<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 1999
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from __________ to ______________
Commission file number 0-17684
-------
ML/EQ Real Estate Portfolio, L.P.
(Exact name of registrant as specified in its governing instrument)
Delaware 58-1739523
(State of Organization) (I.R.S. Employer Identification No.)
3424 Peachtree Road N.E., Suite 800, Atlanta, Georgia 30326
(Address of principal executive office) (Zip Code)
(Registrant's telephone number, including area code) (404) 239-5002
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
<PAGE> 2
ML/EQ REAL ESTATE PORTFOLIO, L.P.
CONTENTS
PART I - FINANCIAL INFORMATION
<TABLE>
<S> <C>
Item 1 - Financial statements:
Consolidated balance sheets at September 30, 1999 and
December 31, 1998
Consolidated statements of operations for the three and nine
months ended September 30, 1999 and 1998
Consolidated statement of partners' capital for the nine
months ended September 30, 1999
Consolidated statements of cash flows for the nine months
ended September 30, 1999 and 1998
Notes to consolidated financial statements
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations
</TABLE>
PART II - OTHER INFORMATION
Items 1 through 6
Signatures
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ML/EQ REAL ESTATE PORTFOLIO, L.P.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
ASSETS
REAL ESTATE INVESTMENTS:
Rental properties held for sale........................... $54,461,982 $ 41,915,300
Rental properties, net of accumulated depreciation of
$5,586,628 in 1998...................................... -- 39,873,242
Mortgage loan receivable.................................. -- 6,000,000
----------- ------------
Total real estate investments...................... 54,461,982 87,788,542
----------- ------------
OTHER ASSETS:
Cash and cash equivalents................................. 9,981,074 11,939,314
Accounts receivable and accrued investment income, net of
allowance for doubtful accounts of $976,442 in 1999 and
$598,018 in 1998........................................ 4,604,925 2,892,290
Deferred rent concessions................................. 745,857 809,836
Guaranty fee, net of accumulated amortization of
$2,870,901 in 1999 and $2,669,713 in 1998............... 871,814 1,073,002
Deferred leasing costs, net of accumulated amortization of
$137,636 in 1998........................................ -- 302,184
Prepaid expenses and other assets......................... 892,075 875,369
Interest receivable....................................... 221,896 96,112
Due from affiliates....................................... 32,613 649
----------- ------------
Total other assets................................. 17,350,254 17,988,756
----------- ------------
TOTAL ASSETS................................................ $71,812,236 $105,777,298
=========== ============
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Accounts payable and accrued real estate expenses......... $ 1,726,742 $ 1,758,841
Accrued capital expenditures.............................. 174,532 788,395
Security deposits and unearned rent....................... 230,503 343,922
Due to affiliates......................................... 121,730 480,453
Distributions declared.................................... -- 2,440,901
----------- ------------
Total liabilities.................................. 2,253,507 5,812,512
----------- ------------
MINORITY INTEREST IN THE VENTURE............................ 30,716,846 32,023,757
----------- ------------
COMMITMENTS AND CONTINGENT LIABILITIES
PARTNERS' CAPITAL:
General partners.......................................... 2,416,414 2,713,299
Initial limited partner................................... 6,247 6,507
Limited partners (5,424,225 BACs issued and
outstanding)............................................ 36,419,222 65,221,223
----------- ------------
Total partners' capital............................ 38,841,883 67,941,029
----------- ------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL..................... $71,812,236 $105,777,298
=========== ============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
ML/EQ REAL ESTATE PORTFOLIO, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------- --------------------------
1999 1998 1999 1998
---------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
REVENUE:
Rental income..................................... $3,634,522 $5,028,414 $ 12,646,826 $15,115,871
Lease termination income.......................... 191,661 -- 191,661 12,501
Interest on loans receivable...................... -- 153,750 51,250 461,250
---------- ---------- ------------ -----------
Total revenue.............................. 3,826,183 5,182,164 12,889,737 15,589,622
---------- ---------- ------------ -----------
OPERATING EXPENSES:
Real estate operating expenses.................... 1,207,977 2,177,699 5,540,003 6,207,514
Depreciation and amortization..................... -- 401,490 789,345 2,520,468
Real estate taxes................................. 406,210 279,525 1,602,427 1,363,810
Property management fees.......................... 82,638 111,813 262,017 334,383
---------- ---------- ------------ -----------
Total operating expenses................... 1,696,825 2,970,527 8,193,792 10,426,175
---------- ---------- ------------ -----------
INCOME FROM PROPERTY OPERATIONS..................... 2,129,358 2,211,637 4,695,945 5,163,447
OTHER INCOME (EXPENSE):
Loss on sale of real estate....................... (141,417) -- (212,979) --
Loss on write-down of real estate assets.......... -- (650,000) (11,371,847) (3,581,890)
Interest and other nonoperating income............ 145,181 121,736 482,836 426,944
Asset management fees............................. (92,815) (157,013) (300,804) (465,919)
Amortization of guarantee fee..................... (67,062) (44,708) (201,188) (178,834)
