UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ______ to _______ .
Commission File Number: 0-17881
PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP
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(Exact name of registrant as specified in its charter)
Virginia 04-2985890
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
265 Franklin Street, Boston, Massachusetts 02110
- ------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 439-8118
--------------
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>
PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
September 30, 1997 and March 31, 1997 (Unaudited)
(In thousands)
ASSETS
September 30 March 31
------------ --------
Operating investment properties, at cost:
Land $ 4,208 $ 4,208
Building and improvements 14,015 14,153
--------- ---------
18,223 18,361
Less accumulated depreciation (4,138) (3,893)
--------- ---------
14,085 14,468
Investments in unconsolidated ventures, at equity 13,294 13,881
Cash and cash equivalents 5,227 4,615
Accrued interest and other receivables 146 101
Prepaid expenses 20 7
Deferred expenses, net 124 133
--------- ---------
$ 32,896 $ 33,205
========= =========
LIABILITIES AND PARTNERS' CAPITAL
Notes payable and deferred interest, including
amounts in default $ 12,472 $ 12,043
Accounts payable and accrued expenses 77 98
Tenant security deposits 20 14
Accrued real estate taxes 37 14
Advances from consolidated ventures 169 195
Other liabilities 2 2
Partners' capital 20,119 20,839
--------- ---------
$ 32,896 $ 33,205
========= =========
See accompanying notes.
<PAGE>
PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and six months ended September 30, 1997 and 1996 (Unaudited)
(In thousands, except per Unit data)
Three Months Ended Six Months Ended
September 30, September 30,
------------------- ------------------
1997 1996 1997 1996
---- ---- ---- ----
Revenues:
Rental income and expense
reimbursements $ 545 $ 596 $ 1,137 $1,159
Interest income 73 51 141 98
----- ----- ------- ------
618 647 1,278 1,257
Expenses:
Interest expense 302 304 623 599
Property operating expenses 123 103 231 234
Real estate taxes 37 38 77 75
General and administrative 75 90 122 174
Depreciation and amortization 128 160 255 294
----- ----- ------- ------
665 695 1,308 1,376
----- ----- ------- ------
Operating loss (47) (48) (30) (119)
Partnership's share of
unconsolidated
ventures' losses (62) (91) (53) (213)
----- ----- ------- ------
Net loss $ (109) $(139) $ (83) $ (332)
====== ===== ======= ======
Net loss per
Limited Partnership Unit $(2.15) $(2.73) $(1.63) $(6.50)
====== ====== ====== ======
Cash distributions per
Limited Partnership Unit $ 6.25 $ 5.00 $12.50 $10.00
====== ====== ====== ======
The above per Limited Partnership Unit information is based upon the
50,468 Limited Partnership Units outstanding during each period.
See accompanying notes.
<PAGE>
PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
For the six months ended September 30, 1997 and 1996 (Unaudited)
(In thousands)
General Limited
Partners Partners
-------- --------
Balance at March 31, 1996 $ (218) $ 22,548
Cash distributions (5) (505)
Net loss (4) (328)
------ --------
Balance at September 30, 1996 $ (227) $ 21,715
====== ========
Balance at March 31, 1997 $ (234) $ 21,073
Cash distributions (6) (631)
Net loss (1) (82)
------ --------
Balance at September 30, 1997 $ (241) $ 20,360
====== ========
See accompanying notes.
