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 March 31, 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 Smith Avenue
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 -- March 31, 1997 and December 31, 1996
Statements of Operations -- For the three months ended March 31, 1997
and March 31, 1996
Statements of Cash Flows -- For the three months ended March 31, 1997
and March 31, 1996
Notes to Financial Statements -- March 31, 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 three
months ended March 31, 1997.
SIGNATURES
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
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USF&G/LEGG MASON REALTY PARTNERS LIMITED PARTNERSHIP
BALANCE SHEETS
<S> <C> <C>
(Unaudited)
March 31, 1997 December 31, 1996
-------------- -----------------
Assets
Real Estate Investments:
Income Producing Properties - Notes B $27,577,786 $27,801,201
Cash and Cash Equivalents (including temporary
investments at March 31, 1997 and December 31,
1996 of $648,661 and $232,850, respectively) - Note C 1,261,762 780,727
Restricted Cash Escrow - Note E 54,156 130,356
Accounts Receivable, Net 198,477 108,082
St. Andrews Recovery Receivables - Note J 175,000 1,525,000
Other Assets 326,394 265,668
---------- ----------
Total Assets $29,593,575 $30,611,034
========== ==========
Liabilities
Mortgages Payable - Note E $20,517,868 $20,529,488
Accounts Payable and Other Liabilities 1,053,159 1,262,790
St. Andrews Construction Loan - Note J 2,232,000 2,790,000
Due to General Partners and Affiliates - Note D 2,297,877 2,249,346
Cash Flow Protector Loan - Note G 4,849,734 4,849,734
---------- ----------
$30,950,638 $31,681,358
Partners' (Deficit) Equity
General Partners $ (257,983) $ (255,116)
Assignor and Assignee Limited Partners,
1,094,283 Units Issued and Outstanding (1,099,080) (815,208)
---------- ----------
(1,357,063) (1,070,324)
---------- ----------
Total Liabilities and Partners' (Deficit) Equity $29,593,575 $30,611,034
========== ==========
See accompanying notes to the financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
USF&G/LEGG MASON REALTY PARTNERS LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
(UNAUDITED)
<S> <C> <C>
For the Three For the Three
Months Ended Months Ended
March 31, 1997 March 31, 1996
-------------- --------------
REVENUE:
Rental $1,189,089 $1,142,296
Interest 4,933 5,878
--------- ---------
Total Revenue 1,194,022 1,148,174
EXPENSES:
Property Operating - Note D 505,370 511,207
St. Andrews Repair and Legal Costs, Net of
Recoveries - Note J 28,576 1,259,109
General and Administrative 32,601 33,281
Interest - Notes D and E 593,216 540,721
Depreciation and Amortization 320,998 305,867
---------- ----------
Total Expenses 1,480,761 2,650,185
---------- ----------
NET LOSS $ (286,739) $(1,502,011)
========== ==========
Net Loss Allocated to:
General Partners $ (2,867) $ (15,020)
Assignor and Assignee Limited Partners (283,872) (1,486,991)
---------- ----------
$ (286,739) $(1,502,011)
========== ==========
Net Loss per Unit -- Note A $ (.26) $ (1.36)
========== ==========
Weighted Average Number of Units 1,094,283 1,094,283
========== ==========
See accompanying notes to the financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
USF&G LEGG MASON REALTY PARTNERS LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<S> <C> <C>
For the Three For the Three
Months Ended Months Ended
March 31, 1997 March 31, 1996
-------------- --------------
Operating Activities
Net Loss $ (286,739) $(1,502,011)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 320,998 305,867
Change in net assets and liabilities related to
operating activities:
Decrease in restricted cash escrow 76,200 42,114
Increase in due to general partners and affiliates 48,531 85,106
(Decrease) increase in accounts payable and other
liabilities (209,631) 664,257
Increase in accounts receivable (90,395) (5,256)
Decrease in St. Andrews recovery receivables 1,350,000 0
Increase in other assets (87,053) (21,072)
--------- ----------
Net Cash Provided by (Used in) Operating Activities 1,121,911 (430,995)
--------- ----------
Investing Activities
Investment in income producing properties (71,256) (74,374)
--------- ----------
Net Cash Used in Investing Activities (71,256) (74,374)
--------- ----------
Financing Activities
Mortgage principal payments (11,620) (15,937)
St. Andrews Construction Loan Advances 215,000 700,000
St. Andrews Construction Loan Principal Payments (773,000) 0
--------- ----------
Net Cash (Used in) Provided by Financing Activities (569,620) 684,063
--------- ----------
Increase in Cash and Cash Equivalents 481,035 178,694
Cash and Cash Equivalents, Beginning of Period 780,727 887,555
--------- ----------
Cash and Cash Equivalents, End of Period $1,261,762 $ 1,066,249
========= ==========
See accompanying notes to the financial statements.
