UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 DECEMBER 31, 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
December 31, 1997 and March 31, 1997 (Unaudited)
(In thousands)
ASSETS
December 31 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 (4,262) (3,893)
--------- ---------
13,961 14,468
Investments in unconsolidated ventures, at equity 12,894 13,881
Cash and cash equivalents 5,643 4,615
Accrued interest and other receivables 113 101
Prepaid expenses 13 7
Deferred expenses, net 116 133
--------- ---------
$ 32,740 $ 33,205
========= =========
LIABILITIES AND PARTNERS' CAPITAL
Notes payable and deferred interest, including
amounts in default $ 12,686 $ 12,043
Accounts payable and accrued expenses 47 98
Tenant security deposits 17 14
Accrued real estate taxes 75 14
Advances from consolidated ventures 198 195
Other liabilities 2 2
Partners' capital 19,715 20,839
--------- ---------
$ 32,740 $ 33,205
========= =========
See accompanying notes.
<PAGE>
PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and nine months ended December 31, 1997 and 1996 (Unaudited)
(In thousands, except per Unit data)
Three Months Ended Nine Months Ended
December 31, December 31,
------------------- ------------------
1997 1996 1997 1996
---- ---- ---- -----
Revenues:
Rental income and expense
reimbursements $ 542 $ 615 $1,679 $1,774
Interest and other income 78 56 219 154
------ ------- ------ ------
620 671 1,898 1,928
Expenses:
Interest expense 317 302 940 901
Property operating expenses 139 114 370 348
Real estate taxes 38 37 115 112
General and administrative 90 45 212 219
Depreciation and amortization 126 136 381 430
------ ------- ------ ------
710 634 2,018 2,010
------ ------- ------ ------
Operating income (loss) (90) 37 (120) (82)
Partnership's share of
unconsolidated
ventures' income (losses) 5 25 (48) (188)
------ ------- ------ ------
Net income (loss) $ (85) $ 62 $ (168) $ (270)
====== ======= ====== ======
Net income (loss) per
Limited Partnership Unit $(1.67) $ 1.21 $(3.30) $(5.29)
====== ======= ====== ======
Cash distributions per
Limited Partnership Unit $ 6.25 $ 5.00 $18.75 $15.00
====== ======= ====== ======
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 nine months ended December 31, 1997 and 1996 (Unaudited)
(In thousands)
General Limited
Partners Partners
-------- --------
Balance at March 31, 1996 $ (218) $ 22,548
Cash distributions (8) (757)
Net loss (3) (267)
------ --------
Balance at December 31, 1996 $ (229) $ 21,524
====== ========
Balance at March 31, 1997 $ (234) $ 21,073
Cash distributions (10) (946)
Net loss (2) (166)
------ --------
Balance at December 31, 1997 $ (246) $ 19,961
====== ========
See accompanying notes.
<PAGE>
PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended December 31, 1997 and 1996 (Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1997 1996
---- ----
Cash flows from operating activities:
Net loss $ (168) $ (270)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Partnership's share of unconsolidated
ventures' losses 48 188
Depreciation and amortization 381 430
Amortization of deferred loan costs 7 29
Interest expense on zero coupon loan 675 610
Changes in assets and liabilities:
Accrued interest and other receivables (12) 88
Prepaid expenses (6) (18)
Deferred expenses (2) (7)
Accounts payable and accrued expenses (51) (4)
Accrued real estate taxes 61 (31)
Tenant security deposits 3 1
Advances from consolidated ventures 3 (90)
------- -------
Total adjustments 1,107 1,196
------- -------
Net cash provided by operating activities 939 926
Cash flows from investing activities:
Additions to operating investment properties (2) -
Receipt of master lease payments 140 -
Distributions from unconsolidated joint ventures 939 624
------- -------
Net cash provided by investing activities 1,077 624
------- --------
Cash flows from financing activities:
Cash distributions to partners (956) (765)
Payments of principal on notes payable (32) (29)
------- ------
Net cash used in financing activities (988) (794)
------- ------
Net increase in cash and cash equivalents 1,028 756
Cash and cash equivalents, beginning of period 4,615 3,439
------- -------
Cash and cash equivalents, end of period $ 5,643 $ 4,195
======= =======
Cash paid during the period for interest $ 258 $ 262
======= =======
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 December 31, 1997 and March 31, 1997 and revenues and
expenses for each of the three and nine-month periods ended December 31, 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 nine-month periods
ended December 31, 1997 and 1996 is $70,000 and $65,000, 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 both of the
nine-month periods ended December 31, 1997 and 1996 is $12,000, 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
--------------------------------------------------------
As of December 31, 1997, the Partnership had 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.
