<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 March 31, 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, GA 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 March 31, 1997 and
December 31, 1996
Consolidated statements of operations for the three months
ended March 31, 1997 and 1996
Consolidated statement of partners' capital for the three
months ended March 31, 1997
Consolidated statements of cash flows for the three months
ended March 31, 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
MARCH 31, 1997 AND DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
REAL ESTATE INVESTMENTS:
Rental properties, net of accumulated depreciation of
$16,898,634 in 1997 and $15,898,604 in 1996............ $128,718,133 $129,359,200
Mortgage loan receivable.................................. 6,000,000 6,000,000
------------ ------------
Total real estate investments..................... 134,718,133 135,359,200
------------ ------------
OTHER ASSETS:
Cash and cash equivalents................................. 28,103,050 27,310,460
Accounts receivable and accrued investment income, net of
allowance for doubtful accounts of $870,730 in 1997 and
$748,994 in 1996....................................... 3,962,803 3,532,898
Deferred rent concessions................................. 2,213,465 2,178,371
Guaranty fee, net of accumulated amortization of
$2,200,274 in 1997 and $2,133,211 in 1996 (Notes 2 and
3)..................................................... 1,542,441 1,609,504
Deferred leasing costs, net of accumulated amortization of
$673,988 in 1997 and $604,828 in 1996.................. 1,016,947 1,167,420
Prepaid expenses and other assets......................... 897,987 683,920
Interest receivable....................................... 119,558 120,195
Due from affiliates (Note 2).............................. 12,710 5,260
------------ ------------
Total other assets................................ 37,868,961 36,608,028
------------ ------------
TOTAL ASSETS...................................... $172,587,094 $171,967,228
============ ============
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Accounts payable and accrued real estate expenses......... $ 2,345,950 $ 2,254,677
Accrued capital expenditures.............................. 200,265 1,120,796
Security deposits and unearned rent....................... 629,394 525,578
Due to affiliates (Note 2)................................ 314,319 608,207
Distributions declared.................................... -- 813,634
------------ ------------
Total liabilities................................. 3,489,928 5,322,892
------------ ------------
MINORITY INTEREST IN THE VENTURE............................ 33,465,084 32,894,839
------------ ------------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 3)
PARTNERS' CAPITAL:
General partners.......................................... 2,238,478 2,144,349
Initial limited partner................................... 6,829 6,747
Limited partners (5,424,225 BACs issued and
outstanding)........................................... 133,386,775 131,598,401
------------ ------------
Total partners' capital........................... 135,632,082 133,749,497
------------ ------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL........... $172,587,094 $171,967,228
============ ============
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 4
ML/EQ REAL ESTATE PORTFOLIO, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
-----------------------
1997 1996
---------- ----------
<S> <C> <C>
REVENUE:
Rental income............................................. $6,819,320 $4,865,805
Lease termination income.................................. 132,840 26,514
Interest on loans receivable.............................. 153,750 744,950
---------- ----------
Total revenue..................................... 7,105,910 5,637,269
---------- ----------
OPERATING EXPENSES:
Real estate operating expenses............................ 2,533,657 2,009,222
Depreciation and amortization............................. 1,069,189 932,387
Real estate taxes......................................... 830,562 512,607
Property management fees (Note 2)......................... 149,646 112,108
---------- ----------
Total operating expenses.......................... 4,583,054 3,566,324
---------- ----------
INCOME FROM PROPERTY OPERATIONS............................. 2,522,856 2,070,945
OTHER INCOME (EXPENSE):
Interest and other nonoperating income.................... 355,172 274,467
Asset management fees..................................... (186,681) (169,926)
Amortization of guarantee fee............................. (67,063) (67,063)
General and administrative, including $127,638 and
$130,689 at March 31, 1997 and 1996, respectively, to
affiliates (Note 2).................................... (171,454) (177,115)
---------- ----------
Total other expense -- net........................ (70,026) (139,637)
---------- ----------
INCOME BEFORE MINORITY INTEREST............................. 2,452,830 1,931,308
MINORITY INTEREST IN NET INCOME OF CONSOLIDATED VENTURE..... (570,245) (463,731)
---------- ----------
NET INCOME.................................................. $1,882,585 $1,467,577
========== ==========
ALLOCATION OF NET INCOME:
General partners.......................................... $ 94,129 $ 73,379
Initial limited partner................................... 82 64
Limited partners.......................................... 1,788,374 1,394,134
---------- ----------
TOTAL............................................. $1,882,585 $1,467,577
========== ==========
NET INCOME PER LIMITED PARTNER BAC.......................... $ 0.33 $ 0.26
========== ==========
WEIGHTED AVERAGE BACs OUTSTANDING........................... 5,424,225 5,424,225
========== ==========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 5
ML/EQ REAL ESTATE PORTFOLIO, L.P.
