Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File Number
0-17633
USF&G/LEGG MASON REALTY PARTNERS LIMITED PARTNERSHIP
(Exact name of registrant as specified in its Certificate
of Limited Partnership)
Maryland 75-2228850
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6225 Centennial Way
LB0101
Baltimore, Maryland 21209
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (410) 205-6900
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 and 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 over the past 90 days.
Yes X No _____
<PAGE>
INDEX
USF&G/LEGG MASON REALTY PARTNERS LIMITED PARTNERSHIP
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets -- June 30, 1997 and December 31, 1996
Statements of Operations -- For the three months
ended June 30, 1997 and June 30, 1996 and for the six
months ended June 30, 1997 and June 30, 1996
Statements of Cash Flows -- For the six months ended
June 30, 1997 and June 30, 1996
Notes to Financial Statements -- June 30, 1997
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
The Partnership did not file any reports on Form 8-K
during the six months ended June 30, 1997.
SIGNATURES
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
USF&G/LEGG MASON REALTY PARTNERS LIMITED PARTNERSHIP
BALANCE SHEETS
<S> <C> <C>
(Unaudited)
June 30, 1997 December 31, 1996
------------- -----------------
Assets
Real Estate Investments:
Income Producing Properties - Note B $27,481,486 $27,801,201
Cash and Cash Equivalents (including temporary
investments at June 30, 1997 and December 31,
1996 of $884,342 and $232,850, respectively) - Note C 1,350,466 780,727
Restricted Cash Escrow - Note E 164,193 130,356
Accounts Receivable, Net 140,966 108,082
St. Andrews Recovery Receivables - Note J 175,000 1,525,000
Other Assets 440,848 265,668
----------- -----------
Total Assets $29,752,959 $30,611,034
=========== ===========
Liabilities
Mortgages Payable - Note E $21,463,540 $20,529,488
Accounts Payable and Other Liabilities 788,418 1,262,790
St. Andrews Construction Loan - Note J 1,757,000 2,790,000
Due to General Partners and Affiliates - Note D 2,364,921 2,249,346
Cash Flow Protector Loan - Note G 4,849,734 4,849,734
----------- -----------
$31,223,613 $31,681,358
Partners' (Deficit) Equity
General Partners $ (259,119) $ (255,116)
Assignor and Assignee Limited Partners,
1,094,283 Units Issued and Outstanding (1,211,535) (815,208)
----------- -----------
(1,470,654) (1,070,324)
----------- -----------
Total Liabilities and Partners' (Deficit) Equity $29,752,959 $30,611,034
=========== ===========
See accompanying notes to the financial statements.
</TABLE>
<PAGE>
USF&G/LEGG MASON REALTY PARTNERS LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
For the Three For the Three For the Six For the Six
Months Ended Months Ended Months Ended Months Ended
June 30, 1997 June 30, 1996 June 30, 1997 June 30, 1996
------------- ------------- ------------- -------------
REVENUE:
Rental $ 1,318,243 $ 1,180,555 $ 2,507,332 $ 2,322,851
Interest 11,352 5,794 16,285 11,672
----------- ----------- ----------- -----------
Total Revenue $ 1,329,595 $ 1,186,349 $ 2,523,617 $ 2,334,523
EXPENSES:
Property Operating - Note D 497,034 495,266 1,002,404 1,006,473
St. Andrews Repair and Legal Costs, Net of
Recoveries - Note J 0 1,425,838 28,576 2,684,947
General and Administrative 32,491 34,049 65,092 67,330
Interest - Notes D and E 576,114 568,791 1,169,330 1,109,512
Depreciation and Amortization 337,547 310,319 658,545 616,186
----------- ----------- ----------- -----------
Total Expenses 1,443,186 2,834,263 2,923,947 5,484,448
----------- ----------- ----------- -----------
NET LOSS $ (113,591) $(1,647,914) $ (400,330) $(3,149,925)
=========== =========== =========== ===========
Net Loss Allocated to:
General Partners $ (1,136) $ (16,479) $ (4,003) $ (31,499)
Assignor and Assignee Limited Partners (112,455) (1,631,435) (396,327) (3,118,426)
----------- ----------- ----------- -----------
$ (113,591) $(1,647,914) $ (400,330) $(3,149,925)
=========== =========== =========== ===========
Net Loss per Unit -- Note A $ (0.10) $ (1.49) $ (0.36) $ (2.85)
=========== =========== =========== ===========
Weighted Average Number of Units 1,094,283 1,094,283 1,094,283 1,094,283
=========== =========== =========== ===========
</TABLE>
See accompanying notes to the financial statements.