Subsequent to the end of the quarter, on January 30, 1998, the Richmond Paragon
Partnership, which owned the One Paragon Place Office Building, sold its
operating investment property to an unrelated third party for $16,500,000. The
Partnership received net proceeds of approximately $8,055,000 in connection with
the sale after the release of certain lender escrow accounts totalling
approximately $555,000, the assumption of the outstanding mortgage loan secured
by the property of approximately $8,500,000, closing costs of approximately
$400,000 and closing proration adjustments of approximately $100,000. The
Partnership expects to distribute the net proceeds from this sale transaction to
the Limited Partners in February 1998.
Summarized operations of the unconsolidated joint ventures, for the
periods indicated, are as follows:
<PAGE>
Condensed Combined Summary of Operations
For the three and nine months ended September 30, 1997 and 1996
(in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1997 1996 1997 1996
---- ---- ---- ----
Revenues:
Rental revenues and expense
recoveries $1,223 $1,124 $3,562 $ 3,183
Interest and other income 9 6 35 27
------ ------ ------ --------
1,232 1,130 3,597 3,210
Expenses:
Property operating expenses 434 356 1,312 1,178
Real estate taxes 36 24 108 111
Interest expense 275 291 835 790
Depreciation and amortization 439 429 1,316 1,291
------ ------ ------ --------
1,184 1,100 3,571 3,370
------ ------ ------ --------
Net income (loss) $ 48 $ 30 $ 26 $ (160)
====== ====== ====== ========
Net income (loss):
Partnership's share of
combined income (losses) $ 10 $ 30 $ (33) $ (173)
Co-venturers' share of
combined income (losses) 38 - 59 13
------ ------ ------ --------
$ 48 $ 30 $ 26 $ (160)
====== ====== ====== ========
Reconciliation of Partnership's Share of Operations
For the three and nine months ended December 31, 1997 and 1996
(in thousands)
Three Months Ended Nine Months Ended
December 31, December 31,
------------------ ------------------
1997 1996 1997 1996
---- ---- ---- ----
Partnership's share of
operations, as shown above $ 10 $ 30 $ (33) $ (173)
Amortization of excess basis (5) (5) (15) (15)
----- ----- ------ ------
Partnership's share of
unconsolidated ventures'
income (losses) $ 5 $ 25 $ (48) $ (188)
===== ===== ====== ======
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.
<PAGE>
The following is a combined summary of property operating expenses for the
consolidated joint ventures for the three and nine months ended September 30,
1997 and 1996 (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1997 1996 1997 1996
---- ---- ---- ----
Common area maintenance $ 39 $ 31 $ 92 $ 93
Utilities 24 22 67 65
Management fees 23 21 68 68
Administrative and other 53 40 143 122
------- ------ ------- -------
$ 139 $ 114 $ 370 $ 348
======= ====== ======= =======
5. Notes payable
Notes payable and deferred interest at December 31, 1997 and March 31,
1997 consist of the following (in thousands):
December 31 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 December 31, 1997
and March 31, 1997 amounted
to $5,133 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). $ 9,183 $ 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 September
30, 1997 and December 31,
1996. 3,503 3,535
-------- --------
$ 12,686 $ 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. A refinancing transaction with a new lender would require a sizable
principal paydown by the Partnership in order to reduce the loan-to-value ratio
of the mortgage note payable. If the refinancing or 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 the 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.
<PAGE>
On November 16, 1995, the zero coupon loan issued in the name of the
Partnership and secured by a mortgage on the One Paragon Place operating
property 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 was secured by a first mortgage on the One Paragon Place Office
Building and was recorded on the books of the unconsolidated joint venture. The
new loan bore interest at 8% per annum and required monthly principal and
interest payments of $68,000 through maturity, on December 10, 2002. The
Partnership had indemnified the Richmond Paragon Partnership and the related
co-venture partner against all liabilities, claims and expenses associated with
this borrowing. As discussed in Note 3, the One Paragon Place Office Building
was sold to a third party in January 1998, and this mortgage loan was assumed by
the buyer of the property.