<PAGE>
PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended September 30, 1997 and 1996 (Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1997 1996
---- ----
Cash flows from operating activities:
Net loss $ (83) $ (332)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Partnership's share of unconsolidated
ventures' losses 53 213
Depreciation and amortization 255 294
Amortization of deferred loan costs 5 21
Interest expense on zero coupon loans 450 403
Changes in assets and liabilities:
Accrued interest and other receivables (45) 95
Prepaid expenses (13) 5
Deferred expenses (6) (3)
Accounts payable and accrued expenses (21) 26
Accrued real estate taxes 23 24
Tenant security deposits 6 -
Advances from consolidated ventures (26) 130
----- -------
Total adjustments 681 1,208
----- -------
Net cash provided by operating activities 598 876
------ -------
Cash flows from investing activities:
Net additions to escrowed cash - (19)
Additions to operating investment properties (2) (4)
Receipt of master lease payments 140 -
Distributions from unconsolidated joint ventures 534 398
------ -------
Net cash provided by investing activities 672 375
------ -------
Cash flows from financing activities:
Cash distributions to partners (637) (510)
Payments of principal on notes payable (21) (19)
------ -------
Net cash used in financing activities (658) (529)
------ -------
Net increase in cash and cash equivalents 612 722
Cash and cash equivalents, beginning of period 4,615 3,439
------ -------
Cash and cash equivalents, end of period $5,227 $ 4,161
====== =======
Cash paid during the period for interest $ 173 $ 175
====== =======
See accompanying notes.
<PAGE>
PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
(Unaudited)
1. General
-------
The accompanying financial statements, footnotes, and discussion should be
read in conjunction with the financial statements and footnotes contained in the
Partnership's Annual Report for the year ended March 31, 1997. In the opinion of
management, the accompanying financial statements, which have not been audited,
reflect all adjustments necessary to present fairly the results for the interim
period. All of the accounting adjustments reflected in the accompanying interim
financial statements are of a normal recurring nature.
The accompanying financial statements have been prepared on the accrual
basis of accounting in accordance with generally accepted accounting principles
which requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities as of September 30, 1997 and March 31, 1997 and revenues and
expenses for each of the three and six-month periods ended September 30, 1997
and 1996. Actual results could differ from the estimates and assumptions used.
2. Related Party Transactions
--------------------------
Included in general and administrative expenses for the six-month periods
ended September 30, 1997 and 1996 is $47,000 and $41,000, respectively,
representing reimbursements to an affiliate of the Managing General Partner for
providing certain financial, accounting and investor communication services to
the Partnership.
Also included in general and administrative expenses for the six months
ended September 30, 1997 and 1996 is $9,000 and $7,000, respectively,
representing fees earned by an affiliate, Mitchell Hutchins Institutional
Investors, Inc., for managing the Partnership's cash assets.
3. Investments in Unconsolidated Joint Venture Partnerships
--------------------------------------------------------
The Partnership has investments in two unconsolidated joint venture
partnerships which own operating properties as more fully described in the
Partnership's Annual Report. The unconsolidated joint ventures are accounted for
by using the equity method because the Partnership does not have a voting
control interest in these ventures. Under the equity method, the assets,
liabilities, revenues and expenses of the joint ventures do not appear in the
Partnership's financial statements. Instead, the investments are carried at cost
adjusted for the Partnership's share of each venture's earnings, losses and
distributions. The Partnership reports its share of unconsolidated joint venture
earnings or losses three months in arrears.