<PAGE>
<TABLE>
<CAPTION>
USF&G LEGG MASON REALTY PARTNERS LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<S> <C> <C>
For the Six For the Six
Months Ended Months Ended
June 30, 1997 June 30, 1996
------------- -------------
Operating Activities
Net Loss $ (400,330) $(3,149,925)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 658,545 616,186
Change in net assets and liabilities related to
operating activities:
(Increase) decrease in restricted cash escrow (33,837) 151,135
Increase in due to general partners and affiliates 115,575 173,595
(Decrease) increase in accounts payable and other
liabilities (474,372) 331,736
Increase in accounts receivable (32,884) (19,037)
Decrease in St. Andrews recovery receivables 1,350,000 0
Increase in other assets (234,993) (63,624)
---------- -----------
Net Cash Provided by (Used in) Operating Activities 947,704 (1,959,934)
---------- -----------
Investing Activities
Investment in income producing properties (279,017) (105,468)
---------- -----------
Net Cash Used in Investing Activities (279,017) (105,468)
---------- -----------
Financing Activities
Mortgage Loan Advances 5,000,000 0
Mortgage Principal Payments (4,065,948) (32,251)
St. Andrews Construction Loan Advances 215,000 2,210,000
St. Andrews Construction Loan Payments (1,248,000) 0
---------- -----------
Net Cash (Used in) Provided by Financing Activities (98,948) 2,177,749
---------- -----------
Increase in Cash and Cash Equivalents 569,739 112,347
Cash and Cash Equivalents, Beginning of Period 780,727 887,555
---------- -----------
Cash and Cash Equivalents, End of Period $1,350,466 $ 999,902
========== ===========
See accompanying notes to the financial statements.
</TABLE>
<PAGE>
USF&G/LEGG MASON REALTY PARTNERS LIMITED PARTNERSHIP
Notes to Financial Statements
June 30, 1997
(Unaudited)
NOTE A - Organization, Basis of Presentation and Summary of Significant
Accounting Policies
USF&G/Legg Mason Realty Partners Limited Partnership (the "Partnership") was
organized under the laws of the State of Maryland on April 12, 1988. The
Partnership was formed to acquire, hold, lease and ultimately dispose of income
producing commercial and multi-family residential properties located primarily
in the Eastern half of the United States.
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the six months ended June 30, 1997 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1997. For further information, refer to the financial statements and footnotes
thereto included in the Partnership's annual report on Form 10-K for the year
ended December 31, 1996.
New Accounting Standards
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share", which is required to be adopted for periods ending after December 15,
1997. The standard was issued to change the current method used by public
companies to compute earnings per share. The Partnership does not anticipate
that SFAS No. 128 will have any effect on the Partnership's computation of
earnings per share.
Allocation of Net (Loss) Income from Operations
Net (loss) income from operations is allocated first among the partners in
proportion to cash distributions and second, if there have been no cash
distributions, 99% to the assignee limited partners ("Unitholders") and 1% to
General Partners. Net (loss) income and cash distributions per Unit were
computed based upon net (loss) income allocated to and cash distributions paid
to Unitholders divided by the weighted average number of Units outstanding
during the periods indicated. The allocated 1% net (loss) income from operations
to the General Partners is prorated for net (loss) on the basis of 80% to USF&G
Realty Partners, Inc. (the "USF&G General Partner") and 20% to Legg Mason Realty
Partners, Inc. (collectively, the "General Partners") while net income is
allocable on the basis of 50% to the USF&G General Partner and 50% to Legg Mason
Realty Partners, Inc.
<PAGE>
USF&G/LEGG MASON REALTY PARTNERS LIMITED PARTNERSHIP
Notes to Financial Statements (Continued)
June 30, 1997
(Unaudited)
NOTE B - Income Producing Properties
The following table sets forth summarized financial information for Northeast
Business Campus, St. Andrews Apartments at Westwood and Shadeland Retail Center,
the three properties owned directly by the Partnership, as of the dates
indicated:
June 30, 1997 December 31, 1996
------------- -----------------
Buildings and improvements $29,685,359 $29,406,342
Land 5,444,913 5,444,913
----------- -----------
35,130,272 34,851,255
Less: Accumulated depreciation (7,648,786) (7,050,054)
----------- -----------
$27,481,486 $27,801,201
=========== ===========
NOTE C - Cash and Cash Equivalents
Cash and cash equivalents include temporary investments in money market funds
with maturities of three months or less.
NOTE D - Related Party Transactions
The following is a summary of compensation and reimbursements of expenses
incurred to the General Partners and their affiliates for the periods indicated:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
For the Three Months Ended For the Six Months Ended
June 30, 1997 June 30, 1996 June 30, 1997 June 30, 1996
------------- ------------- ------------- -------------
Charged to expenses:
Interest Expense $121,283 $111,884 $258,776 $195,323
Operating Expenses 20,498 22,904 45,718 43,930
</TABLE>
<PAGE>
USF&G/LEGG MASON REALTY PARTNERS LIMITED PARTNERSHIP
Notes to Financial Statements (Continued)
June 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
NOTE D - Related Party Transactions (Continued)
Due to General Partners and affiliates consists of the following as of the dates
indicated:
<S> <C> <C>
June 30, 1997 December 31, 1996
------------- -----------------
General Partner Loans $ 200,000 $ 200,000
Accrued Interest on General Partner Loans 44,421 36,045
Accrued Interest on the St. Andrews Construction Loan 13,178 42,548
Operating Expenses 14,000 21,727
---------- ----------
271,599 300,320
Asset Management Fees 423,990 423,990
Accrued Interest on the Cash Flow Protector Loan 1,669,332 1,525,036
---------- ----------
Amounts Subordinate to the return of Unitholder
contributions 2,093,322 1,949,026
---------- ----------
$2,364,921 $2,249,346
========== ==========
</TABLE>
In connection with the loan modification at NEBC executed in the fourth quarter
of 1994 discussed in Note E, the General Partners provided equally a total of
$200,000 to the Partnership toward establishing the required reserves and
escrows at NEBC. The amounts provided by the General Partners are in the form of
loans from each General Partner which accrue interest at the prime rate and
mature on August 15, 1999. The Partnership's obligation to make interest and
principal payments under the loans is limited to the extent of available NEBC
reserves and escrows and sale or refinancing proceeds (as defined in the
Partnership Agreement) attributable to the NEBC property.
