<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, 1998
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, 30326
Atlanta, Georgia (Zip Code)
(Address of principal executive office)
(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
<TABLE>
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1 - Financial statements:
Consolidated balance sheets at June 30, 1998 and
December 31, 1997
Consolidated statements of operations for the three and six
months ended June 30, 1998 and 1997
Consolidated statement of partners' capital for the six
months ended June 30, 1998
Consolidated statements of cash flows for the six months
ended June 30, 1998 and 1997
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
</TABLE>
<PAGE> 3
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
ML/EQ REAL ESTATE PORTFOLIO, L.P.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND DECEMBER 31, 1997
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1998 1997
------------ ------------
<S> <C> <C>
REAL ESTATE INVESTMENTS:
Rental properties, net of accumulated depreciation of
$5,584,995 in 1998 and $18,384,929 in 1997 $ 43,387,261 $109,281,710
Rental properties held for sale (Note 3) 62,215,923 -
Mortgage loan receivable 6,000,000 6,000,000
------------ ------------
Total real estate investments 111,603,184 115,281,710
------------ ------------
OTHER ASSETS:
Cash and cash equivalents 8,568,224 21,256,903
Accounts receivable and accrued investment income, net
of allowance for doubtful accounts of $674,745 in
1998 and $759,545 in 1997 2,696,788 3,364,216
Deferred rent concessions 2,062,521 2,159,595
Guaranty fee, net of accumulated amortization of $2,535,587 in 1998
and $2,401,462 in 1997 (Notes 1 and 2) 1,207,128 1,341,253
Deferred leasing costs, net of accumulated amortization of
$924,850 in 1998 and $781,403 in 1997 1,310,901 1,399,382
Prepaid expenses and other assets 419,126 807,596
Interest receivable 86,164 116,937
Due from affiliates (Note 1) 36,751 10,590
------------ ------------
Total other assets 16,387,603 30,456,472
------------ ------------
TOTAL ASSETS $127,990,787 $145,738,182
============ ============
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Accounts payable and accrued real estate expenses $ 1,534,921 $ 1,817,435
Accrued capital expenditures 247,462 1,566,226
Security deposits and unearned rent 494,965 683,546
Due to affiliates (Note 1) 495,504 629,533
Distributions declared 1,356,118 14,916,619
------------ ------------
Total liabilities 4,128,970 19,613,359
------------ ------------
MINORITY INTEREST IN THE VENTURE 31,210,347 31,508,850
------------ ------------
COMMITMENTS AND CONTINGENT LIABILITIES (Notes 2 and 4)
PARTNERS' CAPITAL:
General partners 2,519,538 2,549,957
Initial limited partner 6,337 6,427
Limited partners (5,424,225 BACs issued and outstanding) 90,125,595 92,059,589
------------ ------------
Total partners' capital 92,651,470 94,615,973
------------ ------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $127,990,787 $145,738,182
============ ============
</TABLE>
See notes to consolidated financial statements.
<PAGE> 4
ML/EQ REAL ESTATE PORTFOLIO, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
REVENUE:
Rental income $ 4,883,187 $ 6,027,854 $ 10,087,457 $ 12,847,174
Lease termination income - - 12,501 132,840
Interest on loans receivable 153,750 153,750 307,500 307,500
----------- ----------- ------------ ------------
Total revenue 5,036,937 6,181,604 10,407,458 13,287,514
----------- ----------- ------------ ------------
OPERATING EXPENSES:
Real estate operating expenses 1,957,250 2,157,115 4,029,815 4,690,772
Depreciation and amortization 1,060,250 1,072,441 2,118,978 2,141,630
Real estate taxes 509,110 824,406 1,084,285 1,654,968
Property management fees (Note 1) 114,880 136,767 222,570 286,413
----------- ----------- ------------ ------------
Total operating expenses 3,641,490 4,190,729 7,455,648 8,773,783