General and administrative, including $110,580 and
$275,316 for the nine months ended September 30,
1999 and 1998, respectively, to affiliates...... (72,488) (221,467) (336,579) (678,860)
---------- ---------- ------------ -----------
Total other expense -- net................. (228,601) (951,452) (11,940,561) (4,478,559)
---------- ---------- ------------ -----------
INCOME (LOSS) BEFORE MINORITY INTEREST.............. 1,900,757 1,260,185 (7,244,616) 684,888
MINORITY INTEREST IN NET (INCOME) LOSS OF
CONSOLIDATED VENTURE.............................. (424,730) (330,523) 1,306,911 (363,611)
---------- ---------- ------------ -----------
NET INCOME (LOSS)................................... $1,476,027 $ 929,662 $ (5,937,705) $ 321,277
========== ========== ============ ===========
ALLOCATION OF NET INCOME (LOSS):
General partners.................................. $ 73,802 $ 46,483 $ (296,885) $ 16,064
Initial limited partner........................... 65 42 (260) 14
Limited partners.................................. 1,402,160 883,137 (5,640,560) 305,199
---------- ---------- ------------ -----------
TOTAL............................................... $1,476,027 $ 929,662 $ (5,937,705) $ 321,277
========== ========== ============ ===========
NET INCOME (LOSS) PER LIMITED PARTNER BAC........... $ 0.26 $ 0.17 $ (1.04) $ 0.06
========== ========== ============ ===========
WEIGHTED AVERAGE BACs OUTSTANDING................... 5,424,225 5,424,225 5,424,225 5,424,225
========== ========== ============ ===========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
ML/EQ REAL ESTATE PORTFOLIO, L.P.
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
INITIAL
GENERAL LIMITED LIMITED
PARTNERS PARTNER PARTNERS TOTAL
---------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Balance, December 31, 1998..................... $2,713,299 $6,507 $ 65,221,223 $ 67,941,029
Net income (loss).............................. (296,885) (260) (5,640,560) (5,937,705)
Distributions.................................. -- -- (23,161,441) (23,161,441)
---------- ------ ------------ ------------
Balance, September 30, 1999.................... $2,416,414 $6,247 $ 36,419,222 $ 38,841,883
========== ====== ============ ============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
ML/EQ REAL ESTATE PORTFOLIO, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Tenant rentals received................................... $ 10,803,349 $ 14,279,741
Interest received......................................... 408,302 978,154
------------ ------------
Cash received from operations............................. 11,211,651 15,257,895
Cash paid for operating activities........................ (8,481,322) (9,230,272)
Cash distributions to minority interest................... -- (671,591)
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES................... 2,730,329 5,356,032
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to rental properties............................ (2,188,317) (3,192,900)
Expenditures for deferred leasing costs................... (43,743) (181,002)
Proceeds from sales of real estate properties............. 17,145,833 --
Repayment of mortgage loan receivable..................... 6,000,000 --
------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES.................................................. 20,913,773 (3,373,902)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash distributions to limited partners.................... (25,602,342) (16,272,738)
------------ ------------
NET CASH USED IN FINANCING ACTIVITIES....................... (25,602,342) (16,272,738)
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS................... (1,958,240) (14,290,608)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 11,939,314 21,256,903
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 9,981,074 $ 6,966,295
============ ============
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net income (loss)........................................... $ (5,937,705) $ 321,277
------------ ------------
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization............................. 990,533 2,699,302
Minority interest in Venture operations................... (1,306,911) 363,611
Cash distributions to minority interest................... -- (671,591)
Loss on sale of real estate............................... 212,979 --
Loss on write-down of real estate assets.................. 11,371,847 3,581,890
Changes in assets (increase) decrease:
Accounts receivable and accrued investment income......... (1,712,635) (850,008)
Deferred rent concessions................................. (209,084) 177,074
Interest receivable....................................... (125,784) 89,960
Prepaid expenses and other assets......................... (16,706) 261,502
Due from affiliates....................................... (31,964) (26,721)
Changes in liabilities increase (decrease):
Accounts payable and accrued real estate expenses......... (32,099) (30,765)
Security deposits and unearned rent....................... (113,419) (175,697)
Due to affiliates......................................... (358,723) (383,802)
------------ ------------
Total adjustments........................................... 8,668,034 5,034,755
------------ ------------
NET CASH FLOW PROVIDED BY OPERATING ACTIVITIES...... $ 2,730,329 $ 5,356,032
============ ============
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 7
ML/EQ REAL ESTATE PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(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, 1998, 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 Beneficial Assignee Certificate
("BAC") holders and to be reimbursed for certain expenses incurred on behalf of
the Partnership. At September 30, 1999 and December 31, 1998, the unpaid balance
of these fees and reimbursements totaled $121,730 and $480,453, respectively.