<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
- -------------------------------
One Paragon Place located in Richmond, Virginia was 91% leased and
occupied at the end of the quarter, compared to 92% the previous quarter.
Leasing activity during the quarter consisted of a 662 square foot lease and the
move-out of a 1,087 square foot tenant whose lease had expired June of 1997. As
previously reported, the Partnership had been monitoring the development
activity in the Richmond, Virginia market while exploring potential sale
opportunities for the One Paragon Place Office Building and had concluded that
it was the appropriate time to sell the property. During the quarter ended
September 30, 1997, management selected a national firm which began to actively
market the property for sale. As part of the marketing process, several offers
were received from prospective buyers. During the quarter ended December 31,
1997, the Partnership negotiated a purchase and sale agreement with one of these
prospective buyers. Subsequent to the end of the third quarter, the One Paragon
Place Office Building was sold to this unrelated third party for $16,500,000.
The Partnership received net proceeds of approximately $8,055,000 in connection
with the sale after the release of certain lender escrow accounts totalling
approximately $555,000, the assumption of the outstanding mortgage loan secured
by the property of approximately $8,500,000, closing costs of approximately
$400,000 and closing proration adjustments of approximately $100,000. The
Partnership expects to distribute the net proceeds from this sale transaction to
the Limited Partners in February 1998. Because of the reduction in the
Partnership's net cash flow subsequent to the sale of the One Paragon Place
property, the quarterly distribution rate will be reduced from 2.5% per annum to
1.75% per annum on remaining invested capital effective for the quarter ending
June 30, 1998.
With the sale of One Paragon Place, the Partnership has three remaining
investments: the Colony Plaza Shopping Center, in Augusta, Georgia; the DeVargas
Mall, in Santa Fe, New Mexico; and the Willow Grove Apartments, in Beaverton
(suburban Portland), Oregon. The Partnership is currently focusing on potential
disposition strategies for these remaining assets. Although no assurances can be
given, it is currently contemplated that sales of the Partnership's remaining
assets could be completed within the next 2 to 3 years. 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
year 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 December 31, 1997, the Colony Plaza Shopping Center
in Augusta, Georgia was 93% leased and 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. Food Lion now reports that it
will open its prototype store at Colony Plaza on April 1, 1998. The leasing team
is confident that with the opening of the Food Lion and the accompanying
expected increase in shoppers visiting the Center that interest in the available
small shop spaces at Colony Plaza will increase.
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 December 31, 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. During the current quarter, a 1,600 square foot tenant closed its
store.
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 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 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. If no
agreement can be reached regarding a modification of the current mortgage loan,
the lender could choose to initiate foreclosure proceedings during 1998. The
eventual outcome of this situation cannot be determined at the present time.
The DeVargas Mall was 83% leased and occupied as of December 31, 1997. As
previously reported, a 27,023 square foot soft goods anchor tenant, representing
11% of the Center's leasable area, closed its store during the second fiscal
quarter. 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 negotiating with
two national anchor replacement tenants, and they remain confident that a
replacement tenant will be signed for this space. During the third quarter of
fiscal 1998, a 491 square foot lease was signed and the lease of a 659 square
foot tenant, which had previously vacated its space, expired. In addition, the
U.S. Post Office took occupancy of its 5,404 square foot space. The leasing team
at DeVargas is currently focusing their efforts on renewing the leases of 25,000
square feet of shop space which expire in calendar year 1998. 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 at the Willow Grove Apartments in Beaverton,
Oregon was 96% as of December 31, 1997. The property's leasing team raised
rental rates by 4% on both new and renewal leases effective March 1, 1997, which
was the first increase in over a year. The property's leasing team reports that
the number of building permits for apartments in the Beaverton market in 1997
were down significantly from 1996 and 1995. As new development appears to be
slowing and most new construction is located farther out to the west of Willow
Grove, between 5 and 15 miles away, the local apartment market is expected to
record strong occupancy levels and moderate rental rate growth during calendar
1998. The property should also benefit from the planned opening of a light-rail
station located within walking distance of the property in the fall of 1998. As
previously reported, there is one property currently in lease-up in Willow
Grove's local market. Phase one of this two-phase property contains 288 units.