----------- ----------- ------------ ------------
INCOME FROM PROPERTY OPERATIONS 1,395,447 1,990,875 2,951,810 4,513,731
OTHER INCOME (EXPENSE):
Interest and other nonoperating income 99,834 404,262 305,208 759,434
Loss on write-down of real estate
assets (Note 3) (2,931,890) - (2,931,890) -
Asset management fees (Note 1) (155,306) (188,754) (308,906) (375,435)
Amortization of guarantee fee (67,063) (67,063) (134,126) (134,126)
General and administrative, including $186,598
and $256,030 for the six months ended
June 30, 1998 and 1997, respectively,
to affiliates (Note 1) (288,941) (189,320) (457,393) (360,774)
----------- ----------- ------------ ------------
Total other expense - net (3,343,366) (40,875) (3,527,107) (110,901)
----------- ----------- ------------ ------------
INCOME (LOSS) BEFORE MINORITY (1,947,919) 1,950,000 (575,297) 4,402,830
INTEREST
MINORITY INTEREST IN NET (INCOME)
LOSS OF CONSOLIDATED VENTURE 316,671 (473,500) (33,088) (1,043,745)
----------- ----------- ------------ ------------
NET INCOME (LOSS) $(1,631,248) $ 1,476,500 $ (608,385) $ 3,359,085
=========== =========== ============ ============
ALLOCATION OF NET INCOME (LOSS):
General partners $ (81,562) $ 73,825 $ (30,419) $ 167,954
Initial limited partner (71) 65 (28) 147
Limited partners (1,549,615) 1,402,610 (577,938) 3,190,984
----------- ----------- ------------ ------------
TOTAL $(1,631,248) $ 1,476,500 $ (608,385) $ 3,359,085
=========== =========== ============ ============
NET INCOME (LOSS) PER LIMITED PARTNER
BAC $ (0.28) $ 0.26 $ (0.11) $ 0.59
=========== =========== ============ ============
WEIGHTED AVERAGE BACs OUTSTANDING 5,424,225 5,424,225 5,424,225 5,424,225
=========== =========== ============ ============
</TABLE>
See notes to consolidated financial statements.
<PAGE> 5
ML/EQ REAL ESTATE PORTFOLIO, L.P.
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(unaudited)
<TABLE>
<CAPTION>
Initial
General Limited Limited
Partners Partner Partners Total
----------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Balance, December 31,1997 $ 2,549,957 $ 6,427 $ 92,059,589 $ 94,615,973
Net income (loss) (30,419) (28) (577,938) (608,385)
Distributions - (62) (1,356,056) (1,356,118)
----------- ------- ------------ ------------
Balance, June 30, 1998 $ 2,519,538 $ 6,337 $ 90,125,595 $ 92,651,470
=========== ======= ============ ============
</TABLE>
See notes to consolidated financial statements.
<PAGE> 6
ML/EQ REAL ESTATE PORTFOLIO, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(unaudited)
<TABLE>
<CAPTION>
June 30, June 30,
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
- ------------------------------------
Tenant rentals received $ 10,675,879 $ 12,695,826
Interest received 643,481 1,042,377
------------ ------------
Cash received from operations 11,319,360 13,738,203
Cash paid for operating activities (6,157,204) (7,538,087)
Cash distributions to minority interest (331,591) -
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,830,565 6,200,116
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
- ------------------------------------
Purchases and additions to rental properties (2,547,659) (1,610,279)
Expenditures for deferred leasing costs (54,966) 53,964
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (2,602,625) (1,556,315)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
- ------------------------------------
Cash distributions to limited partners (14,916,619) (813,634)
------------ ------------
NET CASH USED IN FINANCING ACTIVITIES (14,916,619) (813,634)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (12,688,679) 3,830,167
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 21,256,903 27,310,460
------------ ------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 8,568,224 $ 31,140,627
============ ============
</TABLE>
See notes to consolidated financial statements.