For each of the nine months ended September 30, 1999 and 1998, the expense for
these recurring fees totaled $411,384 and $741,235, 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 Lend Lease Real Estate Investments, Inc.,
("Lend Lease"), its investment advisor. Asset management fees paid by the
Partnership to the Managing General Partner were $300,804 and $465,919 for the
nine months ended September 30, 1999 and 1998, respectively.
Properties are managed and leased by third-party managing and leasing
agents. During 1998 these agents included Compass Management and Leasing, Inc.
("Compass") and ERE Yarmouth Retail, Inc. ("Retail"), formerly affiliates of
Lend Lease. On October 1, 1998, Lend Lease sold Compass and Retail to LaSalle
Partners Incorporated. 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, to Compass
and Retail for properties managed were $292,713 for the nine months ended
September 30, 1998. The Venture reimbursed Compass and Retail for payroll
incurred of $1,321,615 for the nine months ended September 30, 1998. Payroll
reimbursements are included in real estate operating expenses on the statements
of operations.
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
7
<PAGE> 8
ML/EQ REAL ESTATE PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
properties and mortgage loans and notes or the liquidation of the Partnership.
The minimum return will be an amount which, when added to the cumulative
distributions to the limited partners, will enable the Partnership to provide
the limited partners with a minimum return equal to their capital contributions
plus a simple annual return of 9.75% on their adjusted capital contributions
calculated from the dates of the investor closings. Adjusted capital
contributions are the limited partners' original cash contributions reduced by
distributions of sale or financing proceeds and by distributions of certain
funds in reserves, as more particularly described in the Partnership Agreement.
The limited partners' original cash contributions have been adjusted by that
portion of distributions paid through September 30, 1999 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. If there were 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 September 30, 1999
is limited to $108,123,498, 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 to the Partnership totaled
$108,484,500. As of September 30, 1999, the cumulative 9.75% simple annual
return was $111,229,302. As of September 30, 1999, cumulative distributions by
the Partnership to the BAC holders totaled $117,499,548, of which $27,663,548 is
attributable to income form operations and $89,836,000 is attributable to sales
of Venture assets, principal payments on mortgage loans, and other capital
events. Management does not currently believe that future cash distributions to
the limited partners from liquidation of Venture assets will be sufficient to
provide the specified minimum return. Accordingly, the 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
At September 30, 1999, 16/18 Sentry Park West and Northland Mall properties
are classified as held for sale, and accordingly the application of depreciation
has been suspended. The carrying value of Northland Mall was adjusted to the
lower of cost or estimated net realizable value, resulting in a loss of
$9,257,167 recorded during 1999. The 16/18 Sentry Park West property was sold on
October 28, 1999 (see footnote 5).
8
<PAGE> 9
ML/EQ REAL ESTATE PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. LEGAL PROCEEDINGS
As discussed in the Notes to Consolidated Financial Statements of the
Partnership's December 31, 1998 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. In
August 1999, Plaintiffs filed an amended complaint alleging that, in addition to
the allegations made previously, certain distributions from the Partnership were
improperly characterized as sale or financing proceeds rather than distributable
cash. Defendants have filed a motion to dismiss the amended complaint on statute
of limitations grounds.
A Northland Mall tenant filed a lawsuit in 1999 in the State Court of
Michigan against the Venture for breach of lease. The parties entered into a
settlement agreement pursuant to which Equitable, the co-venturer, paid the
tenant the full settlement payment.