<PAGE>
Summarized operations of the unconsolidated joint ventures, for the
periods indicated, are as follows:
Condensed Combined Summary of Operations
For the three and six months ended June 30, 1997 and 1996
(in thousands)
Three Months Ended Six Months Ended
June 30, June 30,
----------------- ------------------
1997 1996 1997 1996
---- ---- ---- ----
Revenues:
Rental revenues and expense
recoveries $1,130 $1,027 $2,339 $ 2,059
Interest and other income 11 12 26 21
------ ------ ------ -------
1,141 1,039 2,365 2,080
Expenses:
Property operating expenses 424 405 878 822
Real estate taxes 35 44 72 87
Interest expense 282 250 560 499
Depreciation and amortization 439 429 877 862
------ ------ ------ -------
1,180 1,128 2,387 2,270
------ ------ ------ -------
Net loss $ (39) $ (89) $ (22) $ (190)
====== ====== ====== =======
Net income (loss):
Partnership's share of
combined income (losses) $ (57) $ (86) $ (43) $ (203)
Co-venturers' share of
combined income (losses) 18 (3) 21 13
------ ------ ------ -------
$ (39) $ (89) $ (22) $ (190)
====== ====== ====== =======
Reconciliation of Partnership's Share of Operations
For the three and six months ended September 30, 1997 and 1996
(in thousands)
Three Months Ended Six Months Ended
September 30, September 30,
------------------ -----------------
1997 1996 1997 1996
---- ---- ---- ----
Partnership's share of
operations, as shown
above $ (57) $ (86) $ (43) $ (203)
Amortization of excess basis (5) (5) (10) (10)
------ ------ ------ ------
Partnership's share of
unconsolidated ventures'
losses $ (62) $ (91) $ (53) $ (213)
====== ====== ===== ======
4. Operating Investment Properties
-------------------------------
The Partnership has investments in two consolidated joint venture
partnerships which own operating investment properties as more fully described
in the Partnership's Annual Report. The consolidated ventures have December 31
year-ends for both tax and financial reporting purposes. Accordingly, the
Partnership's policy is to report the financial position, results of operations
and cash flows of these ventures on a three-month lag. All material transactions
between the Partnership and these joint ventures have been eliminated upon
consolidation, except for lag-period cash transfers. Such lag period cash
transfers are accounted for as advances from consolidated ventures on the
accompanying balance sheets.
As discussed in the Partnership's Annual Report, the Partnership owns a
controlling interest in the Colony Plaza General Partnership, which was formed
to acquire and operate the Colony Plaza Shopping Center located in Augusta,
Georgia. The shopping center, which consists of approximately 217,000 square
feet of leasable retail space, was acquired by the joint venture on January 18,
1990.
On January 27, 1995, the Partnership purchased 99% of its co-venture
partner's interest in Portland Pacific Associates Two for $233,000. The
remaining 1% interest of the co-venturer was assigned to Third Equity Partners,
Inc., the Managing General Partner of the Partnership, in return for a release
from any further obligations or duties called for under the terms of the joint
venture agreement. As a result, the Partnership assumed control over the affairs
of the joint venture. Portland Pacific Associates Two owns the Willow Grove
Apartments, a 119-unit complex located in Beaverton, Oregon.
The following is a combined summary of property operating expenses for the
consolidated joint ventures for the three and six months ended June 30, 1997 and
1996 (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
1997 1996 1997 1996
---- ---- ---- ----
Common area maintenance $ 23 $ 27 $ 53 $ 62
Utilities 22 21 43 43
Management fees 23 26 45 47
Administrative and other 55 29 90 82
---- ----- ----- ----
$123 $ 103 $ 231 $234
==== ===== ===== ====
5. Notes payable
-------------
Notes payable and deferred interest at September 30, 1997 and March 31,
1997 consist of the following (in thousands):
September 30 March 31
------------ --------
10.5% nonrecourse loan payable by
the Partnership to a finance
company, which is secured by the
Colony Plaza operating investment
property. All interest and
principal was due at maturity, on
December 29, 1996. Interest is
compounded semi-annually. Accrued
interest at September 30, 1997 and
March 31, 1997 amounted to $4,908
and $4,458, respectively. It is not
practicable for management to
estimate the fair value of this
mortgage note payable due to its
current default status (see
discussion below). $ 8,958 $ 8,508
9.59% nonrecourse loan payable by
the consolidated Portland Pacific
Associates Two to a finance company
which is secured by the Willow
Grove operating investment
property. The note requires monthly
principal and interest payments of
$32 from April 1995 through
maturity in March 2002. The fair
value of the mortgage note
approximated its carrying value at
June 30, 1997 and December 31,
1996. 3,514 3,535
------- -------
$12,472 $12,043
======= =======
The borrowing secured by Colony Plaza matured on December 29, 1996, at
which time total principal and accrued interest of $8,290,190 was due and
payable. Although the Partnership did not make its scheduled payment upon
maturity, no formal default notices have been issued to date and management
continues to negotiate with the existing lender regarding a potential extension
and modification of the outstanding first mortgage loan. The Partnership,
however, is accruing interest at a default rate of 15%, as per the original loan
agreement because no definitive agreement to modify the loan has been executed