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
FOR THE THREE MONTHS ENDED MARCH 31, 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..................................... 94,129 82 1,788,374 1,882,585
---------- ------ ------------ ------------
Balance, March 31, 1997........................ $2,238,478 $6,829 $133,386,775 $135,632,082
========== ====== ============ ============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 6
ML/EQ REAL ESTATE PORTFOLIO, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Tenant rentals received................................... $ 6,590,977 $ 5,057,669
Interest received......................................... 509,559 1,030,851
----------- -----------
Cash received from operations............................. 7,100,536 6,088,520
Cash paid for operating activities........................ (4,296,132) (3,769,880)
Cash distributions to minority interest................... -- (300,000)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES................... 2,804,404 2,018,640
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases and additions to rental properties.............. (1,279,493) (2,692,933)
Expenditures for deferred leasing costs................... 81,313 (50,997)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES....................... (1,198,180) (2,743,930)
----------- -----------
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 (DECREASE) IN CASH AND CASH EQUIVALENTS........ 792,590 (1,267,713)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 27,310,460 21,738,499
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $28,103,050 $20,470,786
=========== ===========
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
Net income................................................ $ 1,882,585 $ 1,467,577
----------- -----------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 1,136,252 999,450
Minority interest in Venture operations................... 570,245 463,731
Cash distributions to minority interest................... -- (300,000)
Changes in assets (increase) decrease:
Accounts receivable and accrued investment income......... (429,905) 218,561
Deferred rent concessions................................. (35,094) (2,138)
Prepaid expenses and other assets......................... (214,067) (157,319)
Interest receivable....................................... 637 11,434
Due from affiliates....................................... (7,450) (3,531)
Changes in liabilities increase (decrease):
Accounts payable and accrued real estate expenses......... 91,273 (319,052)
Security deposits and unearned rent....................... 103,816 (51,073)
Due to affiliates......................................... (293,888) (309,000)
----------- -----------
Total adjustments........................................... 921,819 551,063
----------- -----------
NET CASH FLOW PROVIDED BY OPERATING ACTIVITIES.............. $ 2,804,404 $ 2,018,640
=========== ===========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 7
ML/EQ REAL ESTATE PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 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. 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, held a 71.66%
participation interest in a zero coupon mortgage note. The property which
secured this first mortgage note was 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 held 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 was 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 (collectively referred to as "Lender") commenced foreclosure by
advertisement 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 to be paid to Lender on account of
the Brookdale zero note. The Venture recorded cash received from the operation
of Brookdale Center on a cash basis as interest income. During the first
quarter of 1996, approximately $825,000 was remitted under the terms of the
receivership. The Venture's portion of these payments was approximately
$591,000.
As of September 30, 1995, an internal review of 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, 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, as contemplated by the Letter Agreement, staying the
Brookdale foreclosure proceeding and terminating the receivership arrangement.
As further 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, was paid to the Lender during the bankruptcy. The Venture
recorded cash received from the operation of Brookdale Center as interest
income.
On December 16, 1996, Brookdale Center was transferred to the Venture and
Equitable, as tenants in common, pursuant to a Chapter 11 bankruptcy plan for
Midwest that was approved by the Bankruptcy Court on November 25, 1996. The
consideration for this transfer was (i) release of Midwest from its obligations
under the Brookdale Zero Note and (ii) payment to Midwest of $500,000, of which
the Venture's portion was $358,303. An internal review of the property,
performed for the Venture as of the date of transfer, estimated the fair market
value of Brookdale Center to be $21,700,000, of which the Venture's portion was
$15,550,364. Following the transfer, Brookdale Center was reclassified from
zero coupon mortgage note receivable to rental properties and income and
expenses were recorded from that date. The Venture recognized a loss of
$6,211,644 to record its interest in Brookdale Center at its estimated fair
market value.
