<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to
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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
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ML/EQ REAL ESTATE PORTFOLIO, L.P.
CONTENTS
PART I - FINANCIAL INFORMATION
Item 1 - Financial statements:
Consolidated balance sheets at March 31, 1999 and
December 31, 1998
Consolidated statements of operations for the three
months ended March 31, 1999 and 1998
Consolidated statement of partners' capital for the three
months ended March 31, 1999
Consolidated statements of cash flows for the three months
ended March 31, 1999 and 1998
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
2
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ML/EQ REAL ESTATE PORTFOLIO, L.P.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 AND DECEMBER 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
----------- ------------
<S> <C> <C>
ASSETS
REAL ESTATE INVESTMENTS:
Rental properties, net of accumulated depreciation of
$5,967,788 in 1999 and $5,586,628 in 1998............... $40,003,454 $ 39,873,242
Rental properties, held for sale.......................... 31,253,707 41,915,300
Mortgage loan receivable.................................. -- 6,000,000
----------- ------------
Total real estate investments...................... 71,257,161 87,788,542
----------- ------------
OTHER ASSETS:
Cash and cash equivalents................................. 10,178,864 11,939,314
Accounts receivable and accrued investment income, net of
allowance for doubtful accounts of $681,801 in 1999 and
$598,018 in 1998........................................ 2,688,471 2,892,290
Deferred rent concessions................................. 933,979 809,836
Guaranty fee, net of accumulated amortization of
$2,736,775 in 1999 and $2,669,713 in 1998............... 1,005,939 1,073,002
Deferred leasing costs, net of accumulated amortization of
$150,582 in 1999 and $137,636 in 1998................... 325,419 302,184
Prepaid expenses and other assets......................... 831,692 875,369
Interest receivable....................................... 36,424 96,112
Due from affiliates....................................... 10,574 649
----------- ------------
Total other assets................................. 16,011,362 17,988,756
----------- ------------
TOTAL ASSETS................................................ $87,268,523 $105,777,298
=========== ============
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Accounts payable and accrued real estate expenses......... $ 2,023,356 $ 1,758,841
Accrued capital expenditures.............................. 479,463 788,395
Security deposits and unearned rent....................... 384,617 343,922
Due to affiliates......................................... 154,585 480,453
Distributions declared.................................... -- 2,440,901
----------- ------------
Total liabilities.................................. 3,042,021 5,812,512
----------- ------------
MINORITY INTEREST IN THE VENTURE............................ 31,877,173 32,023,757
----------- ------------
COMMITMENTS AND CONTINGENT LIABILITIES
PARTNERS' CAPITAL:
General partners.......................................... 2,671,409 2,713,299
Initial limited partner................................... 6,470 6,507
Limited partners (5,424,225 BACs issued and
outstanding)............................................ 49,671,450 65,221,223
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Total partners' capital............................ 52,349,329 67,941,029
----------- ------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL..................... $87,268,523 $105,777,298
=========== ============
</TABLE>
See notes to consolidated financial statements.
3
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ML/EQ REAL ESTATE PORTFOLIO, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
------------------------
1999 1998
----------- ----------
<S> <C> <C>
REVENUE:
Rental income............................................. $ 4,587,277 $5,204,271
Lease termination income.................................. -- 12,500
Interest on loans receivable.............................. 51,250 153,750
----------- ----------
Total revenue..................................... 4,638,527 5,370,521
----------- ----------
OPERATING EXPENSES:
Real estate operating expenses............................ 2,406,030 2,072,565
Depreciation and amortization............................. 394,108 1,058,728
Real estate taxes......................................... 452,444 575,175
Property management fees.................................. 96,199 107,690
----------- ----------
Total operating expenses.......................... 3,348,781 3,814,158
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INCOME FROM PROPERTY OPERATIONS............................. 1,289,746 1,556,363
OTHER INCOME (EXPENSE):
Loss on sale of real estate............................... (71,562) --
Loss on write-down of real estate assets.................. (2,114,680) --
Interest and other non-operating income................... 184,878 205,374
Asset management fees..................................... (106,647) (153,600)
Amortization of guarantee fee............................. (67,063) (67,063)
General and administrative, including $47,938 and $98,845
at March 31, 1999 and 1998, respectively, to
affiliates............................................. (99,064) (168,452)
----------- ----------
Total other expense - net......................... (2,274,138) (183,741)
----------- ----------
INCOME (LOSS) BEFORE MINORITY INTEREST...................... (984,392) 1,372,622
MINORITY INTEREST IN NET (INCOME) LOSS OF CONSOLIDATED
VENTURE................................................... 146,584 (349,759)
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NET INCOME (LOSS)........................................... $ (837,808) $1,022,863
=========== ==========
ALLOCATION OF NET INCOME (LOSS):
General partners.......................................... $ (41,890) $ 51,143
Initial limited partner................................... (37) 45
Limited partners.......................................... (795,881) 971,675
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TOTAL....................................................... $ (837,808) $1,022,863
=========== ==========
NET INCOME (LOSS) PER BAC................................... $ (0.15) $ 0.18
=========== ==========
WEIGHTED AVERAGE BACs OUTSTANDING........................... 5,424,225 5,424,225
=========== ==========
</TABLE>
See notes to consolidated financial statements
4
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ML/EQ REAL ESTATE PORTFOLIO, L.P.