to date. If an extension agreement is signed, this penalty interest would be
waived retroactively to the December 28, 1996 maturity date and the Partnership
would be required to remit a cash payment for interest accruing from that date
forward at the agreed upon modified rate. Colony Plaza was 93% leased, but only
31% occupied as of September 30, 1997 as a result of the closing of the
property's Wal-Mart and Food Max anchor stores during fiscal 1997. As a result
of the current leasing status of the Colony Plaza property, obtaining a new loan
to refinance the outstanding debt is not practical, and the existing lender is
concerned that its first mortgage position could be impaired in the event that
the occupancy level at the property cannot be re-stabilized. Accordingly, the
recent negotiations with the lender have focused on a potential agreement that
would give the Partnership a stated period to re-lease all or some portion of
the Wal-Mart space at Colony Plaza. If the Partnership were successful in
re-leasing the space within the required time frame, then the Partnership would
be entitled to execute a long-term extension of the existing mortgage loan
pursuant to certain previously agreed upon terms. If the Partnership were not
able to re-lease the space within the required time frame, then the lender would
be entitled to initiate foreclosure proceedings on the property. Any such
long-term extension agreement with the lender remains subject to final
negotiation and the execution of definitive modification agreements. If the
modification and extension of this loan cannot be accomplished, the lender could
choose to initiate foreclosure proceedings. Under such circumstances, the
Partnership may be unable to hold this investment and recover its carrying
value. The financial statements of the Partnership have been prepared on a going
concern basis which assumes the realization of assets and the ability to
refinance the existing debt. These financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
On November 16, 1995, the zero coupon loan issued in the name of the
Partnership and secured by a mortgage on One Paragon Place was refinanced with
proceeds of a seven-year $8,750,000 loan from a new lender issued in the name of
the unconsolidated Richmond Paragon Partnership. The zero coupon loan had an
outstanding balance of approximately $10.4 million at the time of the
refinancing. Additional funds required to complete the refinancing transaction
were contributed from the Partnership's cash reserves. The new note is secured
by a first mortgage on the One Paragon Place Office Building and is recorded on
the books of the unconsolidated joint venture. The new loan bears interest at 8%
per annum and requires monthly principal and interest payments of $68,000
through maturity, on December 10, 2002. The Partnership has indemnified the
Richmond Paragon Partnership and the related co-venture partner against all
liabilities, claims and expenses associated with this borrowing.
<PAGE>
PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Information Relating to Forward-Looking Statements
- --------------------------------------------------
The following discussion of financial condition includes forward-looking
statements which reflect management's current views with respect to future
events and financial performance of the Partnership. These forward-looking
statements are subject to certain risks and uncertainties, including those
identified in Item 7 of the Partnership's Annual Report on Form 10-K for the
year ended March 31, 1997 under the heading "Certain Factors Affecting Future
Operating Results", which could cause actual results to differ materially from
historical results or those anticipated. The words "believe", "expect",
"anticipate," and similar expressions identify forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which were made based on facts and conditions as they existed as of
the date of this report. The Partnership undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
Liquidity and Capital Resources
- -------------------------------
As discussed further in the Annual Report, the Partnership's zero coupon
loan which is secured by the Colony Plaza Shopping Center matured on December
28, 1996, at which time approximately $8,290,000 became due. Although the
Partnership did not make the scheduled payment upon maturity, no formal default
notices have been issued by the lender to date. Negotiations have been ongoing
with the lender for the past nine months regarding a possible extension and
modification agreement for the existing loan. Such negotiations have been
complicated by the leasing status of the Colony Plaza property. As of September
30, 1997, the Colony Plaza Shopping Center in Augusta, Georgia was 93% leased,
but only 31% occupied. As previously reported, Wal-Mart closed its 82,000 square
foot store at Colony Plaza in the second quarter of fiscal 1997 to open a
"Supercenter" store at a new location in the Augusta market. Although Wal-Mart
remains obligated to pay rent and its share of operating expenses at Colony
Plaza through the term of its lease, which expires in March 2009, the loss of
the center's principal anchor tenant has adversely affected the Partnership's
ability to retain existing tenants and to lease vacant space at the center. In
addition, Food Max, the Center's 47,990 square foot grocery store tenant, closed
its store on December 1, 1996. However, another grocery store chain, Food Lion,
has entered into a sublease agreement with Food Max to open Food Lion stores in
several former Food Max locations, including the store at Colony Plaza.