2. TRANSACTIONS WITH AFFILIATES
The general partners (or affiliates) are entitled to receive various
recurring fees for the supervision and administration of Partnership assets and
for providing the guaranty of minimum return to BAC holders and to be reimbursed
for certain expenses incurred on behalf of the Partnership. At March 31, 1997
and December 31, 1996 the accrued balance of these fees and reimbursements
totaled $314,319 and $608,207, respectively. For each of the three month periods
ended March 31, 1997 and 1996, the expense for these recurring fees totaled
$314,319 and $300,615, respectively. These amounts are included in the
statements of operations as asset management fees and as components of general
and administrative expense.
Properties are managed and leased by either third-party managing and
leasing agents or by affiliates of Equitable Real Estate, Compass Management and
Leasing, Inc. ("Compass") and Compass Retail, Inc.
7
<PAGE> 9
ML/EQ REAL ESTATE PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
("Compass Retail"). Property management fees are generally established at
specified percentages of 1% to 5% of the gross receipts of the properties as
defined in the management agreements. Property management fees for properties
managed by Compass and Compass Retail were $103,283 and $98,115 during the first
quarter of 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 to Compass and Compass Retail were $11,607 and $50,142
during the first quarter of 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 $393,526 and $487,052 during the first quarter of
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
$56 and $7,417 during the first quarter of 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 entered into a guaranty agreement with the Venture to
provide a minimum return to the Partnership's limited partners on their
contributions. The Venture has assigned its rights under the guaranty agreement
to the Partnership. Payments on the guaranty are due 90 days following the
earlier of the sale or other disposition of all the properties and mortgage
loans and notes or the liquidation of the Partnership. The minimum return will
be an amount which, when added to the cumulative distributions to the limited
partners, will enable the Partnership to provide the limited partners with a
minimum return equal to their capital contributions plus a simple annual return
of 9.75% on their adjusted capital contributions calculated from the dates of
the investor closings. Adjusted capital contributions are the limited partners'
original cash contributions reduced by distributions of sale or financing
proceeds and by distributions of certain funds in reserves, as more particularly
described in the Partnership Agreement. The limited partners' original cash
contributions have been adjusted by that portion of distributions paid through
March 31, 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 March 31, 1997 is limited to $243,594,822, plus the
value of EREIM LP Associates' interest in the Venture less any amounts
contributed by EREIM LP Associates to the Venture to fund cash deficits.
Capital contributions by the BAC Holders totaled $108,484,500. As of March
31, 1997, the cumulative 9.75% simple annual return was $94,520,023. As of March
31, 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 to
8
<PAGE> 10
ML/EQ REAL ESTATE PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
provide the specified minimum return, any shortfall will be funded by the
guarantor, up to the above described maximum.
9
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following analysis of the consolidated results of operations and
financial condition of the Partnership should be read in conjunction with the
consolidated financial statements and the related notes to consolidated
financial statements included elsewhere herein.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 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 March 31, 1997, the Venture, in which the Partnership owns
an 80% interest, had approximately $26.1 million in cash and cash equivalents.
These funds are intended to be utilized primarily to fund renovation work
expected on The Bank of Delaware Building, to fund possible costs incurred to
increase tenancy at Richland Mall, and to fund other general working capital
requirements. These funds, in addition to reserves from future operations, may
also be used to fund improvements deemed to be necessary on Brookdale Center.
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 $4.3 million, of which $1.6 million was incurred in 1995, $1.2
million was incurred in 1996, and approximately $800,000, $530,000 and $260,000
is expected to be incurred in 1997, 1998 and 1999. As of March 31, 1997,
approximately $2.8 million of these costs had been expended.