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
FOR THE THREE MONTHS ENDED MARCH 31, 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)....................... (41,890) (37) (795,881) (837,808)
Distributions........................... -- -- (14,753,892) (14,753,892)
---------- ------- ------------ ------------
Balance, March 31, 1999................. $2,671,409 $(6,470) $ 49,671,450 $ 52,349,329
========== ======= ============ ============
</TABLE>
See notes to consolidated financial statements.
5
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ML/EQ REAL ESTATE PORTFOLIO, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Tenant rentals received................................... $ 4,654,429 $ 5,740,716
Interest received......................................... 295,816 452,387
------------ ------------
Cash received from operations............................. 4,950,245 6,193,103
Cash paid for operating activities........................ (3,187,985) (3,784,824)
Cash distributions to minority interest................... -- (331,593)
------------ ------------
Net cash provided by operating activities.......... 1,762,260 2,076,686
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases and additions to rental properties.............. (1,009,842) (1,864,328)
Expenditures for deferred leasing costs................... (36,181) 16,931
Proceeds from sales of real estate properties............. 8,718,106 --
Repayment of mortgage loan receivable..................... 6,000,000 --
------------ ------------
Net cash provided by (used in) investing
activities....................................... 13,672,083 (1,847,397)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash distributions to limited partners.................... (17,194,793) (14,916,619)
------------ ------------
Net cash used in financing activities.............. (17,194,793) (14,916,619)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS............................................ (1,760,450) (14,687,330)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 11,939,314 21,256,903
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 10,178,864 $ 21,256,903
============ ============
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net income (loss)........................................... $ (837,808) $ 1,022,863
------------ ------------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 461,171 1,125,791
Minority interest in Venture operations................... (146,584) 349,759
Cash distributions to minority interest................... -- (331,593)
Loss on sale of real estate............................... 71,562 --
Loss on write-down of real estate......................... 2,114,680 --
Changes in assets (increase) decrease:
Accounts receivable and accrued investment income......... 203,819 575,255
Deferred rent concessions................................. (177,362) 62,238
Interest receivable....................................... 59,688 93,262
Prepaid expenses and other assets......................... 43,677 (96,800)
Due from affiliates....................................... (9,925) (5,475)
Changes in liabilities increase (decrease):
Accounts payable and accrued real estate expenses......... 264,515 (227,978)
Security deposits and unearned rent....................... 40,695 (113,548)
Due to affiliates......................................... (325,868) (377,088)
------------ ------------
Total adjustments.................................. 2,600,068 1,053,823
------------ ------------
NET CASH FLOW PROVIDED BY OPERATING ACTIVITIES..... $ 1,762,260 $ 2,076,686
============ ============
</TABLE>
See notes to consolidated financial statements.
6
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ML/EQ REAL ESTATE PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 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 BAC holders and to be reimbursed
for certain expenses incurred on behalf of the Partnership. At March 31, 1999
and December 31, 1998, the accrued balance of these fees and reimbursements
totaled $154,585 and $480,453, respectively. For each of the three months ended
March 31, 1999 and 1998, the expense for these recurring fees totaled $154,585
and $252,445, 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 Lend Lease Real Estate
Investments, Inc., ("Lend Lease"), its investment advisor. Asset management fees
paid by the Partnership to the Managing General Partner were $106,647 and
$153,600 for the three months ended March 31, 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 $93,395 for the three months ended March
31, 1998.
The Venture reimbursed Compass and Retail for payroll incurred of $476,219
for the three months ended March 31, 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.