</TABLE>
<PAGE>
USF&G/LEGG MASON REALTY PARTNERS LIMITED PARTNERSHIP
Notes to Financial Statements
March 31, 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 three months ended March 31, 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)
March 31, 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:
March 31, 1997 December 31, 1996
-------------- -----------------
Buildings and Improvements $29,477,598 $29,406,342
Land 5,444,913 5,444,913
---------- ----------
34,922,511 34,851,255
Less: Accumulated depreciation (7,344,725) (7,050,054)
---------- ----------
$27,577,786 $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 reimbursable expenses incurred to
the General Partners and their affiliates for the periods indicated:
For the Three Months Ended
March 31, 1997 March 31, 1996
-------------- --------------
Charged to expenses:
Interest Expense $137,493 $83,439
Operating Expenses 25,220 21,026
<PAGE>
USF&G/LEGG MASON REALTY PARTNERS LIMITED PARTNERSHIP
Notes to Financial Statements (Continued)
March 31, 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>
March 31, 1997 December 31, 1996
-------------- -----------------
General Partner Loans $ 200,000 $ 200,000
Accrued Interest on General Partner Loans 40,170 36,045
Accrued Interest on the St. Andrews Construction Loan 19,231 42,548
Operating Expenses 17,701 21,727
--------- ---------
277,102 300,320
--------- ---------
Asset Management Fees 423,990 423,990
Accrued Interest on the Cash Flow Protector Loan 1,596,785 1,525,036
--------- ---------
Amounts Subordinate to the return of Unitholder
contributions 2,020,775 1,949,026
--------- ---------
$2,297,877 $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, USF&G Realty Partners, Inc.
and Legg Mason Realty Partners, Inc., 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 G 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)
March 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
NOTE E - Mortgages Payable
Mortgages payable consists of the following as of the dates indicated:
<S> <C> <C>
March 31, 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 1, 1997, interest at 9.375% 4,042,868 4,054,488
---------- ----------
$20,517,868 $20,529,488
========== ==========
</TABLE>
The mortgage loans are non-recourse obligations except under certain defined
circumstances. Interest expense of $455,723 and $457,282 was incurred on these
mortgages for the three months ended March 31, 1997 and 1996, respectively.
Interest payments of $427,870 and $461,138 were made for the three months ended
March 31, 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 March 31, 1997, the lender
held a total of $54,156 of restricted cash escrow which included $8,336 in
reserves and $45,820 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. See Note
D - Related Party Transactions and Note I - Commitments and Contingencies.
The Shadeland Retail Center mortgage loan, originally due January 1, 1997, was
extended until April 1, 1997 during the fourth quarter of 1996, and then again
extended until May 1, 1997 during the first quarter of 1997. The Partnership
obtained a mortgage loan during May 1997 from an unaffiliated lender to
refinance the Shadeland Retail Center mortgage loan. The new loan is a
$5,000,000, five-year, 7.6% fixed interest rate loan with a 25-year amortization
due May 2002.
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.
<PAGE>
USF&G/LEGG MASON REALTY PARTNERS LIMITED PARTNERSHIP
Notes to Financial Statements (Continued)
March 31, 1997
(Unaudited)
NOTE F - Distributions to Partners (Continued)
As of March 31, 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 March 31, 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 $1,596,785 as of
March 31, 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
March 31, 1997, the General Partners have repurchased 168,858 Units under the
Right of Presentment Program.