See Note J - St. Andrews Repair and Legal Costs for a discussion of the
St. Andrews Construction Loan and Note G - Cash Flow Protector Loan for a
discussion of the Cash Flow Protector Loan from the USF&G General Partner.
The subordinated amount identified above is subordinate under Section 4.4 of the
Partnership Agreement.
<PAGE>
USF&G/LEGG MASON REALTY PARTNERS LIMITED PARTNERSHIP
Notes to Financial Statements (Continued)
June 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
NOTE E - Mortgages Payable
Mortgages payable consists of the following as of the dates indicated:
<S> <C> <C>
June 30, 1997 December 31, 1996
------------- -----------------
Mortgage loan, secured by Northeast Business Campus,
due August 15, 1999, interest at 8.00% $ 7,975,000 $ 7,975,000
Mortgage loan, secured by St. Andrews at Westwood,
due September 1, 1997, interest at 9.65% 8,500,000 8,500,000
Mortgage loan, secured by a portion of Shadeland Retail
Center, due May, 2002, interest at 7.60% 4,988,540 4,054,488
----------- -----------
$21,463,540 $20,529,488
=========== ===========
</TABLE>
The mortgage loans are non-recourse obligations except under certain defined
circumstances. Interest expense of $910,554 and $914,189 was incurred on these
mortgages for the six months ended June 30, 1997 and 1996, respectively.
Interest payments of $933,611 and $921,903 were made for the six months ended
June 30, 1997 and 1996, respectively.
In connection with the 1994 NEBC loan modification, the Partnership was required
to establish with the lender a reserve for future tenant improvements and lease
commissions and escrows for taxes and insurance. At June 30, 1997, the lender
held a total of $14,193 of restricted cash escrow which included $8,430 in
reserves and $5,763 in tax and insurance escrows. All future cash flow generated
by the NEBC property will be held in a reserve account which may be used only
for the benefit of NEBC or to meet obligations to the lender. The Partnership
held $233,112 in segregated funds for such purposes and this amount was included
in the Partnership's cash and cash equivalents balance at June 30, 1997. See
Note D - Related Party Transactions and Note I - Commitments and Contingencies.
The Shadeland Retail Center mortgage loan, originally due January 1, 1997 and
subsequently extended to May 31, 1997, was refinanced in May 1997 with an
unaffiliated lender. The Partnership obtained a $5,000,000, five-year, 7.60%
fixed interest rate loan with a 25-year amortization due May 2002. The lender
required a $150,000 cash hold-back to be used for expenses relating to parking
lot resurfacing. The resurfacing of the parking lot was completed in July 1997.
This $150,000 hold-back is included on the Partnership's balance sheet in a
Restricted Cash Escrow at June 30, 1997.
<PAGE>
USF&G/LEGG MASON REALTY PARTNERS LIMITED PARTNERSHIP
Notes to Financial Statements (Continued)
June 30, 1997
(Unaudited)
NOTE F - Distributions to Partners
The Partnership Agreement provides for quarterly cash distributions to the
partners no later than 45 days after the close of each quarter. The quarterly
cash distributions are allocated 99% to Unitholders and 1% to the General
Partners.
As of June 30, 1997, cumulative cash distributions of $10,545,983 and $106,517
had been made to the Unitholders and General Partners, respectively. These cash
distributions represent a cumulative return of 2% per quarter on invested
capital through the period ended July 13, 1993. The last distribution to
Unitholders was made November 12, 1993.
NOTE G - Cash Flow Protector Loan
Pursuant to the Cash Flow Protector Loan, the USF&G General Partner agreed to
lend to the Partnership an amount up to $5,471,415, representing 20% of the
gross proceeds of the offering, to the extent that the Partnership's
distributable cash flow was insufficient to pay a 2% cumulative quarterly return
(8% annual return) to Unitholders. In connection with cumulative cash
distributions, as of June 30, 1997, the USF&G General Partner had funded
$4,849,734 pursuant to the Cash Flow Protector Loan. The last distribution to
Unitholders was made November 12, 1993.
The USF&G General Partner's commitment to lend amounts pursuant to the Cash Flow
Protector Loan expired on July 13, 1993. The Cash Flow Protector Loan currently
accrues interest at an annual simple rate of 6%, a reduction in the rate from 8%
by the USF&G General Partner effective January 1, 1993. The Cash Flow Protector
Loan is due and payable on December 31, 2003 or earlier, from sale or
refinancing proceeds. The related aggregate accrued interest of $1,669,332 as of
June 30, 1997 is subordinate to the return of Unitholder capital contributions
as discussed in Note D.
NOTE H - Right of Presentment
The Right of Presentment provisions of the Partnership's Partnership Agreement
now provide that if in a year Units are presented in excess of the amount
required to be purchased by the USF&G General Partner then the General Partners
may elect to purchase such excess presented Units, provided that the total
number of Units repurchased shall not exceed 50% of the Units outstanding. As of
June 30, 1997, the General Partners have repurchased 185,774 Units under the
Right of Presentment Program.