(CONTINUED)
<PAGE> 7
ML/EQ REAL ESTATE PORTFOLIO, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(unaudited)
<TABLE>
<CAPTION>
June 30, June 30,
1998 1997
----------- -----------
<S> <C> <C>
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net income (loss) $ (608,385) $ 3,359,085
----------- -----------
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 2,253,104 2,275,756
Minority interest in Venture operations 33,088 1,043,745
Cash distributions to minority interest (331,591) -
Loss on write-down of real estate assets 2,931,890 -
Changes in assets (increase) decrease:
Accounts receivable and accrued investment income 667,428 (537,013)
Deferred rent concessions 97,074 (49,492)
Interest receivable 30,773 (24,557)
Prepaid expenses and other assets 388,470 270,360
Due from affiliates (26,161) (21,953)
Changes in liabilities increase (decrease):
Accounts payable and accrued real estate expenses (282,515) (441,390)
Security deposits and unearned rent (188,581) 302,317
Due to affiliates (134,029) 23,258
----------- -----------
Total adjustments 5,438,950 2,841,031
----------- -----------
NET CASH FLOW PROVIDED BY OPERATING
ACTIVITIES $ 4,830,565 $ 6,200,116
=========== ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE> 8
ML/EQ REAL ESTATE PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(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, 1997, 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. 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, 1998 and December 31, 1997, the accrued balance of these fees and
reimbursements totaled $495,504 and $629,533, respectively. For each of the
six months ended June 30, 1998 and 1997, the expense for these recurring
fees totaled $495,504 and $631,465, respectively, and this expense is
included in the statements of operations as asset management fees and as
components of general and administrative expense. Asset management fees are
paid by the Partnership to EREIM Managers Corp. (the "Managing General
Partner"), which then pays the fees to ERE Yarmouth Inc., its investment
advisor. On July 13, 1998, Lend Lease Corporation Limited changed the name
of its wholly owned subsidiary, ERE Yarmouth, Inc. to Lend Lease Real
Estate Investments, Inc. ("Lend Lease"). Lend Lease continues to serve as
the investment advisor to the Managing General Partner. Asset management
fees paid by the Partnership to the Managing General Partner were $308,906
and $375,435 for the six months ended June 30, 1998 and 1997, respectively.
Properties are managed and leased by third-party managing and leasing
agents, including Compass Management and Leasing, Inc. ("Compass") and Lend
Lease Retail Division ("Retail", formerly ERE Yarmouth Retail, Inc.),
affiliates of Lend Lease. 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 paid by EML Associates (the "Venture"), a joint venture in which the
Partnership holds an 80% interest and which invests in income-producing
real properties and a fixed-rate mortgage loan, to Compass and Retail for
properties managed were $194,881 and $202,477 for the six months ended June
30, 1998 and 1997, 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 Retail were $0 and $32,122
for the six months ended June 30, 1998 and 1997, 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 Retail for payroll incurred of $870,762 and
$839,610 for each of the six months ended June 30, 1998 and 1997,
respectively. Payroll reimbursements are included in real estate operating
expenses on the statements of operations.
<PAGE> 9
ML/EQ REAL ESTATE PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(unaudited)
2. GUARANTY AGREEMENT
EREIM LP Associates, a general partnership between The Equitable Life
Assurance Society of the United States ("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, 1998 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 there are no distributions until December
31, 2002, the 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, 1998 is limited to $180,657,022, 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, 1998, the cumulative 9.75% simple annual
return was $105,682,834. As of June 30, 1998, cumulative distributions by
the Partnership to the BAC holders totaled $64,396,385, of which
$26,307,492 is attributable to income from operations and $38,088,893 is
attributable to sales of Venture assets, principal payments on mortgage
loans, and other capital events. To the extent that future cash
distributions to the limited partners are insufficient to provide the
specified minimum return, any shortfall will be funded by the guarantor, up
to the above described maximum.
Effective as of January 1, 1997, the Partnership entered into an amendment
to the Joint Venture Agreement of the Venture between the Partnership and
EREIM LP Associates pursuant to which EREIM LP Associates agreed to defer,
without interest, its rights to receive 20% of the Venture's distributions
of sale or financing proceeds until the Partnership has received aggregate
distributions from the Venture in an amount equal to the capital
contributions made to the Partnership by the BAC holders plus a
noncompounded cumulative return computed at the rate of 9.75% per annum on
contributions outstanding from time to time. Prior to the amendment, EREIM
LP Associates had a right to receive 20% of all the Venture's distributions
of sale or financing proceeds on a pari passu basis with the Partnership.
The amendment has the effect of accelerating the return of original
contributions to BAC holders to the extent that sale or financing proceeds
are realized prior to the dissolution of the Partnership.
3. RENTAL PROPERTIES HELD FOR SALE
The Partnership evaluates appropriate strategies for the ownership of each
of the assets in the portfolio in order to achieve maximum value. As a
result of this evaluation, the Partnership has decided to market for sale
the 1200 Whipple Road, 1345 Doolittle Drive, Richland Mall, 300 Delaware
and 16/18 Sentry Park West properties. To that end, brokerage firms have
been engaged. If offers to purchase the properties are within the targeted
price range, the Partnership expects the properties to be sold. As of June
30, 1998, these properties are classified as held for sale. A loss of
$2,931,890 was recorded as a result of the reclassification of Richland
Mall. Management, through discussions with real estate brokers, determined
that the carrying value for Richland Mall was in excess of the estimated
market value. The Venture has established a valuation allowance for the
asset to reduce the carrying value to represent management's best estimate
of the property's market value less selling costs. For each of the other
properties classified as held for sale, management believes that the
carrying value does not exceed market value less selling costs. For the
three and six months ended June 30, 1998, income from property operations
includes approximately $719,000, or 52% and $1,327,000, or 45%,
respectively, of income from the five rental properties held for sale.