<PAGE>
USF&G/LEGG MASON REALTY PARTNERS LIMITED PARTNERSHIP
Notes to Financial Statements (Continued)
March 31, 1997
(Unaudited)
NOTE H - Right of Presentment (Continued)
The USF&G General Partner will repurchase Units under the 1997 Right of
Presentment at the 1997 Right of Presentment purchase price of $3.48 per unit.
If more than 13,886 Units are presented for purchase, 13,886 Units will be
purchased by the USF&G General Partner on a pro rata basis from the Unitholders
that present. The other General Partner may elect to purchase all or a portion
of the excess Units presented up to 455,770 additional Units due to the 50%
limit discussed above. Units will be purchased by June 30, 1997. A Certificate
of Assignee Units of Limited Partnership Interests representing any Units
tendered but not purchased will be issued. The purchasing General Partner is
entitled to the beneficial rights attributable to any purchased Units, including
the rights to cash distributions, and a percentage of the Partnership's income,
gains, losses, deductions and credits, but not voting rights. For the
administrative convenience of the Partnership and Unitholders, the General
Partners have modified certain procedures for exercising the Right of
Presentment from those outlined in the Prospectus and Partnership Agreement.
Presentment is now based upon acceptance of the announced per Unit purchase
price. There is no longer a withdrawal period. Unitholders offering Units for
purchase must present Units by June 6, 1997.
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 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.
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.
<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.
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 March 31, 1997
increased $481,035 from December 31, 1996. The increase was primarily due to 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 March 31, 1997, the lender held $54,156 in
reserves and escrows and the Partnership held $411,104 in segregated funds
subject to the lien and 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 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 increased to 88% as of March 31, 1997 as compared to 83%
at December 31, 1996. The increase in occupancy was due to a 4,800 square foot
American Carpets lease that was executed in November 1996, with the tenant
occupying that space in January 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, 7.6% fixed interest rate
loan with a 25-year amortization. The lender required a $150,000 hold-back for
parking lot resurfacing that will begin in the second quarter of 1997. The loan
provided total cash proceeds in excess of the current 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 St. Andrews construction loan 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 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. 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.
<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 March 31, 1997, the outstanding balance
of the construction loan was $2,232,000 and no further advances on the loan are
expected. The Partnership made a partial repayment from the excess Shadeland
refinancing proceeds discussed above and 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 also extended. The St. Andrews mortgage matures September 1, 1997. The
Partnership intends to seek an extension of the mortgage loan prior to that date
and will continue to evaluate refinancing alternatives.
At March 31, 1997, occupancy at St. Andrews was 98%. The apartment market in the
area continues to be very strong and occupancies of St. Andrews' main
competitors range from 95% to 98%. A new apartment community, The Mission Club,
a 352-unit luxury complex is located within one mile of the St. Andrews complex,
was completed during the second quarter of 1996. The new complex has had little
impact on St. Andrews occupancy and leasing activity has remained strong due to
the strength of the market.
Results of Operations
Net Income (Loss) Net Income (Loss)
for the Three Months for the Three Months
Ended March 31, 1997 Ended March 31, 1996
-------------------- --------------------
NEBC $ (63,827) $ (46,294)
St. Andrews (36,957) (109,693)
St. Andrews Repair and Legal
Costs, Net (28,576) (1,259,109)
Shadeland 8,734 26,204
-------- ----------
$(120,626) $(1,388,892)
Partnership Expense (166,113) (113,119)
-------- ----------
$(286,739) $(1,502,011)
======== ==========
Three Months Ended March 31, 1997 ("Current Period")
as compared to March 31, 1996 ("Comparable Period")
The Partnership incurred a net loss of $286,739 for the three months ended March
31, 1997 ("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 $1,259,109 during the comparable
period. Rental revenue increased $46,793 to $1,189,089 for the current period as
compared to $1,142,296 for the three month period ended March 31, 1996 ("the
comparable period"). The increased rental revenue was primarily due to higher
occupancy and rental rates at St. Andrews during 1997, offset in part by lower
expense reimbursements at Shadeland caused by a timing difference in billing the
anchor tenants. Property operating expenses decreased $5,837 to $505,370 for the
<PAGE>
current period from $511,207 for the comparable period. The decreased operating
expenses were due to lower grounds and landscaping costs at Shadeland in 1997.