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ML/EQ REAL ESTATE PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 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 March 31, 1999 is limited to $119,292,639, 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, 1999, the cumulative 9.75% simple annual return
was $110,007,770. As of March 31, 1999, cumulative distributions by the
Partnership to the BAC holders totaled $109,091,999, of which $27,663,548 is
attributable to income from operations and $81,428,451 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
At March 31, 1999, the 300 Delaware and 16/18 Sentry Park West properties
are classified as held for sale, and accordingly the application of depreciation
has been suspended. Northland Mall, the remaining property held for investment,
continues to be depreciated. In April 1999, the Partnership executed a purchase
and sale agreement to sell 300 Delaware for $8,750,000. A loss of $2,114,680 was
recorded in the first quarter of 1999 as a result of this agreement in order to
reduce 300 Delaware's carrying value to its estimated net realizable value. The
Partnership expects to close this transaction prior to the end of the third
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ML/EQ REAL ESTATE PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
quarter, subject to customary closing conditions and results of due diligence
procedures. The Partnership anticipates making a special distribution of the net
proceeds to BAC holders shortly after the transaction is complete. Based on the
amendment to the Joint Venture Agreement effective as of January 1, 1997, EREIM
LP Associates agreed to defer, without interest, its rights 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 sale. For 16/18 Sentry Park West, management believes that the carrying
value does not exceed market value less selling costs. For the three months
ended March 31, 1999, income from property operations includes approximately
$736,000, or 57%, of income from the two properties held for sale.
As discussed in the Notes to Consolidated Financial Statements of the
Partnership's December 31, 1998 audited financial statements, on January 27,
1999, the Partnership consummated the sale of the Richland Mall property at a
sales price of $9,010,000. The net sales proceeds received were $8,718,106,
which resulted in a loss of $71,562.
4. MORTGAGE LOAN RECEIVABLE
In 1989, the Partnership made a $6,000,000 nonrecourse first mortgage loan
bearing interest at 10.25% per annum. The loan was collateralized by an
apartment complex in Weston, Massachusetts. This note matured and was paid in
full on February 1, 1999.
5. 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.
There have been no new developments associated with this action for the three
months ended March 31, 1999.
The Venture is currently in litigation with a current Northland Mall tenant
who is seeking damages for breach of lease. The Plaintiff, My Inc, filed a claim
with the State Court of Michigan in 1997. The parties have agreed to the
principal terms of a settlement, which has not yet been finalized.
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ML/EQ REAL ESTATE PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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-sown of assets, income (loss)
before minority interest, identifiable assets and capital expenditures for the
quarters ending March 31, are as follows:
<TABLE>
<CAPTION>
MORTGAGE CORPORATE/
RETAIL OFFICE INDUSTRIAL LOANS OTHER TOTAL
---------- ---------- ---------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues
1999....................... 3,164,920 1,432,357 (10,000) 51,250 4,638,527
1998....................... 3,320,722 1,325,833 570,216 153,750 5,370,521
Depreciation and
amortization
1999....................... 394,108 67,063 461,171
1998....................... 490,435 437,085 131,208 67,063 1,125,791
Loss on write-down of
assets
1999....................... 2,114,680 2,114,680
1998.......................
Income (loss) before
minority interest
1999....................... 488,887 (1,378,768) (3,068) 51,250 (142,693) (984,392)
1998....................... 994,086 129,701 317,498 153,750 (222,413) 1,372,622
Identifiable assets
1999....................... 45,124,047 32,078,161 69,196 9,997,119 87,268,523
1998....................... 58,420,737 36,822,511 21,061,764 6,000,000 7,532,848 129,837,860
Capital expenditures
1999....................... 547,555 498,468 1,046,023
1998....................... 911,461 927,164 8,772 1,847,397
</TABLE>
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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 March 31, 1999, cash and cash equivalents on the balance sheet were
approximately $10.2 million. The Partnership had directly held cash and cash
equivalents of approximately $.7 million. Such cash and cash equivalents are
available for distribution to the extent not required for working capital. In
addition, at March 31, 1999, the Venture, in which the Partnership owns an 80%
interest, had approximately $9.5 million in cash and cash equivalents.