<PAGE> 10
ML/EQ REAL ESTATE PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(unaudited)
4. LEGAL PROCEEDINGS
As discussed in the Notes to Consolidated Financial Statements of the
Partnership's December 31, 1997 audited financial statements, 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. There have been no new developments associated with
this action for the six months ended June 30, 1998.
<PAGE> 11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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.
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 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 Annual Report
on Form 10-K for the year ended December 31, 1997.
Liquidity and Capital Resources
As of June 30, 1998, cash and cash equivalents on the balance sheet
were $8.6 million. The Partnership had cash and cash equivalents of
approximately $1.8 million. Such cash and cash equivalents are available for
distribution to the extent not required for working capital. In addition, at
June 30, 1998, the Venture, in which the Partnership owns an 80% interest, had
approximately $6.8 million in cash and cash equivalents. This money was retained
for the specific purpose of funding the renovation work on 300 Delaware, to fund
possible costs to be incurred to increase tenancy at Northland Mall, 1850
Westfork and Richland Mall and to cover general working capital requirements.
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, the Partnership takes 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 provides the basis for hold/sell recommendations for
the properties. As a result of the evaluation, the Partnership has decided to
market for sale the 1200 Whipple Road, 1345 Doolittle Drive, Richland Mall, 300
Delaware and 16/18 Sentry Park West properties. To that end, brokerage firms
have been engaged. If offers to purchase the properties are within the targeted
price range, the Partnership expects the properties to be sold. As of June 30,
1998, these properties are classified as held for sale. A loss of $2,931,890 was
recorded as a result of the reclassification of Richland Mall. Management,
through discussions with real estate brokers, determined that the carrying value
for Richland Mall was in excess of the estimated market value. The Venture has
established a valuation allowance for the asset to reduce the carrying value to
represent management's best estimate of the property's market value less selling
costs. In an effort to refocus the marketing strategy for 1850 Westfork,
management has selected a broker to market the property for sale or lease. While
there is no guarantee that efforts to sell these properties will be successful,
the Partnership will continue to look for selling opportunities. Additionally,
the Partnership continues to evaluate appropriate strategies for Northland Mall.
While the Partnership has not engaged a broker to market the property for sale,
several brokers have provided an evaluation of the property to help determine an
appropriate plan of action for an exit strategy.
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 1997, whereby Talisman
Brookdale L.L.C. agreed to purchase Brookdale Center for approximately $24.8
million, of which the Venture's portion was approximately $17.8 million. The
Venture, in which the Partnership holds an 80% interest, held a 71.66%
participation interest in Brookdale Center. In November 1997, the Partnership
sold Brookdale Center to Talisman Brookdale L.L.C. and made a special
distribution of the net proceeds in December 1997. 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 currently 100% of the
sale or financing proceeds attributable to the sale.
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Management has established an enhancement, stabilization, and
renovation program for 300 Delaware 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, $398,000 was incurred in 1997, $268,000 was incurred for the
six months ended June 30, 1998, and the remaining balance is expected to be
expended through 1998. As of June 30, 1998, approximately $3.4 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. The deferred maintenance
and cosmetic upgrades have been substantially completed as of June 30, 1998.
Management expects to complete the asbestos abatement and sprinkler installation
projects by the end of 1998. Additional costs not included in the above figures
are estimated tenant improvements of $4.7 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, 1998, approximately $2.0
million 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 in connection with leasing the currently vacant space.
As of June 30, 1998, the Venture has incurred costs of approximately
$3.8 million to renovate Richland Mall and to increase tenancy at the property.
This project is near completion and management does not expect to incur any
additional significant renovation costs related to the project. One block of
vacant space remains and is being actively marketed by management.
Cash received by the Venture from tenant rentals for the six months
ended June 30, 1998 decreased approximately $2.0 million, or 16%, to $10.7
million from $12.7 million for the six months ended June 30, 1997. This decrease
is due to the sale of Brookdale Center and the Chicago Industrial properties in
late 1997. Rental income received from Brookdale Center and the Chicago
Industrial properties for the six months ended June 30, 1997 was approximately
$3.4 million. The absence of rental income from the sold properties is offset by
an overall increase in cash received at the remaining properties. Specifically,
tenant rentals received at Richland Mall increased $1.0 million due to the
timing of the remittance of rental income.