Initially, Food Lion planned to open its new store at Colony Plaza in the summer
of 1997. However, due to unexpected delays in the process of obtaining the
municipal approvals to build their prototype store, the store will not be ready
to open until early in calendar year 1998. Because the opening of a Food Lion
grocery store would significantly improve customer traffic levels at the Center,
the leasing team is working closely with Food Lion to achieve the earliest
possible opening date for the new store. The property's management and leasing
team reports that with the announcement that Food Lion will open at Colony
Plaza, a number of shop tenants in the local market have expressed interest in
leasing space in the Center. Additionally, the leasing team reports that two
shop tenants in the Center have expressed an interest in expanding their
existing stores. During the quarter, the leasing team signed a lease with a
3,000 square foot tenant. In addition, two lease renewals were signed with 1,500
and 1,600 square foot tenants.
Notwithstanding the expected Food Lion opening in the fourth quarter of
fiscal 1998, the decisions by Wal-Mart and Food Max to close their stores have
weakened the sales volumes of many of the tenants of Colony Plaza, which in some
cases has affected their ability to meet their rent obligations. In certain
other cases, the Wal-Mart store closing will enable tenants to exercise
provisions in their leases that will permit them to terminate leases or convert
the rental rate to a percentage of sales. To date, one 6,000 square foot tenant
exercised a co-tenancy clause in its lease which allowed it to close its store
in the second quarter of fiscal 1997 and pay only its share of common area
maintenance, taxes and insurance because of the Wal-Mart vacancy. During the
quarter ended June 30, 1997, this tenant notified the Partnership that it would
be exercising its right to terminate its lease during the quarter ended
September 30, 1997 due to the Wal-Mart vacancy. In addition, during the quarter
ended March 31, 1997 two shop tenants with leases representing 4,600 square feet
closed their stores. Five other tenants, comprising 12,900 square feet, or 6% of
the Center's leasable area, have lease clauses which permit them to terminate
their leases if the anchor space is not re-leased within a specified time frame.
Two of these tenants also have the right to pay a specified percentage of sales
revenues as base rent while the anchor tenant space remains vacant. In addition,
several other tenants have requested rental abatements as a result of the
Wal-Mart vacancy.
As a result of the current leasing status of the Colony Plaza property,
obtaining a new loan to refinance the outstanding debt is not practical, and the
existing lender is concerned that its first mortgage position could be impaired
in the event that the occupancy level at the property cannot be re-stabilized.
Accordingly, the recent negotiations with the lender have focused on a potential
agreement that would give the Partnership a stated period to re-lease all or
some portion of the Wal-Mart space at Colony Plaza. If the Partnership were
successful in re-leasing the space within the required time frame, then the
Partnership would be entitled to execute a long-term extension of the existing
mortgage loan pursuant to certain previously agreed upon terms. If the
Partnership were not able to re-lease the space within the required time frame,
then the lender would be entitled to initiate foreclosure proceedings on the
property. Any such long-term extension agreement with the lender remains subject
to final negotiation and the execution of definitive modification agreements.