On June 30, 1997, the General Partners purchased all of the 16,916 Units
presented under the 1997 Right of Presentment Program. The Units were purchased
at a price per unit of $3.48 from all Unitholders that presented. The USF&G
General Partner purchased 13,886 of the Units. The remaining 3,030 Units were
purchased by Legg Mason Realty Partners, Inc.
<PAGE>
USF&G/LEGG MASON REALTY PARTNERS LIMITED PARTNERSHIP
Notes to Financial Statements (Continued)
June 30, 1997
(Unaudited)
NOTE I - Commitments and Contingencies
In order to obtain the NEBC loan modification during 1994 discussed in Note E,
the Partnership agreed to permit the NEBC mortgage lender to participate in the
NEBC sales proceeds above the outstanding debt and closing costs. Upon sale of
NEBC, the lender will be entitled to receive 60% of the first $1,500,000, 40% of
the next $500,000 and 10% thereafter of the remaining proceeds.
NOTE J - St. Andrews Repair and Legal Costs
During the second quarter of 1995, the Partnership entered into a $3,000,000
contract to complete the necessary repairs at St. Andrews. Certain modifications
were made to the original construction contract and the total completed contract
cost was approximately $3,700,000. Contract repairs began during the third
quarter of 1995 and were complete by the end of 1996. The Partnership recognized
cumulative costs of $4,549,000 and $699,000 related to assessing and repairing
the construction problems and pursuing legal remedies, respectively, through the
three year period ended December 31, 1996. These costs were offset by cumulative
settlement and insurance recoveries of $2,732,500. The Partnership incurred
approximately $19,170 and $9,406 of St. Andrews repair and legal costs,
respectively during 1997.
During 1997, the Partnership obtained, through settlement, the right to pursue
the general contractor's claims for indemnity and contribution from the
subcontractors who worked on the St. Andrews project. The Partnership is
continuing to pursue these claims against the subcontractors as well as against
the supervising architect. There can be no assurance as to the outcome of such
litigation.
The Partnership executed an agreement for a construction loan with the USF&G
General Partner during the third quarter of 1995 which will permit the
Partnership to borrow up to $3,500,000 to complete the necessary repairs. Under
its term, the loan will mature September 1, 1997, and pay interest monthly on
advanced funds at 9.0%. The terms also provide for early repayment from
additional recoveries from the Partnership's lawsuit, net operating income after
reserves or sales or refinancing proceeds. As of June 30, 1997, the outstanding
balance of the construction loan was $1,757,000 and no further advances on the
loan are expected. Interest expense of $106,104 and $41,938 was incurred and
interest payments totaling $135,474 and $25,622 were made on this loan for the
six months ended June 30, 1997, and 1996, respectively (see Note D).
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The Partnership cautions readers that certain forward-looking statements are
contained in the following discussion and elsewhere in the Form 10-Q and may be
contained in future filings with the Securities and Exchange Commission.
Forward-looking statements are statements which relate to future operations,
strategies, financial results, or other developments. Forward-looking statements
are necessarily based upon estimates and assumptions that are inherently subject
to significant business, economic and competitive uncertainties and
contingencies, many of which are beyond the Partnership's control and many of
which, with respect to future business decisions, are subject to change. These
uncertainties and contingencies can affect actual results and could cause actual
results to differ materially from those expressed in any forward-looking
statements made by the Partnership. The Partnership wishes to caution readers
not to place undue reliance upon any such forward-looking statements, which are
made pursuant to Private Securities Litigation Reform Act of 1995, and as such,
speak only as of the date made. The Partnership disclaims any duty or obligation
to update any such forward-looking statements.
General
On June 28, 1988, the Partnership's Registration Statement registering 1,400,000
Units at an offering price of $25 per Unit was declared effective by the
Securities and Exchange Commission. As of December 31, 1989, at the termination
of the offering, 1,094,283 Units had been sold for aggregate gross proceeds of
$27,357,075.
After deducting rebates to Unitholders of $835,001 and offering and
organizational costs and selling commissions totaling $2,174,276, approximately
$24,348,000 was available for investment in income producing properties.
Substantially all of the proceeds available for investment were invested in four
income producing properties meeting the investment criteria of the Partnership.
Northeast Business Campus ("NEBC"), St. Andrews Apartments at Westwood ("St.
Andrews"), and Shadeland Retail Center ("Shadeland") are owned directly by the
Partnership (collectively, the "Properties") and the Partnership owned a fifty
percent general partnership interest in the Greenbrier Towers General
Partnership (the "Joint Venture"). The Joint Venture's sole property, Greenbrier
Towers, was purchased by the lender at foreclosure on April 26, 1995.
Liquidity and Capital Resources
The cash and cash equivalents position of the Partnership at June 30, 1997
increased $569,739 from December 31, 1996. The increase was primarily due to
excess cash proceeds from the Shadeland mortgage loan refinancing and St.
Andrews settlements received during the period offset in part by the net
principal repayment on the St. Andrews construction loan and a decline in
accounts payable and other liabilities. The Partnership's cash and cash
equivalents position will continue to fluctuate during each quarter as follows:
(1) decreasing with the funding of lease-up costs and capital improvements at
Shadeland and St. Andrews; (2) increasing as net rental income and interest
income are received; and (3) decreasing as expenses (including debt service
requirements) are paid. Under the 1994 NEBC loan modification, all future cash
flow generated by the NEBC property must be used only for the benefit of NEBC or
to meet obligations to the lender. At June 30, 1997, the lender held $14,193 in
reserves and escrows and the Partnership held $233,112 in segregated funds
subject to the lien, for the benefit of the lender which was included in the
Partnership's cash and cash equivalents balance.