Financial Condition
Cash and cash equivalents decreased approximately $12.7 million, or
60%, from $21.3 million at December 31, 1997 to $8.6 million at June 30, 1998
due mainly to the distributions to BAC holders and minority interest of $15.2
million in the first quarter of 1998, offset by $4.8 million of cash provided by
operating activities less $2.8 million of cash used in investing activities.
Accounts receivable and accrued investment income decreased
approximately $700,000, or 20%, from $3.4 million at December 31, 1997 to $2.7
million at June 30, 1998 due primarily to the timing of the remittance of rental
income.
Prepaid expenses and other assets decreased approximately $388,000, or
48%, from $808,000 at December 31, 1997 to $419,000 at June 30, 1998 due to the
monthly expense of real estate taxes and insurance.
Total liabilities decreased approximately $15.5 million, or 79%, from
$19.6 million at December 31, 1997 to $4.1 million at June 30, 1998. The
decrease is due primarily to the payment during the first half of 1998 of
accrued distributions to BAC holders of $14.9 million and approximately $1.3
million of accrued capital expenditures, offset by the distribution declared as
of June 30, 1998 of $1.3 million.
The percentage of leased space at the Venture's properties at June 30,
1998 was 76% compared to the percentage of leased space at December 31, 1997 of
78%. The 2% decrease is primarily due to a decrease in occupancy at Northland
Mall.
Results of Operations
Rental income decreased approximately $1.1 million, or 19%, and $2.7
million, or 21% for the three and six months ended June 30, 1998, respectively
from $6.0 million for the three months and $12.8 million for the six months
ended June 30, 1997 to $4.9 million for the three months and $10.1 million for
the six months ended June 30, 1998. The decrease is due primarily to the sale of
Brookdale Center and the Chicago Industrial properties during 1997. Rental
income for Brookdale Center and the Chicago Industrial properties for the six
months ended June 30, 1997 was approximately $3.4 million, offset by an increase
in rental income at 300 Delaware, Northland Mall and Richland Mall of
approximately $300,000, $100,000 and $100,000, respectively.
Lease termination income for the six months ended June 30, 1998
decreased approximately $120,000, or 90%, from $133,000 for the six months ended
June 30, 1997 to $13,000 for the six months ended June 30, 1998. The decrease is
due to approximately $13,000 of lease termination income recognized during the
first half of 1998 at 300 Delaware compared to approximately $133,000 of lease
termination income recognized during the first half of 1997 at Richland Mall.
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Real estate operating expenses decreased approximately $200,000, or 9%,
and $700,000, or 14% for the three and six months ended June 30, 1998,
respectively, from $2.2 million for the three months and $4.7 million for the
six months ended June 30, 1997 to $2.0 million for the three months and $4.0
million for the six months ended June 30, 1998 . The decrease is primarily a
result of the sale of Brookdale Center and the Chicago Industrial properties in
late 1997.
Depreciation and amortization decreased approximately $12,000, or 1%,
and $23,000, or 1% for the three and six months ended June 30, 1998,
respectively, compared to the three and six months ended June 30, 1997 due
primarily to a decrease in depreciation relating to the sale of Brookdale
Center and the Chicago Industrial properties in late 1997, offset by an
increase in depreciation due to capital improvements at 300 Delaware and
Richland Mall.
Real estate taxes decreased approximately $315,000, or 38%, and
$571,000, or 34% for the three and six months ended June 30, 1998, respectively,
from $824,000 for the three months and $1.7 million for the six months ended
June 30, 1997 to $509,000 for the three months and $1.1 million for the six
months ended June 30, 1998. The decrease is due primarily to the sale of
Brookdale Center and the Chicago Industrial properties in late 1997. Real estate
tax expense associated with these two properties in the first half of 1997 was
approximately $612,000, offset by slight increases in real estate tax expense at
the remaining properties in the first half of 1998.
Property management fees decreased approximately $22,000, or 16%, and
$63,000, or 22% for the three and six months ended June 30, 1998, respectively,
from $137,000 for the three months and $286,000 for the six months ended June
30, 1997 to $115,000 for the three months and $223,000 for the six months ended
June 30, 1998, primarily due to the sale of Brookdale Center and the Chicago
Industrial properties in late 1997. Property management fees for Brookdale
Center and the Chicago Industrial properties for the six months ended June 30,
1997 totaled $69,000.