During this negotiation period, penalty interest is accruing on the outstanding
principal balance at 15% per annum in accordance with the original loan
agreement because no definitive agreement to modify the loan has been executed
to date. If an extension agreement is signed, this penalty interest would be
waived retroactively to the December 28, 1996 maturity date and the Partnership
would be required to remit a cash payment for interest accruing from that date
forward at the agreed upon modified rate. If no agreement can be reached
regarding a modification of the current mortgage loan, the lender could choose
to initiate foreclosure proceedings during fiscal 1998. The eventual outcome of
this situation cannot be determined at the present time.
The One Paragon Place Office Building was 92% leased at September 30,
1997, compared to 98% at March 31, 1997. Almost 3% of the 6% change resulted
from the addition of 3,702 square feet of previously non-rentable area to the
building's leasable area. This was accomplished by moving the management and
leasing office out of One Paragon Place and also by converting an adjoining
janitorial area into leasable space. The property's leasing team has combined
the 3,702 square feet with a 2,389 square foot space left vacant by the
downsizing of an existing tenant, as described further below, and is offering
the combined 6,091 square feet for rent. Market rental rates for newly
constructed Class A office properties in Richmond, Virginia increased by nearly
3% during the quarter ended September 30, 1997. As market rental rates keep
moving higher than the rents paid by the existing tenants at One Paragon Place,
revenues should continue to increase as new leases or renewals are signed.
During the first quarter, a five-year lease renewal was signed with one of the
building's largest tenants. As part of the renewal agreement, this tenant will
pay approximately 17% more in annual rental payments than was due during its
initial lease term. The tenant will also downsize by 2,389 square feet to 17,759
square feet, or 12% of the building's leasable area. During the second quarter,
the leasing team signed a five-year lease renewal with a tenant at average rents
21% higher than due during the original lease term. As part of the renewal, this
tenant downsized from 6,359 square feet to 5,620 square feet. During the next
fifteen months, leases comprising 32% of One Paragon Place's leasable area will
be up for renewal. The property's leasing team will continue to negotiate with
these tenants to sign renewal agreements at rental rates higher than the rates
currently being paid.
As previously reported, the market environment for suburban office
properties in Richmond, Virginia is marked by near full occupancy levels and
rising rental rates justifying new construction. Two fully-leased, Class A
buildings, totalling 450,000 square feet, were completed during the second
quarter. Approximately 570,000 square feet of competing Class A office space in
nine buildings is under construction in the Northwest Quadrant, with 18%
pre-leased. An additional 360,000 square feet of comparable office space in four
buildings has been proposed for development in the 6,043,000 square foot market.
Absorption of the buildings under construction, as well as the proposed
construction, is expected to remain strong, given the calendar 1996 absorption
of 316,000 square feet and the significant absorption to date in calendar 1997.
The Partnership has been monitoring the development activity in the market,
while exploring potential sale opportunities for One Paragon Place and has
concluded that it is the appropriate time to sell the property. During the
quarter ended September 30, 1997, a real estate broker was selected to market
the property for sale. Management expects to begin actively marketing the
property during the quarter ending December 31, 1997. There are no assurances,
however, that a sale transaction will be completed in the near term.
The DeVargas Mall was 83% leased and 80% occupied as of September 30,
1997, compared to 95% leased and 92% occupied for the prior quarter. As reported
last quarter, a 27,023 square foot soft goods anchor tenant, representing 11% of
the Center's leasable area, announced that it would close its store on July 31,
1997. This tenant's lease expired on January 31, 1997, and it had been leasing
on a month-to-month basis. As interest in Santa Fe from national anchor tenants
continues to increase, the property's leasing team is cautiously optimistic that
they will secure a replacement tenant or tenants for this anchor space. Funding
of the required tenant improvements for the leasing activity at DeVargas has
been accomplished by means of advances under the lines of credit provided by the
Partnership's co-venture partner. As of March 31, 1997, the co-venture partner
had two outstanding lines of credit with the DeVargas joint venture which
permitted the venture to borrow up to an aggregate amount of $5,553,000. The
first note, which allowed the venture to borrow up to $5,000,000, bore interest
at the greater of prime plus 1.5% or 10% per annum and was due to mature in June
1997. The second note, which allowed the venture to borrow up to $553,000, bore
interest at prime plus 1% and was scheduled to mature in November 2002. The
outstanding borrowings under both lines of credit totalled $4,214,000 as of
March 31, 1997. In June 1997, the Partnership and the co-venturer reached an
agreement to consolidate the two lines of credit into one loan and to modify the
terms. The new loan, which allows the venture to borrow up to $5,000,000, bears
interest at the greater of the prime rate or 9% per annum and is due to mature
on June 1, 1998.