<PAGE>
The Partnership's ability to compete in each market is affected by the level of
cash provided by operations since the level of tenant improvements are limited
to the cash available for investment in income producing properties. In
connection with the acquisition of the Properties, the Partnership established
cumulative working capital reserves of approximately 3% of gross offering
proceeds. For the foreseeable future, the Partnership expects to apply cash flow
from operations to increase Partnership working capital reserves, to paydown the
St. Andrews construction loan, and to provide for St. Andrews and Shadeland
maintenance and improvements, and consequently, there is no expectation that
Distributable Cash Flow will be available to make distributions to Unitholders.
This policy reflects the commitment by the General Partners to maintain adequate
working capital reserves. The General Partners believe that such a policy is
prudent and is consistent with the Partnership's objective to maintain and
increase the value of the Properties.
Occupancy at Shadeland was 88% as of June 30, 1997 and March 31, 1997. The
Partnership obtained a mortgage loan during May 1997 from an unaffiliated lender
to refinance the existing Shadeland mortgage loan. The new loan is a $5,000,000,
five-year, 7.60% fixed interest rate loan with a 25-year amortization. The
lender required a $150,000 cash hold-back to be used for expenses relating to
parking lot resurfacing. The resurfacing of the parking lot was completed in
July 1997. The loan provided total cash proceeds in excess of the prior
mortgage, closing costs and the parking lot resurfacing hold-back of
approximately $795,000. Approximately $250,000 of the excess proceeds may be
used to fund certain future additional capital improvement costs and leasing
commissions at Shadeland. Of the remaining proceeds of approximately $545,000,
the Partnership applied $475,000 to the repayment of the St. Andrews
construction loan discussed below and the balance of $70,000 to increase working
capital reserves.
During the second quarter of 1995, the Partnership entered into a $3,000,000
contract to complete the necessary repairs at St. Andrews. Certain modifications
were made to the original construction contact and the total completed contract
cost was approximately $3,700,000. Contract repairs began during the third
quarter of 1995 and were complete by the end of 1996. The Partnership recognized
cumulative costs of $4,549,000 and $699,000 related to assessing and repairing
the construction problems and pursuing legal remedies, respectively, through the
three year period ended December 31, 1996. These costs were offset by cumulative
settlement and insurance recoveries of $2,732,500. During the first quarter of
1997, the Partnership incurred approximately $19,170 and $9,406 of St. Andrews
repair and legal costs, respectively. The 1997 repair costs relate to
engineering fees necessary to assess additional repairs during the warranty
period related to the original construction contract. The Partnership may incur
these engineering costs related to the construction repairs during the warranty
period through the remainder of 1997. During the second quarter of 1997, there
were no St. Andrews repair and legal costs. The Partnership received payment of
a settlement recovery in the amount of $175,000 from a responsible party during
July 1997. This recovery of $175,000 is carried as a receivable on the
Partnership's balance sheet as of June 30, 1997. The Partnership continues to
assert its claims against the remaining potentially responsible parties, and
accordingly, will incur future legal costs. During 1997, the Partnership
obtained, through settlement, the right to pursue the general contractor's
claims for indemnity and contribution from the subcontractors who worked on the
St. Andrews project. The Partnership is continuing to pursue these claims
against the subcontractors as well as against the supervising architect. There
can be no assurance as to the outcome of such litigation. Accordingly, none of
these amounts have been recorded on the Partnership's financial statements.
<PAGE>
The Partnership executed an agreement for a construction loan with the USF&G
General Partner during the third quarter of 1995 which permits the Partnership
to borrow up to $3,500,000 to complete the necessary repairs. Under its terms,
the loan will mature on September 1, 1997 and interest is payable monthly on
advanced funds at 9.0%. The terms also provide for early repayment from
additional settlements from the Partnership's claims against potentially
responsible parties related to the lawsuit, net operating income after reserves,
or sale or refinancing proceeds. As of June 30, 1997, the outstanding balance of
the construction loan was $1,757,000 and no further advances on the loan are
expected. Principal repayments during 1997 of $1,248,000 through June 30
included settlement recoveries and excess refinancing proceeds. There was an
advance on the construction loan in the amount of $215,000 during February 1997.
In July, the Partnership made an additional $500,000 repayment from the excess
working capital reserves and from the St. Andrews settlement recovery discussed
above. The Partnership anticipates additional principal repayments prior to
maturity from additional recoveries with respect to the construction deficiency
claims. The USF&G General Partner has indicated its current intention to extend
the construction loan if the existing mortgage loan is refinanced. The St.
Andrews mortgage matures September 1, 1997. The Partnership has completed an
application with an unaffiliated lender to refinance the mortgage loan with a
$8,500,000, three-year, floating interest rate loan with a 30-year amortization.
Although the Partnership has submitted an application to secure this loan, there
can be no assurance that it will be made or that the St. Andrews mortgage will
otherwise be refinanced.