Interest and other nonoperating income decreased approximately
$304,000, or 75%, and $454,000, or 60% for the three and six months ended June
30, 1998, respectively, from $404,000 for the three months and $759,000 for the
six months ended June 30, 1997 to $100,000 for the three months and $305,000 for
the six months ended June 30, 1998, due to lower cash balances held, which
reduced the amount of interest income received.
Loss on write-down of real estate assets increased approximately $2.9
million, or 100% for the three and six months ended June 30, 1998 from $0 for
the three and six months ended June 30, 1997 due to the write-down of Richland
Mall in 1998. The Venture has been in discussions with brokers to market the
property for sale. Through these discussions, management determined that the
carrying value for Richland Mall was in excess of the estimated market value.
The Venture has established a valuation allowance for the asset to reduce the
carrying value to represent management's best estimate of the property's market
value less selling costs.
General and administrative expenses increased approximately $100,000,
or 53%, and $96,000, or 27%, for the three and six months ended June 30, 1998,
respectively, from $189,000 for the three months and $361,000 for the six months
ended June 30, 1997 to $289,000 for the three months and $457,000 for the six
months ended June 30, 1998, due to higher income taxes paid by the Partnership
during the second quarter of 1998 as a result of the sale of Brookdale Center
and the Chicago Industrial properties in 1997. In addition, the Partnership has
incurred increased legal fees for the six months ended June 30, 1998, due to the
pending litigation against the Partnership.
Year 2000
The inability of computers, software and other equipment to recognize
and properly process data fields containing a two digit year is commonly
referred to as the Year 2000 compliance issue. As the year 2000 approaches, such
systems may be unable to accurately process certain date-based information.
The Partnership and the Venture rely on the services of third-party
providers, including Merrill Lynch & Co., Inc. and Lend Lease, for all its
computing needs. Lend Lease is in the process of updating or replacing
applications, computer systems and real estate operating systems with embedded
processors that are not known to be Year 2000 compliant. This process involves,
in part, sending letters to vendors of such systems to ascertain whether and
when necessary updates, remediation or replacement will be available. If vendors
can not assure Year 2000 compliance within Lend Lease's implementation
deadlines, Lend Lease will look for alternative providers who are able to
warrant Year 2000 compliance in a timely manner. Lend Lease has not yet
determined the possible costs relating to finding alternative providers. The
Partnership and the Venture are in the process of communicating with other
third-party providers to obtain assurance that such providers will be Year 2000
compliant. There can be no assurance that the systems of such providers will be
Year 2000 compliant or that any third party's failure to have Year 2000
compliant systems will not have a material adverse effect on the Partnership and
the Venture.
<PAGE> 14
PART II
<TABLE>
<S> <C>
Item 1. Legal Proceedings
-----------------
Response: None
Item 2. Changes in Securities
---------------------
Response: None
Item 3. Default Upon Senior Securities
------------------------------
Response: None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Response: None
Item 5. Other Information
-----------------
Response: None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
Response:
a) Exhibits
27 Financial Data Schedule (for SEC filing purposes only)
b) Reports
None
</TABLE>
<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: Patricia C. Snedeker
--------------------
Vice President, Controller
and Treasurer
(Principal Accounting Officer)
Dated: August 13, 1998
<PAGE> 16
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- --------------------------------------------------------
<S> <C>
27 Financial Data Schedule (for SEC filing purposes only)
</TABLE>
<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, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 8,568,224
<SECURITIES> 0
<RECEIVABLES> 3,494,448
<ALLOWANCES> 674,745
<INVENTORY> 0
<CURRENT-ASSETS> 11,807,053
<PP&E> 111,202,597
<DEPRECIATION> 5,599,413
<TOTAL-ASSETS> 127,990,787
<CURRENT-LIABILITIES> 3,634,005
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 92,651,470
<TOTAL-LIABILITY-AND-EQUITY> 127,990,787
<SALES> 0
<TOTAL-REVENUES> 10,712,666
<CGS> 0
<TOTAL-COSTS> 5,336,670
<OTHER-EXPENSES> 2,118,978
<LOSS-PROVISION> 2,931,890
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (575,297)
<INCOME-TAX> 0
<INCOME-CONTINUING> (608,385)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (608,385)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> 0
</TABLE>