Included in the estimated $4.3 million of renovation expenditures is
approximately $2.3 million for asbestos abatement of which approximately $1.6
million has been expended. Also included in the $4.3 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 March 31, 1997, approximately $244,000 had been expended for tenant
improvements. The remaining tenant improvement costs of $2.8 million are
expected to be expended over the next few years to tenant the currently vacant
space.
The Venture anticipates costs to be incurred to increase tenancy at
Richland Mall of approximately $3.8 million, 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 Redner's Market. The Redner's Market
lease is for an initial 20-year term with renewal options thereafter. The
balance of the funds, approximately $1.7 million, is to be expended in
connection with additional required work to relocate 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 March 31, 1997, approximately $393,000 of these costs
have been incurred.
Cash received by the Venture from tenant rentals for the three months ended
March 31, 1997 increased approximately $1.5 million to $6.6 million from $5.1
million for the three months ended March 31, 1996. This
10
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
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 three months ended March
31, 1997 was approximately $2.2 million of which the Venture's portion was
approximately $1.5 million.
Interest received by the Venture for the three months ended March 31, 1997
decreased approximately $521,000 to $510,000 from $1.0 million for the three
months ended March 31, 1996. This decrease is primarily due to the receipt of
approximately $825,000 in 1996, of which the Venture's portion was approximately
$591,000, which was remitted under the terms of the receivership in connection
with the Brookdale Zero Note.
FINANCIAL CONDITION
Total liabilities decreased approximately $1.8 million from $5.3 million at
December 31, 1996 to $3.5 million at March 31, 1997. Approximately $921,000 of
this decrease is attributable to accrued construction costs paid during the
first quarter of 1997. The remainder of the decrease is due to the semiannual
payment of distributions to BAC holders and limited partners of $813,634 and the
semiannual payment of fees to affiliates of approximately $608,000 in the first
quarter of 1997. This decrease is offset by the accrual of approximately
$314,000 of fees due to affiliates for the first quarter of 1997.
RESULTS OF OPERATIONS
Rental income for the three months ended March 31, 1997 increased
approximately $2.0 million to $6.8 million from $4.9 million for the three
months ended March 31, 1996. The increase is due primarily to rental income from
Brookdale Center of approximately $2.2 million of which the Venture's portion
was approximately $1.5 million, in addition to higher rental income due to
increased occupancy at various other properties.
Lease termination rental income for the three months ended March 31, 1997
increased approximately $106,000 to $133,000 from $27,000 for the three months
ended March 31, 1996. This increase is due to approximately $133,000 of lease
termination rental income recognized during the first quarter of 1997 at
Richland Mall compared to approximately $27,000 of lease termination income
recognized during the first quarter of 1996 at Northland Mall.
Interest on loans receivable decreased approximately $591,000 to $154,000
for the three months ended March 31, 1997 from $745,000 for the three months
ended March 31, 1996. The decline is due to interest income received on the
Brookdale zero note during the first quarter of 1996 of approximately $825,000,
of which the Venture's portion was approximately $591,000.
Real estate operating expenses increased approximately $524,000 to $2.5
million for the three months ended March 31, 1997 from $2.0 million for the
three months ended March 31, 1996. The increase is due primarily to real estate
operating expenses at Brookdale Center of approximately $740,000, of which the
Venture's portion was approximately $531,000.
Depreciation and amortization for the three months ended March 31, 1997
increased approximately $137,000 to $1.1 million from $932,000 for the three
months ended March 31, 1996. This increase is primarily due to depreciation
recorded by Brookdale Center of approximately $111,000, of which the Venture's
portion was approximately $79,000. The remaining increase is attributable to
capital renovations incurred at
11
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
Northland Center and in connection with the enhancement, stabilization, and
renovation program for The Bank of Delaware Building.
Real estate taxes for the three months ended March 31, 1997 increased
approximately $318,000 to $831,000 from $513,000 for the three months ended
March 31, 1996 primarily due to the real estate taxes associated with Brookdale
Center of approximately $395,000, of which the Venture's portion was
approximately $284,000.
The percentage of leased space at the Venture's properties at March 31,
1997 was 84.4% compared to the percentage of leased space at December 31, 1996
of 85.5%. The 1.1% decline is due to the termination of leases in connection
with plans to enhance the tenant mix at Richland Mall and tenants vacating
Brookdale Center upon their lease expirations.