The average occupancy level for the first quarter of fiscal 1998 at the
Willow Grove Apartments in Beaverton, Oregon was 97%, up from 95% for the prior
quarter. These occupancy levels continue to compare favorably to similar Class A
quality properties in the local market, which includes approximately 2,500 units
built in the last three years and located within 4 to 6 miles of the property.
Building permits for apartments in Beaverton to date in calendar 1997 total only
434 units, versus 1,178 units in 1996 and 2,034 units in 1995. As new
development appears to be slowing and most new construction is located farther
to the west of Willow Grove, between 5 and 15 miles away, the local apartment
market should continue to record strong occupancy levels and moderate rental
rate growth. As previously reported, there is one property currently in lease-up
in the local market. Phase one of this two-phase property contains 288 units and
was 90% leased as of September 30, 1997. Phase two, which will include an
additional 150 units, is under construction. While this new property offers more
amenities, its effective rental rates are comparable to those at Willow Grove.
Once both phases of this property are substantially leased, the rental rates of
the new property would be expected to increase above the rates at Willow Grove.
A light-rail station, which will be located within walking distance of Willow
Grove Apartments, is scheduled to open in the fall of 1998. With strong local
market conditions and the pending opening of the rail station near Willow Grove,
two lower quality apartments neighboring the property are undergoing renovation.
While these properties are not expected to compete with Willow Grove even after
they are renovated, the upgrades will enhance the overall appeal and quality of
the immediate market.
At September 30, 1997, the Partnership and its consolidated joint ventures
had available cash and cash equivalents of approximately $5,227,000. These funds
will be utilized for the working capital requirements of the Partnership,
distributions to partners, refinancing costs related to the Partnership's
remaining zero coupon loan, if necessary, and to fund capital enhancements and
tenant improvements for the operating investment properties in accordance with
the respective joint venture agreements. The source of future liquidity and
distributions to the partners is expected to be from cash generated by the
Partnership's income-producing properties and from the proceeds received from
the sale or refinancing of such properties. Such sources of liquidity are
expected to be sufficient to meet the Partnership's needs on both a short-term
and long-term basis.
Results of Operations
Three Months Ended September 30, 1997
- -------------------------------------
The Partnership reported a net loss of $109,000 for the three months ended
September 30, 1997 as compared to a net loss of $139,000 for the same period in
the prior year. This decrease of $30,000 in the Partnership's net loss is
attributable to a decrease in the Partnership's share of unconsolidated
ventures' losses of $29,000 and a decrease in the Partnership's operating loss
of $1,000. The favorable change in the Partnership's share of unconsolidated
ventures' losses is primarily due to an increase in combined rental revenues
which was partially offset by increases in the property operating expenses and
interest expense. Rental revenues at DeVargas increased due to the addition of
two new tenants during the second half of fiscal 1997. Since the operations of
the ventures are reported on a three-month lag, the current period results do
not reflect the loss of the major tenant at DeVargas in July 1997 which is
discussed further above. In addition rental income at One Paragon Place
increased due to new leases signed during the past year at rates substantially
higher than the rates on expiring leases. Interest expense increased due to an
increase in the average outstanding principal balance of the line of credit
borrowings of the DeVargas joint venture which are discussed further above.
