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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
<TABLE>
<S> <S>
(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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
</TABLE>
COMMISSION FILE NUMBER: 0-17684
ML/EQ REAL ESTATE PORTFOLIO, L.P.
(Exact name of registrant as specified in its governing instrument)
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<S> <C>
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)
</TABLE>
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 [ ]
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ML/EQ REAL ESTATE PORTFOLIO, L.P.
CONTENTS
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PAGE
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PART I -- FINANCIAL INFORMATION
Item 1 -- Financial statements:
Consolidated balance sheets at March 31,
1998 and December 31, 1997..................... 1
Consolidated statements of operations for
the three months ended March 31, 1998 and
1997........................................... 2
Consolidated statement of partners' capital
for the three months ended March 31, 1998...... 3
Consolidated statements of cash flows for
the three months ended March 31, 1998 and
1997........................................... 4
Notes to consolidated financial
statements..................................... 5
Item 2 -- Management's Discussion and Analysis of
Financial Condition and Results of Operations......... 8
PART II -- OTHER INFORMATION................................
Items 1 through 6...................................... 12
Signatures............................................. 13
</TABLE>
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ML/EQ REAL ESTATE PORTFOLIO, L.P.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
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<S> <C> <C>
ASSETS
REAL ESTATE INVESTMENTS:
Rental properties, net of accumulated depreciation of
$19,371,282 in 1998 and $18,384,929 in 1997............. $108,853,565 $109,281,710
Mortgage loan receivable.................................. 6,000,000 6,000,000
------------ ------------
Total real estate investments...................... 114,853,565 115,281,710
------------ ------------
OTHER ASSETS:
Cash and cash equivalents................................. 6,569,573 21,256,903
Accounts receivable and accrued investment income, net of
allowance for doubtful accounts of $684,834 in 1998 and
$759,545 in 1997........................................ 2,788,961 3,364,216
Deferred rent concessions................................. 2,097,357 2,159,595
Guaranty fee, net of accumulated amortization of
$2,468,524 in 1998 and $2,401,462 in 1997 (Notes 1 and
2)...................................................... 1,274,190 1,341,253
Deferred leasing costs, net of accumulated amortization of
$853,776 in 1998 and $781,403 in 1997................... 1,310,078 1,399,382
Prepaid expenses and other assets......................... 904,396 807,596
Interest receivable....................................... 23,675 116,937
Due from affiliates (Note 1).............................. 16,065 10,590
------------ ------------
Total other assets................................. 14,984,295 30,456,472
------------ ------------
TOTAL ASSETS....................................... $129,837,860 $145,738,182
============ ============
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Accounts payable and accrued real estate expenses......... $ 1,589,457 $ 1,817,435
Accrued capital expenditures.............................. 260,106 1,566,226
Security deposits and unearned rent....................... 569,998 683,546
Due to affiliates (Note 1)................................ 252,445 629,533
Distributions declared.................................... -- 14,916,619
------------ ------------
Total liabilities.................................. 2,672,006 19,613,359
------------ ------------
MINORITY INTEREST IN THE VENTURE............................ 31,527,018 31,508,850
------------ ------------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 2)
PARTNERS' CAPITAL:
General partners.......................................... 2,601,100 2,549,957
Initial limited partner................................... 6,472 6,427
Limited partners (5,424,225 BACs issued and
outstanding)............................................ 93,031,264 92,059,589
------------ ------------
Total partners' capital............................ 95,638,836 94,615,973
------------ ------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL............ $129,837,860 $145,738,182
============ ============
</TABLE>
See notes to consolidated financial statements.