Under the terms of the Brookdale Zero Note, which was 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, the Venture discontinued the accrual
of interest on the Brookdale Zero Note as the accreted value of the mortgage
approximated the estimated fair market value of Brookdale Center. Under the
terms of the mortgage agreement, however, the Venture continued to accrue
interest off the books at the effective implicit rate of 10.2% until June 30,
1995. On July 1, 1995, the Venture began to accrue interest off the books at
the default rate of 19.0%.
Additionally, Equitable and the Venture commenced foreclosure by
advertisement 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 on a cash basis as interest income. During the
first quarter of 1996, approximately $825,000 was remitted under the terms of
the receivership. The Venture's portion of these payments was approximately
$591,000.
As of September 30, 1995, an internal review of 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, 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.
12
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
On June 20, 1996 Midwest filed a voluntary petition for Chapter 11
bankruptcy protection, as contemplated by the Letter Agreement, staying the
Brookdale foreclosure proceeding and terminating the receivership arrangement.
As further 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, was paid to the Lender during the bankruptcy. The Venture
recorded cash received from the operation of Brookdale Center as interest
income.
On December 16, 1996, Brookdale Center was transferred to the Venture and
Equitable, as tenants in common, pursuant to a Chapter 11 bankruptcy plan for
Midwest that was approved by the Bankruptcy Court on November 25, 1996. The
consideration for this transfer was (i) release of Midwest from its obligations
under the Brookdale Zero Note and (ii) payment to Midwest of $500,000, of which
the Venture's portion was $358,303. An internal review of the property,
performed for Venture as of the date of transfer, estimated the fair market
value of Brookdale Center to be $21,700,000, of which the Venture's portion
was $15,550,364. Following the transfer, Brookdale Center was reclassified from
zero coupon mortgage note receivable to rental properties and income and
expenses were recorded from that date. The Venture recognized a loss of
$6,211,644 to record its interest in Brookdale Center at its estimated fair
market value.
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. Rental rates have stopped dropping in many of the
properties' markets and, in some markets, rental rates are experiencing an
increase. Any significant recovery in rental rates, if achieved at all, will
likely occur over an extended period of time. It appears that certain property
types in particular market areas are at cyclical heights relative to market
values. Based on the upturn in the market for certain of the Venture's
properties, the Partnership may consider the sale of certain assets.
13
<PAGE> 15
PART II
Item l. Legal Proceedings
Response: None
Item 2. Changes in Securities
Response: None
Item 3. Default Upon Senior Securities
Response: None
Item 4. Submission of Matters to a Vote of Security Holders
Response: None
Item 5. Other Information
Response: None
Item 6. Exhibits and Reports on Form 8-K
Response:
a) Exhibits
27 Financial Data Schedule (for SEC filing purposes only)
b) Reports
None
14
<PAGE> 16
Pursuant to the requirements of Section 13 or 15 (d) of the
Securities Exchange Act of 1934, the Partnership has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ML/EQ Real Estate Portfolio, L.P.
By: EREIM Managers Corp.
Managing General Partner
By: Claire Snedeker
------------------------------------
Claire Snedeker
Vice President, Controller
and Treasurer
(Principal Accounting Officer)
Dated: May 15, 1997
15
<PAGE> 17
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
MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 28,103,050
<SECURITIES> 0
<RECEIVABLES> 4,965,801
<ALLOWANCES> 870,730
<INVENTORY> 0
<CURRENT-ASSETS> 33,096,108
<PP&E> 145,611,767
<DEPRECIATION> 16,898,634
<TOTAL-ASSETS> 172,587,094
<CURRENT-LIABILITIES> 2,860,534
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 135,632,082
<TOTAL-LIABILITY-AND-EQUITY> 172,587,094
<SALES> 0
<TOTAL-REVENUES> 7,461,082
<CGS> 0
<TOTAL-COSTS> 3,513,865
<OTHER-EXPENSES> 1,069,189
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,452,830
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,882,585
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,882,585
<EPS-PRIMARY> .33
<EPS-DILUTED> 0
</TABLE>