Property operating expenses increased mainly due to an increase in marketing
expenses at One Paragon Place.
The favorable change in the Partnership's operating loss is the result of
a decrease in depreciation and amortization expense of $32,000 and an increase
in interest income of $22,000. Depreciation and amortization expense decreased
as a result of some assets having become fully depreciated during the prior
year. Interest income increased due to an increase in interest rates earned on
invested cash equivalents and an increase in the average balance of invested
cash reserves. The decrease in depreciation and amortization expense and the
increase in interest income were partially offset by a decrease in rental income
of $51,000. Rental income decreased at Colony Plaza due to a reduction in shop
space occupancy related to the two anchor tenant vacancies discussed further
above.
Six Months Ended September 30, 1997
- -----------------------------------
The Partnership reported a net loss of $83,000 for the six months ended
September 30, 1997 as compared to a net loss of $332,000 for the same period in
the prior year. This favorable change in the Partnership's net operating results
is due to a decrease in the Partnership's share of unconsolidated ventures'
losses of $160,000 and a decrease in the Partnership's operating loss of
$89,000. The decrease in the Partnership's share of unconsolidated ventures'
losses is primarily attributable to an increase in rental revenues which was
partially offset by an increase in property operating expenses and interest
expense. The increase in rental revenues at DeVargas Mall is a result of the
addition of two new tenants during the second half of fiscal 1997. Since the
operations of the ventures are reported on a three-month lag, the current period
results do not reflect the loss of the major tenant at DeVargas in July 1997
which is discussed further above. In addition rental income at One Paragon Place
increased due to new leases signed during the past year at rates substantially
higher than the rates on expiring leases. Interest expense increased as a result
of an increase in the average outstanding principal balance of the line of
credit borrowings of the DeVargas joint venture. Property operating expenses
increased primarily as a result of an increase in repairs and maintenance
expense at DeVargas Mall due to higher snow removal costs and roof repairs. An
increase in marketing expenses at One Paragon Place also contributed to the
increase in property operating expenses for the current six-month period.
The Partnership's operating loss decreased by $89,000 primarily due to
decreases in general and administrative expenses of $52,000 and depreciation and
amortization expense of $49,000. General and administrative expenses decreased
primarily due to certain costs incurred during the prior year in conjunction
with the refinancing of the One Paragon Place loan. Depreciation and
amortization expense decreased as a result of some assets having become fully
depreciated during the prior year.
<PAGE>
PART II
Other Information
Item 1. Legal Proceedings NONE
Item 2. through 5. NONE
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: NONE
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed by the registrant during the
quarter for which this report is filed.
<PAGE>
PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP
SIGNATURES
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.
PAINEWEBBER EQUITY PARTNERS THREE
LIMITED PARTNERSHIP
By: Third Equity Partners, Inc.
Managing General Partner
By: /s/ Walter V. Arnold
--------------------
Walter V. Arnold
Senior Vice President and
Chief Financial Officer
Dated: November 10, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Partnership's audited financial statements for the six months ended September
30, 1997 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> SEP-30-1997
<CASH> 5,227
<SECURITIES> 0
<RECEIVABLES> 146
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,393
<PP&E> 31,517
<DEPRECIATION> 4,138
<TOTAL-ASSETS> 32,896
<CURRENT-LIABILITIES> 9,263
<BONDS> 3,514
0
0
<COMMON> 0
<OTHER-SE> 20,119
<TOTAL-LIABILITY-AND-EQUITY> 32,896
<SALES> 0
<TOTAL-REVENUES> 1,278
<CGS> 0
<TOTAL-COSTS> 685
<OTHER-EXPENSES> 53
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 623
<INCOME-PRETAX> (83)
<INCOME-TAX> 0
<INCOME-CONTINUING> (83)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (83)
<EPS-PRIMARY> (1.63)
<EPS-DILUTED> (1.63)
</TABLE>