At June 30, 1997, occupancy at St. Andrews was 97%. The apartment market in the
area continues to be very strong and occupancies of St. Andrews' main
competitors range from 88% to 98%. Leasing activity at St. Andrews has remained
strong due to the strength of the market and the high number of corporate leases
in place.
Results of Operations
Net Income (Loss) Net Income (Loss)
for the Six Months for the Six Months
Ended June 30, 1997 Ended June 30, 1996
------------------- -------------------
NEBC $ (82,657) $ (50,044)
St. Andrews (49,080) (178,943)
St. Andrews Repair and Legal
Costs, Net (28,576) (2,684,947)
Shadeland 69,540 18,971
--------- -----------
$ (90,773) $(2,894,963)
Partnership Expense (309,557) (254,962)
--------- -----------
$(400,330) $(3,149,925)
========= ===========
Six Months Ended June 30, 1997 ("Current Period")
as compared to June 30, 1996 ("Comparable Period")
The Partnership incurred a net loss of $400,330 for the six months ended June
30, 1997 ("the current period"). The decreased net loss was due primarily to the
significant St. Andrews repair and legal costs incurred in 1996. These costs
were $28,576 during the current period and $2,684,947 during the comparable
period. Rental revenue increased $184,481 to $2,507,332 for the current period
<PAGE>
as compared to $2,322,851 for the six month period ended June 30, 1996 ("the
comparable period"). The increased rental revenue was primarily due to higher
occupancy and rental rates and more corporate leases in place at St. Andrews
during 1997. Property operating expenses decreased $4,069 to $1,002,404 for the
current period from $1,006,473 for the comparable period. The decreased
operating expenses were due to lower operating expenses at Shadeland in 1997,
offset in part by increased operating expenses at St. Andrews and NEBC.
Rental revenue at NEBC increased $25,286 to $879,009 for the current period as
compared to $853,723 for the comparable period. The increase in rental revenue
is due primarily to greater expense reimbursements from Express Med's expansion
into Building 1 during the fourth quarter of 1996. The occupancy at NEBC
increased to 96% as of June 30, 1997 as compared to 90% as of June 30, 1996. The
occupancy for NEBC's office and service center space at June 30, 1997 was 95%
and 100% respectively, as compared to 86% and 100% respectively, at June 30,
1996. The increased occupancy in office space was due primarily to the addition
of a new tenant and the expansion of an existing tenant in Building 5 during the
second quarter of 1997. The average net rental rate at June 30, 1997 decreased
to $8.48 per square foot for office space, excluding free-rent allowances, and
increased to $7.06 per square foot for service center space as compared to $8.64
and $6.84, respectively, at June 30, 1996. The decrease in the office space
average rental rate is due to the Express Med expansion into Building 1 at a
lower rental rate than prior leases. The increase in the service center average
rental rate is due to several tenant renewals at higher rental rates.
Operating expenses at NEBC increased $30,693 to $386,554 for the current period
as compared to $355,861 for the comparable period. The increase was primarily
due to higher maintenance and real estate taxes. Maintenance costs are higher
due to increased HVAC and general building repairs and higher payroll costs.
Real estate taxes are higher due to a successful tax appeal which resulted in a
refund in the comparable period.
Rental revenue at St. Andrews increased $154,982 to $1,048,897 for the current
period as compared to $893,915 for the comparable period. The increase in rental
revenue was due to higher occupancy and rental rates and more corporate leases
in place for the current period. The average occupancy at St. Andrews was 97%
and 93% for the current and comparable periods, respectively. The average
monthly rental rate during the current period increased to $648 per unit as
compared to $596 during the comparable period due to decreased rental
concessions offered during the current period and the strength of the rental
market. The number of corporate units increased to fifty-eight at June 30, 1997
from twenty-eight at June 30, 1996. Corporate unit leases at St. Andrews include
a corporate unit premium fee to compensate for the additional services provided
to the tenants. The corporate unit premium fee was $48,357 and $17,974 for the
current and comparable periods, respectively. Operating expenses at St. Andrews
increased $17,220 to $455,723 for the current period as compared to $438,503 for
the comparable period. The increase in operating expenses was due to an increase
in real estate taxes, maintenance costs and corporate unit expenses offset in
part by a decrease in third party management fees. Real estate taxes were higher
due to a successful tax appeal which resulted in a refund in the comparable
period. Maintenance costs were higher due to the power-washing of the new vinyl
siding in the current period. The manufacturer and engineering consultant have
recommended periodic power-washing to maintain the siding's appearance in the
Florida climate. Corporate unit expenses which may include furnishings, cable
and utilities were higher due to increased corporate unit rentals.
<PAGE>
Overall, operating expenses at St. Andrews increased due to higher occupancy.
Third party management fees were lower due to payment of the 1995 incentive fee
in the comparable period while the 1996 incentive fee was accrued for in
December 1996.
The Partnership incurred significant engineering, construction and legal costs
at St. Andrews related to assessing and repairing the construction problems and
pursuing legal remedies against responsible parties during the comparable period
which included approximately $3,072,000 and $158,000 of St. Andrews repair and
legal costs, respectively, which were offset in part by settlement payments and
insurance recoveries received of $45,000 and $500,000, respectively. The
Partnership incurred approximately $19,170 and $9,406 of St. Andrews repair and
legal costs, respectively, during the current period. No insurance recoveries or
settlement payments were netted against these costs in 1997.