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 property's rental rates would be expected to increase
above the rates at Willow Grove. With the number of new apartments under
construction or permitted down significantly from the two previous years,
combined with the strong regional economy, the near term outlook for the
Portland area apartment market is good. Management is currently reviewing the
local market conditions to assess the appropriate timing for the disposition of
the Willow Grove property and expects to market the property for sale during
calendar 1998.
At December 31, 1997, the Partnership and its consolidated joint ventures
had available cash and cash equivalents of approximately $5,643,000. 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 December 31, 1997
- ------------------------------------
The Partnership reported a net loss of $85,000 for the three months ended
December 31, 1997, as compared to net income of $62,000 for the same period in
the prior year. This unfavorable change of $147,000 in the Partnership's net
operating results is attributable to a decrease in the Partnership's share of
unconsolidated ventures' income of $20,000 and an unfavorable change in the
Partnership's operating income (loss) of $127,000. The decrease in the
Partnership's share of unconsolidated ventures' income is mainly due to an
increase in the net loss of the One Paragon Place joint venture for the current
three-month period. The increase in the net loss at One Paragon Place was
primarily the result of an increase in property operating expenses which
reflects certain costs incurred in connection with preparing the property for
sale.
The unfavorable change in the Partnership's operating income (loss) is the
result of a decrease in total revenues of $50,000 and an increase in total
expenses of $77,000. General and administrative expenses increased mainly due to
the timing of certain recurring professional services compared to the prior
year. In addition, interest expense increased due to the Colony Plaza borrowing,
which is accruing interest at a default rate of 15%, as discussed further above.
The decline in revenues was the result of a decrease in rental income from the
consolidated joint ventures which was partially offset by an increase in
interest and other income. Interest income increased due to an increase in the
average outstanding amount of the Partnership's invested cash reserves. Rental
income decreased at Colony Plaza due to a reduction in shop space occupancy
related to the two anchor tenant vacancies which are discussed further above.
Nine months ended December 31, 1997
- -----------------------------------
The Partnership reported a net loss of $168,000 for the nine months ended
December 31, 1997 as compared to a net loss of $270,000 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 $140,000 which was partially offset by an increase in the
Partnership's operating loss of $38,000. 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. Revenues were also higher at One Paragon Place as a result of an increase
in rental rates on new leases signed over the past year. Interest expense
increased as a result of an increase in the average outstanding principal
balance of the capital and tenant improvement loan payable by the DeVargas joint
venture. Property operating expenses increased primarily as a result of an
increase in common area maintenance and utilities expense at One Paragon Place.
The Partnership's operating loss increased by $38,000 due to an increase
in total expenses of $8,000 and a decrease in total revenues of $30,000. Rental
income decreased at the consolidated Colony Plaza property due to a reduction in
shop space occupancy related to the anchor tenant vacancies discussed further
above. The decline in rental revenues was partially offset by an increase in
interest and other income. Interest income increased due to an increase in the
average outstanding amount of the Partnership's invested cash reserves. The
increase in expenses is the result of higher property operating expenses at the
consolidated ventures and an increase in interest expense which were partially
offset by lower general and administrative and depreciation and amortization
expenses. Interest expense increased due to the Colony Plaza borrowing, which is
accruing interest at a default rate of 15%, as discussed further above. 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: February 12, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Partnership's audited financial statements for the quarter ended December 31,
1997 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> DEC-31-1997
<CASH> 5,643
<SECURITIES> 0
<RECEIVABLES> 113
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,769
<PP&E> 31,117
<DEPRECIATION> 4,262
<TOTAL-ASSETS> 32,740
<CURRENT-LIABILITIES> 9,522
<BONDS> 3,503
0
0
<COMMON> 0
<OTHER-SE> 19,715
<TOTAL-LIABILITY-AND-EQUITY> 32,740
<SALES> 0
<TOTAL-REVENUES> 1,898
<CGS> 0
<TOTAL-COSTS> 1,078
<OTHER-EXPENSES> 48
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 940
<INCOME-PRETAX> (168)
<INCOME-TAX> 0
<INCOME-CONTINUING> (168)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (168)
<EPS-PRIMARY> (3.30)
<EPS-DILUTED> (3.30)
</TABLE>