Three distributions of sale and financing proceeds were made to BAC holders
in the first quarter of 1999. On February 26, 1999 two separate distributions
were made. One was in the amount of $0.45 per BAC to holders of record on
December 18, 1999, which represents sale proceeds from the sale of 1850 Westfork
Drive. The other distribution on February 26, 1999 was in the amount of $1.61
per BAC to holders of record on January 27, 1999, which represents sale proceeds
from the sale of Richland Mall. On March 21, 1999 a distribution in the amount
of $1.11 per BAC was made to holders of record as of February 1, 1999, which
represents sale or financing proceeds from the payoff of the Jericho Village
loan. The cash balances that remain have been retained primarily to fund
potential costs that may be required to increase tenancy at 300 Delaware and
Northland Mall, both of which have significant vacancies. In addition, these
funds may be required to cover other general working capital requirements.
The Partnership continues to evaluate the appropriate strategies for the
ownership of each of the assets in the portfolio in order to achieve maximum
value. In this regard, the Partnership considers capital market and
11
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investment market conditions for real estate, local market conditions; future
capital needs, including potential lease exposure for specific properties; and
other issues that impact property performance. This ongoing analysis provides
the basis for hold/sell recommendations for the properties. Based on this
analysis of the various factors, the Partnership marketed for sale the Richland
Mall, 300 Delaware and 16/18 Sentry Park West properties in the second half of
1998. Due primarily to the turmoil in the financial markets during the third
quarter of 1998, the Partnership was unable to sell 300 Delaware and 16/18
Sentry Park West in 1998 at an acceptable price. On January 27, 1999, the
Venture completed the sale of Richland Mall at a price of $9.01 million.
In accordance with the Partnership's strategy to achieve the maximum value
for each property prior to the termination of the Partnership on December 31,
2002, management is continuing its efforts to sell or position for sale the
three remaining properties. In April 1999, a purchase and sale agreement was
executed for 300 Delaware at a price of $8.75 million. This potential sale is
scheduled to close in the third quarter of 1999, subject to the customary
closing conditions, including the results of the due diligence procedures. There
is no assurance that the sale of 300 Delaware will be completed. Remarketing
efforts for 16/18 Sentry Park West commenced in April 1999, with the intent of
selling the property prior to the end of 1999. However, there is no certainty as
to when this property will be sold.
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.
As of March 31, 1999, 300 Delaware and 16/18 Sentry Park West are
classified as held for sale. Based on the purchase and sale agreement price of
$8.75 million for 300 Delaware, an additional reserve of $2.1 million was
recognized in the first quarter of 1999. Based on the current estimated value of
16/18 Sentry Park West, no reserve is required for this property.
Cash received by the Venture from tenant rentals for the three months ended
March 31, 1999 decreased approximately $1.1 million, or 19%, to $4.6 million
from $5.7 million for the three months ended March 31, 1998. The decrease is
primarily due to the sale of 1200 Whipple Road, 1345 Doolittle Drive and
Richland Mall; resulting in a decrease in tenant rentals received of
approximately $1.6 million. This decrease was partially offset by an increase in
tenant rentals received at Northland Mall of approximately $548,000, due to the
timing of the remittance of rental income.
FINANCIAL CONDITION
Cash and cash equivalents decreased approximately $1.7 million, or 15%,
from $11.9 million at December 31, 1998 to $10.2 million at March 31, 1999 due
primarily to the Partnership making cash distributions of $17.2 million during
the first quarter of 1999, partially offset by approximately $8.7 million in net
proceeds received in January, 1999 from the sale of the Richland Mall property,
and $6.0 million received in February 1999 from the payoff of the Jericho
mortgage loan receivable.
Interest receivable decreased approximately $60,000, or 63%, from $96,000
at December 31, 1998 to $36,000 at March 31, 1999 due to higher average cash
balances during December 1998 compared to March 1999.
Total liabilities decreased approximately $2.8 million, or 48%, from $5.8
million at December 31, 1998 to $3.0 million at March 31, 1999. The decrease is
primarily due to the payment during the first quarter of 1998 of accrued
distributions to BAC holders of $2.4 million.
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<PAGE> 13
The percentage of leased space at the Venture's properties at March 31,
1999 was 66% compared to the percentage of leased space at December 31, 1998 of
68%.
RESULTS OF OPERATION
Rental income decreased approximately $617,000, or 12%, from $5.2 million
for the three months ended March 31, 1998 to $4.6 million for the three months
ended March 31, 1999. The decrease is due primarily to the sales of the 1200
Whipple Road and 1345 Doolittle Drive properties in late 1998 and the sale of
Richland Mall in January 1999. The decrease in rental income due to these sales
was approximately $878,000. This was partially offset by increases in rental
income at Northland Mall and 300 Delaware of $183,000 and $82,000, respectively,
due to additional tenants in 1999.