1
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ML/EQ REAL ESTATE PORTFOLIO, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
-----------------------
1998 1997
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<S> <C> <C>
REVENUE:
Rental income............................................. $5,204,271 $6,819,320
Lease termination income.................................. 12,500 132,840
Interest on loans receivable.............................. 153,750 153,750
---------- ----------
Total revenue..................................... 5,370,521 7,105,910
---------- ----------
OPERATING EXPENSES:
Real estate operating expenses............................ 2,072,565 2,533,657
Depreciation and amortization............................. 1,058,728 1,069,189
Real estate taxes......................................... 575,175 830,562
Property management fees (Note 1)......................... 107,690 149,646
---------- ----------
Total operating expenses.......................... 3,814,158 4,583,054
---------- ----------
INCOME FROM PROPERTY OPERATIONS............................. 1,556,363 2,522,856
OTHER INCOME (EXPENSE):
Interest and other nonoperating income.................... 205,374 355,172
Asset management fees (Note 1)............................ (153,600) (186,681)
Amortization of guarantee fee............................. (67,063) (67,063)
General and administrative, including $98,845 and $127,638
at March 31, 1998 and 1997, respectively, to affiliates
(Note 1)............................................... (168,452) (171,454)
---------- ----------
Total other expense -- net........................ (183,741) (70,026)
---------- ----------
INCOME BEFORE MINORITY INTEREST............................. 1,372,622 2,452,830
MINORITY INTEREST IN NET INCOME OF CONSOLIDATED VENTURE..... (349,759) (570,245)
---------- ----------
NET INCOME.................................................. $1,022,863 $1,882,585
========== ==========
ALLOCATION OF NET INCOME:
General partners.......................................... $ 51,143 $ 94,129
Initial limited partner................................... 45 82
Limited partners.......................................... 971,675 1,788,374
---------- ----------
TOTAL............................................. $1,022,863 $1,882,585
========== ==========
NET INCOME PER LIMITED PARTNER BAC.......................... $ 0.18 $ 0.33
========== ==========
WEIGHTED AVERAGE BACs OUTSTANDING........................... 5,424,225 5,424,225
========== ==========
</TABLE>
See notes to consolidated financial statements.
2
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ML/EQ REAL ESTATE PORTFOLIO, L.P.
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
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<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....................................... 51,143 45 971,675 1,022,863
Distributions.................................... -- -- -- --
---------- ------ ----------- -----------
Balance, March 31, 1998.......................... $2,601,100 $6,472 $93,031,264 $95,638,836
========== ====== =========== ===========
</TABLE>
See notes to consolidated financial statements.
3
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ML/EQ REAL ESTATE PORTFOLIO, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
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<CAPTION>
MARCH 31, MARCH 31,
1998 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Tenant rentals received................................... $ 5,740,716 $ 6,590,977
Interest received......................................... 452,387 509,559
------------ ------------
Cash received from operations............................. 6,193,103 7,100,536
Cash paid for operating activities........................ (3,784,824) (4,296,132)
Cash distributions to minority interest................... (331,593) --
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES................... 2,076,686 2,804,404
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases and additions to rental properties.............. (1,864,328) (1,279,493)
Expenditures for deferred leasing costs................... 16,931 81,313
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES....................... (1,847,397) (1,198,180)
------------ ------------
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........ (14,687,330) 792,590
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 21,256,903 27,310,460
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 6,569,573 $ 28,103,050
============ ============
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net income.................................................. $ 1,022,863 $ 1,882,585
------------ ------------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 1,125,791 1,136,252
Minority interest in Venture operations................... 349,759 570,245
Cash distributions to minority interest................... (331,593) --
Changes in assets (increase) decrease:
Accounts receivable and accrued investment income......... 575,255 (429,905)
Deferred rent concessions................................. 62,238 (35,094)
Interest receivable....................................... 93,262 637
Prepaid expenses and other assets......................... (96,800) (214,067)
Due from affiliates....................................... (5,475) (7,450)
Changes in liabilities increase (decrease):
Accounts payable and accrued real estate expenses......... (227,978) 91,273
Security deposits and unearned rent....................... (113,548) 103,816
Due to affiliates......................................... (377,088) (293,888)
------------ ------------
Total adjustments........................................... 1,053,823 921,819
------------ ------------
NET CASH FLOW PROVIDED BY OPERATING ACTIVITIES.............. $ 2,076,686 $ 2,804,404
============ ============
</TABLE>
See notes to consolidated financial statements.