5. SUBSEQUENT EVENT
On October 28, 1999, the Venture consummated the sale of the 16/18 Sentry
Park West property at a sales price of $29.05 million. The net sales proceeds
received were $28,420,559, which resulted in a gain of $4,726,752. On November
17, 1999, the Partnership will make a distribution of the net proceeds from the
sale and various lease termination payments of $5.28 per unit to BAC holders of
record as of October 28, 1999.
6. SEGMENT REPORTING
The Partnership owns or has owned real estate investments in the retail,
office and industrial sectors, and mortgage loan investments. Revenues,
depreciation and amortization, loss on write-down of assets, income (loss)
before minority interest, identifiable assets and capital expenditures for the
three and nine month periods ending September 30, are as follows:
<TABLE>
<CAPTION>
MORTGAGE CORPORATE/
RETAIL OFFICE INDUSTRIAL LOANS OTHER TOTAL
---------- ---------- ---------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues
3 months
1999................................ 2,776,579 1,049,604 3,826,183
1998................................ 3,132,483 1,309,438 586,493 153,750 5,182,164
9 months
1999................................ 8,811,100 4,037,387 (10,000) 51,250 12,889,737
1998................................ 9,451,697 3,885,938 1,790,737 461,250 15,589,622
Depreciation and amortization
3 months
1999................................ 67,062 67,062
1998................................ 381,821 19,668 44,709 446,198
9 months
1999................................ 789,345 201,188 990,533
1998................................ 1,365,571 872,065 282,082 179,584 2,699,302
</TABLE>
9
<PAGE> 10
ML/EQ REAL ESTATE PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
MORTGAGE CORPORATE/
RETAIL OFFICE INDUSTRIAL LOANS OTHER TOTAL
---------- ---------- ---------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Loss on write-down of assets
3 months
1999................................
1998................................ 650,000 650,000
9 months
1999................................ 9,257,167 2,114,680 11,371,847
1998................................ 2,931,890 650,000 3,581,890
Income (loss) before minority
interest
3 months
1999................................ 1,385,458 611,841 (96,542) 1,900,757
1998................................ 1,063,675 636,341 (258,318) 153,750 (335,263) 1,260,185
9 months
1999................................ (6,970,975) 143,049 (3,498) 51,250 (464,442) (7,244,616)
1998................................ (201,386) 952,576 426,960 461,250 (954,512) 684,888
Identifiable assets
At September 30
1999................................ 36,718,535 24,269,687 84,611 10,739,403 71,812,236
1998................................ 55,719,548 37,472,093 20,253,273 6,000,000 7,966,056 127,410,970
Capital expenditures
3 months
1999................................ 93,929 295,577 389,506
1998................................ 28,100 584,432 612,532
9 months
1999................................ 760,557 857,640 1,618,197
1998................................ 431,989 1,464,404 1,896,393
</TABLE>
10
<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, risks associated with the Year
2000 issue, 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, 1998.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, cash and cash equivalents on the balance sheet
were approximately $10.0 million. The Partnership held directly cash and cash
equivalents of approximately $0.3 million, and the Venture, in which the
Partnership owns an 80% interest, had approximately $9.7 million in cash and
cash equivalents. Such cash and cash equivalents are available for distribution
to the extent not required for working capital or capital improvements.
In the third quarter of 1999, as a result of the sale of the 300 Delaware
property, a distribution of sale and financing proceeds of $1.55 per BAC was
made to holders of record as of July 23, 1999. The cash balances that remain
have been retained primarily to fund potential costs that may be required to
improve tenancy at Northland Mall. In addition, these funds may be required to
cover other general working capital requirements.
In August 1999, the Partnership executed a purchase and sale agreement to
sell 16/18 Sentry Park West for $29.05 million. The property sold on October 28,
1999 for $29.05 million. The net proceeds received were $28,420,559, which
resulted in a gain of $4,726,252. On November 17, 1999, the Partnership will
make a distribution of net proceeds from the sale and various lease termination
payments of $5.28 per unit to BAC holders of record as of October 28, 1999.
Based on the amendment to the Joint Venture Agreement effective as of January 1,
1997, EREIM LP Associates agreed to defer, without interest, its right to
receive 20% of the Venture's distribution of sale or financing proceeds, thereby
entitling the Partnership to receive 100% of the sale or financing proceeds
attributable to the sales.
11
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Regarding Northland Mall, the property is being held for sale, and the
Partnership is currently evaluating offers that have been received. However,
there is no certainty as to when the property will be sold.