Rental revenue at Shadeland increased $4,213 to $579,426 for the current period
as compared to $575,213 for the comparable period. The increase was primarily
due to higher expense reimbursements in the current period. The average rental
rate was $10.54 per square foot at June 30, 1997 and $10.68 per square foot at
June 30, 1996. Occupancy at Shadeland declined slightly to 88% as of June 30,
1997 as compared to 89% as of June 30, 1996. Operating expenses at Shadeland
decreased $51,982 to $160,127 for the current period as compared to $212,109 for
the comparable period. The decrease was primarily due to lower real estate
taxes, grounds and landscaping costs and maintenance costs offset in part by
higher legal costs. The comparable period included tax expenses for an increased
1995 assessment which was paid during the comparable period. Grounds and
landscaping costs decreased due to higher snow removal costs associated with the
severe winter in 1996. Maintenance costs decreased due to unanticipated canopy
repairs required in the comparable period. Legal costs increased due to an
increased number of prospective leases.
Partnership expense is comprised of general and administrative expenses and the
interest expense related to the Cash Flow Protector Loan, General Partner loans,
and St. Andrews construction loan offset in part by interest earned on temporary
investments. The increase in Partnership expense of $54,595 to $309,557 for the
current period as compared to $254,962 was primarily due to the interest expense
related to the increased advances under the St. Andrews construction loan from
the USF&G General Partner which was initially funded in February 1996.
Total general and administrative expenses decreased by $2,238 to $65,092 for the
current period as compared to $67,330 for the comparable period. General and
administrative expenses include various costs required for the administration of
the Partnership. The decrease is due to lower overall administrative costs.
Interest expense includes interest incurred in connection with the mortgages
secured by NEBC, St. Andrews and Shadeland and interest on the Cash Flow
Protector Loan from the USF&G General Partner, the General Partner loans, and
the St. Andrews construction loan. Interest expense increased $59,818 to
$1,169,330 for the current period as compared to $1,109,512 for the comparable
period. The increase was due to interest incurred on increased advances under
the St. Andrews construction loan which was initially funded in February 1996.
Depreciation and amortization expense increased by $42,359 to $658,545 for the
current period as compared to $616,186 for the comparable period primarily due
to the depreciation of tenant improvement and leasing commission additions at
NEBC in 1997.
<PAGE>
Results of Operations
Net Income (Loss) Net Income (Loss)
for the Three Months for the Three Months
Ended June 30, 1997 Ended June 30, 1996
NEBC $ (18,830) $ (3,750)
St. Andrews (12,123) (69,250)
St. Andrews Repair and Legal
Costs, Net 0 (1,425,838)
Shadeland 60,806 (7,233)
--------- -----------
$ 29,853 $(1,506,071)
Partnership Expense (143,444) (141,843)
--------- -----------
$(113,591) $(1,647,914)
========= ===========
Three Months Ended June 30, 1997 ("Current Period")
as compared to June 30, 1996 ("Comparable Period")
The Partnership incurred a net loss of $113,591 for the three months ended June
30, 1997 ("the current period"). The decreased net loss was due primarily to the
significant St. Andrews repair and legal costs incurred in 1996. None of these
costs were incurred during the current period while $1,425,838 were incurred
during the comparable period. Rental revenue increased $137,688 to $1,318,243
for the current period as compared to $1,180,555 for the three month period
ended June 30, 1996 ("the comparable period"). The increased rental revenue was
primarily due to higher rental rates and more corporate leases in place at St.
Andrews during 1997, as well as higher expense reimbursements at Shadeland and
NEBC. Property operating expenses increased $1,768 to $497,034 for the current
period from $495,266 for the comparable period.
Rental revenue at NEBC increased $37,478 to $471,609 for the current period as
compared to $434,131 for the comparable period. The increase in rental revenue
is due primarily to increased occupancy in Building 5 and greater expense
reimbursements from Express Med's expansion into Building 1 during the fourth
quarter of 1996. The occupancy at NEBC increased to 96% as of June 30, 1997 as
compared to 90% as of June 30, 1996 due primarily to increased office space
occupancy. The occupancy for NEBC's office and service center space at June 30,
1997 was 95% and 100% respectively, as compared to 86% and 100% respectively, at
June 30, 1996. The increased occupancy in office space was due primarily to the
addition of a new tenant and the expansion of an existing tenant in Building 5
during the second quarter of 1997. The average net rental rate at June 30, 1997,
decreased to $8.48 per square foot for office space, excluding free-rent
allowances, and increased to $7.06 per square foot for service center space as
compared to $8.64 and $6.84, respectively, at June 30, 1996. The decrease in the
office space average rental rate is due to the Express Med expansion into
Building 1 at a lower rental rate than prior leases. The increase in the service
center average rental rate is due to several tenant renewals at higher rental
rates. Operating expenses at NEBC increased $35,993 to $198,235 for the current
period as compared to $162,242 for the comparable period. The increase was
primarily due to higher real estate taxes, grounds and landscaping costs,
maintenance costs and utilities. Real estate taxes are higher in the current
<PAGE>
period due to a successful tax appeal which resulted in a refund in the
comparable period. Grounds and landscaping costs are higher due to lot repairs
for Buildings 3 and 5 that were incurred in the current period. Maintenance cost
are higher due to increased HVAC and general building repairs and higher payroll
costs. Utilities are higher due primarily to greater gas consumption in the
current period.