Interest on loans receivable decreased approximately $103,000, or 67%, from
$154,000 for the three months ended March 31, 1998 to $51,000 for the three
months ended March 31, 1999. The decrease is due to the payoff of the Jericho
mortgage note on February 1, 1999.
Real estate operating expenses increased approximately $333,000, or 16%,
from $2.1 million for the three months ended March 31, 1998 to $2.4 million for
the three months ended March 31, 1999. The increase is due primarily to a
$502,000 legal reserve recorded in 1999 for pending litigation at Northland
Mall. The increase is partially offset by a decrease in operating expenses of
approximately $203,000 due to the sales of 1200 Whipple Road, 1345 Doolittle
Drive and Richland Mall.
Depreciation and amortization decreased approximately $665,000, or 63%,
from $1.1 million for the three months ended March 31, 1998 to $394,000 for the
three months ended March 31, 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 depreciation being suspended. Depreciation
and amortization for these three properties for the three months ended March 31,
1998 totaled $549,000. 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 three months ended March 31, 1998 was
approximately $112,000.
Loss on write-down of real estate assets was approximately $2.1 million for
the three months ended March 31, 1999, compared to $0 for the three months ended
March 31, 1998, due to the write-down of 300 Delaware in March 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 are currently being
assessed. Potential critical exposures include reliance on third party vendors
and building systems that are not Y2K compliant. The Venture has communicated
with our third party service vendors such as Lend Lease, Merrill Lynch and
property managers in an effort to assess their Y2K compliance status and the
adequacy of their Y2K efforts.
Each property owned by the Venture is being individually assessed in an
effort to identify critical Y2K issues specific to each property. The inventory
survey and assessment process for 16/18 Sentry Park West and Northland Mall have
been completed and remediation efforts are expected to be complete by July 31,
1999. Remediation strategies have been developed based on assessment findings.
The inventory survey for 300 Delaware Avenue was halted due to the pending sale
of the property.
13
<PAGE> 14
The Partnership and the Venture have incurred costs to date relating to Y2K
of approximately $27,000. The total property assessment costs to the Venture are
expected to be approximately $55,000 and the total cost for third party
engineers and consultants is expected to be approximately $12,700. Estimated
remediation costs of $30,000 are expected to be incurred to remediate and test
non-compliant building systems, for a total estimated cost of $97,700.
The failure to adequately address the Year 2000 issue may result in a delay
or temporary suspension of certain building services, the closure of buildings
owned by the Venture, or delay in distributions to BAC Holders. In order to
reduce the potential impact on the operations of the Partnership and the
Venture, contingency plans for the Partnership entity will be developed by July
31, 1999.
Likewise, contingency plans will be developed by June 30, 1999 for each of
the buildings owned by the Venture on a property by property basis. This will
allow the efficient development of contingency plans that take into account
individual circumstances surrounding each property. 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.
ITEM 3. 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 March 31, 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 the 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.
There have been no new developments associated with this action for the three
months ended March 31, 1999.
The Venture is currently in litigation with a current Northland Mall tenant who
is seeking damages for breach of lease. The Plaintiff, My Inc, filed a claim
with the State Court of Michigan in 1997. The parties have agreed to the
principal terms of a settlement, which has not yet been finalized.
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
The Partnership filed a Current Report on Form 8-K on February
17, 1999, pursuant to which the sales of two of the Properties,
1850 Westfork Drive and Richland Mall, were reported.
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/ Patricia C. Snedeker
------------------------
Patricia C. Snedeker
Vice President, Controller
and Treasurer
(Principal Accounting Officer)
Dated: May 14, 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
MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 10,178,864
<SECURITIES> 0
<RECEIVABLES> 3,417,270
<ALLOWANCES> 681,801
<INVENTORY> 0
<CURRENT-ASSETS> 13,746,025
<PP&E> 77,224,949
<DEPRECIATION> 5,967,788
<TOTAL-ASSETS> 87,268,523
<CURRENT-LIABILITIES> 2,657,404
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 52,349,329
<TOTAL-LIABILITY-AND-EQUITY> 87,268,523
<SALES> 0
<TOTAL-REVENUES> 4,823,405
<CGS> 0
<TOTAL-COSTS> 2,954,673
<OTHER-EXPENSES> 394,108
<LOSS-PROVISION> 2,186,242
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (984,392)
<INCOME-TAX> 0
<INCOME-CONTINUING> (837,808)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (837,808)
<EPS-PRIMARY> (0.15)
<EPS-DILUTED> 0
</TABLE>