4
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ML/EQ REAL ESTATE PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 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 March 31, 1998
and December 31, 1997, the accrued balance of these fees and reimbursements
totaled $252,445 and $629,533, respectively. For each of the three months ended
March 31, 1998 and 1997, the expense for these recurring fees totaled $252,445
and $314,319, respectively, and 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 ("ERE Yarmouth"). Asset management fees paid by the
Partnership to the Managing General Partner were $153,600 and $186,681 for the
three months ended March 31, 1998 and 1997, respectively.
Properties are managed and leased by third-party managing and leasing
agents, including Compass Management and Leasing, Inc. ("Compass") and ERE
Yarmouth Retail, Inc. ("Retail", formerly Compass Retail, Inc.), affiliates of
ERE Yarmouth. 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 $93,395 and $103,283 for
the three months ended March 31, 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 to Compass and Retail were $0 and $11,607 for the three months ended March
31, 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
$476,219 and $393,526 for each of the three months ended March 31, 1998 and
1997, respectively. Payroll reimbursements are included in real estate operating
expenses on the statements of operations.
5
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ML/EQ REAL ESTATE PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
March 31, 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 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, 1998 is limited to $180,661,723, 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 March 31, 1998, the cumulative 9.75% simple annual return
was $103,971,642. As of March 31, 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.
6
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ML/EQ REAL ESTATE PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. 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 three
months ended March 31, 1998.
7
<PAGE> 10
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 March 31, 1998, cash and cash equivalents on the balance sheet were
approximately $6.6 million. The Partnership had directly held cash and cash
equivalents of approximately $1.9 million. Such cash and cash equivalents are
available for distribution to the extent not required for working capital. In
addition, at March 31, 1998, the Venture, in which the Partnership owns an 80%
interest, had approximately $4.6 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 1850
Westfork, Richland Mall and Northland Mall, to fund capital improvements at the
Venture's other properties 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 will provide the basis for hold/sell recommendations
for the properties. The Partnership is in discussion with real estate brokers to
market for sale the 1200 Whipple Road, 1345 Doolittle Drive and 16/18 Sentry
Park West properties. While there is no guarantee that efforts to sell these
properties will be successful, the Partnership will continue to look for selling
opportunities.
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
8
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
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.
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, $160,000 was incurred for the three
months ended March 31, 1998, and the remaining balance is expected to be
expended through 1998. As of March 31, 1998, approximately $3.3 million of these
costs had been expended and approximately $91,000 had been accrued but not
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 March 31, 1998.
Management expects to complete the asbestos abatement and sprinkler installation
projects by the end of the year. 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, 1998,
approximately $1.6 million had been expended for tenant improvements. The
remaining tenant improvement costs of approximately $1.4 million are expected to
be expended over the next few years in connection with leasing the currently
vacant space.
As of March 31, 1998, the Venture has incurred costs of approximately $3.8
million to renovate and to increase tenancy at Richland Mall. This project is
near completion and Management does not expect to incur any additional
significant renovation costs related to the project. There is one block of
vacant space remaining to be leased. The vacant space is being actively marketed
by Management.
Cash received by the Venture from tenant rentals for the three months ended
March 31, 1998 decreased approximately $900,000, or 13%, to $5.7 million from
$6.6 million for the three months ended March 31, 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 three months ended March 31, 1997 was approximately $1.8
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, Sentry Park West and Whipple Road
increased $364,000, $155,000 and $101,000, respectively due to the timing of the
remittance of rental income, and tenant rentals received at 300 Delaware
increased $136,000 due to an increase in occupancy.
9
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
FINANCIAL CONDITION
Cash and cash equivalents decreased approximately $14.7 million, or 69%,
from $21.3 million at December 31, 1997 to $6.6 million at March 31, 1998 due
mainly to the distributions to BAC holders and minority interest of $14.9
million in the first quarter of 1998.
Accounts receivable and accrued investment income decreased approximately
$575,000, or 17%, from $3.4 million at December 31, 1997 to $2.8 million at
March 31, 1998 due primarily to the timing of the remittance of rental income.
Interest receivable decreased approximately $93,000, or 80%, from $117,000
at December 31, 1997 to $24,000 at March 31, 1998 due to lower average cash
balances held during March 1998 as compared to December 1997.