FINANCIAL CONDITION
Cash and cash equivalents decreased approximately $2.0 million, or 16.4%,
from $11.9 million at December 31, 1998 to $10.0 million at September 30, 1999
due primarily to the Partnership making cash distributions of $25.6 million and
expending $2.2 million in additions to real estate during 1999, partially offset
by approximately $17.1 million in net proceeds received from the sales of the
Richland Mall and 300 Delaware properties, $6.0 million received from the payoff
of the Jericho mortgage loan receivable, and $2.7 million of cash provided by
operating activities during 1999.
Accounts receivable and accrued investment income increased approximately
$1.7 million, or 59%, from $2.9 million at December 31, 1998 to $4.6 million at
September 30, 1999 due to the timing of the remittance of rental income.
Interest receivable increased approximately $126,000, or 131%, from $96,000
at December 31, 1998 to $222,000 at September 30, 1999 due to higher average
cash balances during September 1999 compared to December 1998.
Total liabilities decreased approximately $3.6 million, or 61%, from $5.8
million at December 31, 1998 to $2.3 million at September 30, 1999. The decrease
is due primarily to the payment during the first quarter of 1999 of accrued
distributions to BAC holders of $2.4 million and $610,000 in payments of accrued
capital expenditures during 1999.
The percentage of leased space at the Venture's properties at September 30,
1999 was 62% compared to the percentage of leased space at December 31, 1998 of
68%.
RESULTS OF OPERATIONS
Rental income decreased approximately $1.4 million, or 28%, and $2.5
million, or 16%, for the three and nine months ended September 30, 1999,
respectively, from $5.0 million for the three months and $15.1 million for the
nine months ended September 30, 1998 to $3.6 million for the three months and
$12.6 million for the nine months ended September 30, 1999. The decrease is due
primarily to the sales of the 1200 Whipple Road and 1345 Doolittle Drive
properties in late 1998 and the sales of Richland Mall and 300 Delaware in 1999.
The decrease in rental income attributable to these sales was approximately $3.0
million for the nine months ended September 30, 1999. This decrease was
partially offset by increases in rental income at Northland Mall and 16/18
Sentry Park West of $320,000 and $190,000, respectfully, due to additional
tenants in 1999.
Interest on loans receivable decreased approximately $154,000, or 100%, and
$410,000, or 89% for the three and nine months ended September 30, 1999,
respectively, from $154,000 for the three months and $461,000 for the nine
months ended September 30, 1998 to $0 for the three months and $51,000 for the
nine months ended September 30, 1999. The decrease is due to the payoff of the
Jericho mortgage note on February 1, 1999.
12
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Real estate operating expenses decreased approximately $970,000, or 45%,
and $668,000, or 11%, for the three and nine months ended September 30, 1999,
from $2.2 million for the three months and $6.2 million for the nine months
ended September 30, 1998 to $1.2 million for the three months and $5.5 million
for the nine months ended September 30, 1999. The decrease is primarily due to a
decrease in operating expenses of approximately $826,000 due to the sales of
1200 Whipple Road, 1345 Doolittle Drive, Richland Mall and 300 Delaware.
Depreciation and amortization decreased approximately $400,000, or 100%,
and $1.7 million, or 69%, for the three and nine months ended September 30,
1999, respectively, from $400,000 for the three months and $2.5 million for the
nine months ended September 30, 1998 to $0 for the three months and $789,000 for
the nine months ended September 30, 1999. The decrease is due to the Richland
Mall, 300 Delaware and 16/18 Sentry Park West properties being reclassified to
held for sale during mid 1998, resulting in no further depreciation being
recorded. Northland Mall was reclassified to held for sale at the end of the
second quarter in 1999. The decrease in depreciation and amortization
attributable to these four properties was approximately $1.4 million. The
decrease is also due to the sales of 1200 Whipple Road and 1345 Doolittle Drive
during late 1998. Depreciation and amortization for these two properties for the
nine months ended September 30, 1998 was approximately $223,000.
Loss on write-down of real estate assets was $0 and $11.3 million for the
three and nine months ended September 30, 1999, respectively, compared to
$650,000 and $3.6 million for the three and nine months ended September 30,
1998, due to the write-downs of 300 Delaware and Northland Mall in 1999 and the
write-downs of Richland Mall and 1850 Westfork in 1998.