Rental revenue at St. Andrews increased $69,621 to $535,404 for the current
period as compared to $465,783 for the comparable period. The increase in rental
revenue was due to higher rental rates and more corporate leases in place for
the current period. The average occupancy at St. Andrews was 97% for the current
and comparable periods. The average monthly rental rate during the current
period increased to $657 per unit as compared to $599 during the comparable
period due to decreased rental concessions offered during the current period and
the strength of the rental market. The number of corporate units increased to
fifty-eight at June 30, 1997 from twenty-eight at June 30, 1996. Corporate unit
leases at St. Andrews include a corporate unit premium fee to compensate for the
additional services provided to the tenants. The corporate unit premium fee was
$24,240 and $9,406 for the current and comparable periods, respectively.
Operating expenses at St. Andrews increased $8,611 to $226,109 for the current
period as compared to $217,498 for the comparable period. The increase in
operating expenses was primarily due to an increase in real estate taxes,
maintenance costs and corporate unit expenses offset in part by a decrease in
third party management fees and payroll. Real estate taxes were higher due to a
successful tax appeal which resulted in a refund in the comparable period.
Maintenance costs were higher due to the power-washing of the new vinyl siding
in the current period. The manufacturer and engineering consultant have
recommended periodic power-washing to maintain the siding's appearance in the
Florida climate. Corporate unit expenses which may include furnishings, cable
and utilities were higher due to increased corporate unit rentals. Third party
management fees were lower due to payment of the 1995 incentive fee in the
comparable period while the 1996 incentive fee was accrued for in December 1996.
Payroll was lower due to payment of construction liaison wages in the comparable
period.
The Partnership incurred significant engineering, construction and legal costs
at St. Andrews related to assessing and repairing the construction problems and
pursuing legal remedies against responsible parties during the comparable period
which included approximately $1,374,000 and $96,000 of St. Andrews repair and
legal costs, respectively, which were offset in part by settlement recoveries
received of $45,000. The Partnership incurred no repair and legal costs at St.
Andrews during the current period.
Rental revenue at Shadeland increased $30,589 to $311,230 for the current period
as compared to $280,641 for the comparable period. The increase was primarily
due to higher expense reimbursements in the current period. The average rental
rate was $10.54 per square foot at June 30, 1997 and $10.68 per square foot at
June 30, 1996. Occupancy at Shadeland declined slightly to 88% as of June 30,
1997 as compared to 89% as of June 30, 1996. Operating expenses at Shadeland
decreased $42,836 to $72,690 for the current period as compared to $115,526 for
the comparable period. The decrease was primarily due to lower real estate
taxes. The comparable period included tax expenses for an increased 1995
assessment which was paid during the comparable period.
Partnership expense is comprised of general and administrative expenses and the
interest expense related to the Cash Flow Protector Loan, General Partner loans,
and St. Andrews construction loan offset in part by interest earned on temporary
investments. The increase in Partnership expense of $1,601 to $143,444 for the
current period as compared to $141,843 was primarily due to higher interest
<PAGE>
expense offset in part by higher interest income. The increase in interest
expense was related to higher outstanding principal balances on the St. Andrews
construction loan in the current period. The increase in interest income is due
to greater working capital reserve balances in the current period from excess
Shadeland refinancing proceeds and St. Andrews settlement recoveries received.
Total general and administrative expenses decreased by $1,558 to $32,491 for the
current period as compared to $34,049 for the comparable period. General and
administrative expenses include various costs required for the administration of
the Partnership.
Interest expense includes interest incurred in connection with the mortgages
secured by NEBC, St. Andrews and Shadeland and interest on the Cash Flow
Protector Loan from the USF&G General Partner, the General Partner loans, and
the St. Andrews construction loan. Interest expense increased $7,323 to $576,114
for the current period as compared to $568,791 for the comparable period. The
increase in interest expense was related to higher outstanding principal
balances on the St. Andrews construction loan in the current period.
Depreciation and amortization expense increased by $27,228 to $337,547 for the
current period as compared to $310,319 for the comparable period primarily due
to the depreciation of tenant improvement and leasing commission additions at
NEBC in 1997.
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits
27 Financial Data Schedule
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, and in the capacity and on the date
indicated.
USF&G/LEGG MASON REALTY PARTNERS
LIMITED PARTNERSHIP
(Registrant)
By: USF&G Realty Partners, Inc.,
A General Partner
Date: __________ /s/ Joseph A. Wesolowski
Joseph A. Wesolowski
Vice President and Chief Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,350,466
<SECURITIES> 0
<RECEIVABLES> 315,966
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 35,130,272
<DEPRECIATION> 7,648,786
<TOTAL-ASSETS> 29,752,959
<CURRENT-LIABILITIES> 0
<BONDS> 21,463,540
0
0
<COMMON> (1,470,654)
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 29,752,959
<SALES> 0
<TOTAL-REVENUES> 2,523,617
<CGS> 0
<TOTAL-COSTS> 1,754,617
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,169,330
<INCOME-PRETAX> (400,330)
<INCOME-TAX> 0
<INCOME-CONTINUING> (400,330)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (400,330)
<EPS-PRIMARY> (0.36)
<EPS-DILUTED> (0.36)
</TABLE>