Total liabilities decreased approximately $16.9 million, or 86%, from $19.6
million at December 31, 1997 to $2.7 million at March 31, 1998. The decrease is
due primarily to the payment during the first quarter of 1998 of accrued
distributions to BAC holders and limited partners of $14.9 million,
approximately $1.3 million of accrued capital expenditures and approximately
$400,000 of fees due to affiliates.
The percentage of leased space at the Venture's properties at March 31,
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 $1.6 million, or 24%, from $6.8
million for the three months ended March 31, 1997 to $5.2 million for the three
months ended March 31, 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 three
months ended March 31, 1997 was approximately $1.8 million, offset by an
increase in rental income at 300 Delaware of approximately $170,000.
Lease termination income for the three months ended March 31, 1998
decreased approximately $120,000, or 90%, from $133,000 for the three months
ended March 31, 1997 to $13,000 for the three months ended March 31, 1998. The
decrease is due to approximately $13,000 of lease termination income recognized
during the first quarter of 1998 at 300 Delaware compared to approximately
$133,000 of lease termination income recognized during the first quarter of 1997
at Richland Mall.
Real estate operating expenses decreased approximately $460,000, or 18%,
from $2.5 million for the three months ended March 31, 1997 to $2.1 million for
the three months ended March 31, 1998 . The decrease is primarily a result of a
decrease of $388,000 due to the sale of Brookdale Center and the Chicago
Industrial properties in late 1997.
Depreciation and amortization decreased approximately $10,000, or 1%, for
the three months ended March 31, 1998 compared to the three months ended March
31, 1997 due primarily to a decrease in depreciation of approximately $132,000
from the sale of Brookdale Center and the Chicago Industrial properties in late
1997, offset by an increase in depreciation of $114,000 due to capital
improvements at 300 Delaware and Richland Mall.
10
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
Real estate taxes decreased approximately $256,000, or 31%, from $831,000
for the three months ended March 31, 1997 to $575,000 for the three months ended
March 31, 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 quarter of 1997 was
approximately $312,000, offset by slight increases in real estate tax expense at
the remaining properties.
Property management fees decreased approximately $42,000, or 28%, from
$150,000 for the three months ended March 31, 1997 to $108,000 for the three
months ended March 31, 1998, due primarily 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 three months
ended March 31, 1997 totaled $35,000.
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 ERE Yarmouth, for all its
computing needs. The Partnership and the Venture are in the process of
communicating with such 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.
11
<PAGE> 14
PART II
ITEM 1. LEGAL PROCEEDINGS
Several class action lawsuits have been filed against Midwest Real Estate
Shopping Center, L.P., the original borrower on the Northland Center Zero Coupon
Mortgage Note ("Midwest"), the general partner of Midwest, certain officers of
such general partner, Lehman Brothers, Inc., Equitable and Equitable Real
Estate. The complaints allege, among other things, that defendants breached
their fiduciary duties and violated federal securities laws in connection with
the initial sale of BACs, the operation of Midwest and Midwest's sale of
Northland Center to the Venture and Equitable. Neither the Venture nor the
Partnership has been named as a party to the lawsuits. A settlement of these
class actions was approved by the 7th District Court of New York on February 20,
1998.
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
12
<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: May 13, 1998
13
<PAGE> 16
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
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
MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 6,569,573
<SECURITIES> 0
<RECEIVABLES> 3,513,535
<ALLOWANCES> 684,834
<INVENTORY> 0
<CURRENT-ASSETS> 10,302,670
<PP&E> 128,224,847
<DEPRECIATION> 19,371,282
<TOTAL-ASSETS> 129,837,860
<CURRENT-LIABILITIES> 2,102,008
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 95,638,836
<TOTAL-LIABILITY-AND-EQUITY> 129,837,860
<SALES> 0
<TOTAL-REVENUES> 5,575,895
<CGS> 0
<TOTAL-COSTS> 2,755,430
<OTHER-EXPENSES> 1,058,728
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,372,622
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,022,863
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,022,863
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0
</TABLE>