General and administrative expenses decreased approximately $149,000, or
67%, and $342,000, or 50%, for the three and nine months ended September 30,
1999, respectively, from $221,000 for the three months and $679,000 for the nine
months ended September 30, 1998 to $72,000 for the three months and $337,000 for
the nine months ended September 30, 1999. The decrease is due primarily to
decreases in guaranty fees and partnership administration fees of approximately
$165,000 for the nine months ended September 30, 1999 due to a reduction in
adjusted capital contributions. In addition, the Partnership incurred increased
legal fees during 1998 due to pending litigation against the Partnership. Total
legal fees were approximately $110,000 higher in 1998 compared to 1999.
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 (Y2K). As the year 2000 approaches, such
systems may be unable to accurately process certain date-based information.
Y2K exposures of the Partnership and the Venture continue to be assessed.
Potential critical exposures include reliance on third party vendors and
building systems that are not Y2K compliant. The Venture continues to
communicate with our third party service vendors in an effort to assess Y2K
compliance status and the adequacy of Y2K efforts.
13
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Each property owned by the Venture has been individually assessed in an
effort to identify critical Y2K issues specific to each property. The inventory
survey, assessment and remediation efforts for 16 Sentry Park West, 18 Sentry
Park West and Northland Mall have been completed.
The Partnership and the Venture have incurred total costs to date relating
to Y2K of approximately $62,200. The total property assessment costs to the
Venture were approximately $49,500 and the total cost for quality assurance for
third party engineers and consultants were approximately $12,700. No material
costs were incurred to remediate and test non-compliant building systems. In
addition, contingency plans were developed for each of the buildings owned by
the Venture and are in place for the remaining property, Northland Mall.
Contingency plans may involve the engagement of additional security services,
implementation of temporary systems modifications, and the identification and
engagement of alternate service vendors. Additional contingency plans may be
developed as circumstances warrant.
The failure to adequately address the Year 2000 issue may result in a
cessation or disruption of building operations, the closure of buildings owned
by the Venture, or delay in distributions to BAC Holders. There could be
unexpected costs associated with Y2K issues and these costs cannot be predicted
at this time. These unexpected costs could be incurred prior to or after the
year 2000. In order to reduce the potential impact on the operations of the
Partnership and the Venture, Partnership contingency plans were completed.
Quantitative and Qualitative Disclosures About Market Risk
Market risk is the exposure to loss resulting from changes in interest
rates, foreign currency exchange rates, commodity prices, and equity prices. As
of September 30, 1999, the Partnership had no material exposure to market risk.
14
<PAGE> 15
PART II
Item 1. Legal Proceedings
As discussed in the Notes to Consolidated Financial Statements of the
Partnership's December 31, 1998 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. In August 1999, Plaintiffs filed an amended
complaint alleging that, in addition to the allegations made previously,
certain distributions from the Partnership were improperly characterized as
sale or financing proceeds rather than distributable cash. Defendants have
filed a motion to dismiss the amended complaint on statute of limitations
grounds.
A Northland Mall tenant filed a lawsuit in 1999 in the State Court of
Michigan against the Venture for breach of lease. The parties entered into
a settlement agreement pursuant to which Equitable, the co-venturer,
paid the tenant the full settlement payment.
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
15
<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: /s/ Debra L. Keller
----------------------------------------
Debra L. Keller
Vice President and Assistant Treasurer
(Principal Accounting Officer)
Dated: November 12, 1999
16
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- ------------------------------------------------------
<S> <C>
27 Financial Data Schedule (for SEC filing purposes only)
</TABLE>
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF ML/EQ REAL ESTATE PORTFOLIO LP FOR THE PERIOD ENDED
SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 9,981,074
<SECURITIES> 0
<RECEIVABLES> 5,835,876
<ALLOWANCES> 967,442
<INVENTORY> 0
<CURRENT-ASSETS> 15,732,583
<PP&E> 54,461,982
<DEPRECIATION> 0
<TOTAL-ASSETS> 71,812,236
<CURRENT-LIABILITIES> 2,023,004
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 38,841,883
<TOTAL-LIABILITY-AND-EQUITY> 71,812,236
<SALES> 0
<TOTAL-REVENUES> 13,372,573
<CGS> 0
<TOTAL-COSTS> 7,404,447
<OTHER-EXPENSES> 789,345
<LOSS-PROVISION> 11,584,826
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (7,244,615)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,937,705)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,937,705)
<EPS-BASIC> (1.04)
<EPS-DILUTED> 0
</TABLE>
