 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 six months ended June 30, 1997
increased approximately $254,000 and $572,000, respectively, compared to the
three and six months ended June 30, 1996. The increase is primarily due to the
real estate taxes associated with Brookdale Center of approximately $380,000 and
$776,000 for the three and six months ended June 30, 1997, of which the
Venture's portion was approximately $272,000 and $556,000, respectively.
The percentage of leased space at the Venture's properties at June 30, 1997
was 84.1% compared to the percentage of leased space at December 31, 1996 of
85.5%. The 1.4% decline is 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 Mall upon their lease expirations.
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
12
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
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 Scher v. ML/EQ Real Estate Portfolio,
L.P., et al., an action brought in the Court of Chancery of the State of
Delaware. The complaint was served on the Partnership on July 14, 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 Plaintiff purports 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 underperforming 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 has not yet responded to the complaint but
will do so in the time permitted to respond. The Partnership intends to defend
vigorously against these claims. 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
Current Report on Form 8-K of the Partnership dated July 10, 1997.
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: August 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 JUNE
30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 31,140,627
<SECURITIES> 0
<RECEIVABLES> 5,093,367
<ALLOWANCES> 851,490
<INVENTORY> 0
<CURRENT-ASSETS> 35,796,064
<PP&E> 145,870,212
<DEPRECIATION> 17,903,975
<TOTAL-ASSETS> 174,442,738
<CURRENT-LIABILITIES> 17,213,760
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 122,462,499
<TOTAL-LIABILITY-AND-EQUITY> 174,442,738
<SALES> 0
<TOTAL-REVENUES> 14,046,948
<CGS> 0
<TOTAL-COSTS> 6,632,153
<OTHER-EXPENSES> 2,141,630
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,402,830
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,359,085
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,359,085
<EPS-PRIMARY> .59
<EPS-DILUTED> 0
</TABLE>