Rental revenue at NEBC decreased $12,193 to $407,400 for the current period as
compared to $419,593 for the comparable period. The decrease in rental revenue
is due to a lease termination fee from the departure of one tenant prior to
lease expiration which was received in the first quarter of 1996. The occupancy
at NEBC increased to 93% as of March 31, 1997 as compared to 91% as of March 31,
1996. The occupancy for NEBC's office and service center space at March 31, 1997
was 90% and 100% respectively, as compared to 87% and 100% respectively, at
March 31, 1996. The increased occupancy in office space was due primarily to the
Express Med expansion into Building 1 during the fourth quarter of 1996. This
tenant previously occupied approximately 4,300 square feet in Building 3. Under
the terms of the new lease, this tenant initially occupied 14,600 square feet in
Building 1 with a commitment to expand into an additional 6,300 square feet in
the second quarter of 1997 after the current tenant's lease expires. Express
Med's expansion was offset in part by three tenants vacating their premises in
Building 1 and a tenant downsizing their space in Building 5 during 1996. The
average net rental rate at March 31, 1997 decreased slightly to $8.70 per square
foot for office space, excluding free-rent allowances, and to $6.76 per square
foot for service center space as compared to $8.71 and $6.83, respectively, at
March 31, 1996. The decrease in the office space average rental rates is due to
new tenant leases at lower rental rates as a result of lower tenant improvement
allowances. The decrease in service center average rental rates is due primarily
to a tenant renewal at a lower rental rate. Operating expenses at NEBC decreased
$5,301 to $188,318 for the current period as compared to $193,619 for the
comparable period.
Rental revenue at St. Andrews increased $85,362 to $513,493 for the current
period as compared to $428,131 for the comparable period. The increase in rental
revenue was due to the increased occupancy and rental rates for the current
period. The average occupancy at St. Andrews was 97% and 89% for the current and
comparable periods, respectively. The average monthly rental rate during the
current period increased to $638 per unit as compared to $593 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 forty-three at March 31, 1997 from eleven at March 31, 1996.
Operating expenses at St. Andrews increased $8,609 to $229,614 for the current
period as compared to $221,005 for the comparable period. The increase in
operating expenses was primarily due to an increase in payroll, marketing and
leasing expenses and turnover costs offset in part by lower professional fees.
Payroll costs were higher due to greater bonuses related to an improved property
performance in the last quarter of 1996 as compared to last quarter of 1995.
Marketing and leasing expenses were higher due to a greater number of referral
fees paid for corporate units in 1997. Turnover costs were higher due to more
carpet cleaning and apartment cleaning from an increase in units that were
turned over in the current period. Professional fees declined due to fewer
tenant evictions in the current period resulting in a lower level of legal
expenses.
<PAGE>
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 $1,698,000 and $62,000 of St. Andrews repair and
legal costs, respectively, which were offset in part by insurance recoveries
received of $500,000. 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 decreased $26,376 to $268,196 for the current period
as compared to $294,572 for the comparable period. The decrease was primarily
due to lower expense reimbursements in the current period caused by a timing
difference in billing the anchor tenants. The average rental rate was $10.36 per
square foot at March 31, 1997 and $10.55 at March 31, 1996. Occupancy at
Shadeland was 88% for the current period as compared to 86% for the comparable
period. Operating expenses at Shadeland decreased $9,145 to $87,438 for the
current period as compared to $96,583 for the comparable period. The decrease
was primarily due to lower grounds and landscaping and maintenance costs offset
in part by greater real estate taxes and legal costs. 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. Real estate taxes increased due to a tax
assessment in excess of the amount anticipated and accrued for 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 $52,994 to $166,113 for the
current period as compared to $113,119 was primarily due to the interest expense
related to 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 $680 to $32,601 for the
current period as compared to $33,281 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 $52,495 to
$593,216 for the current period as compared to $540,721 for the comparable
period. The increase was due to interest incurred on the St. Andrews
construction loan which was initially funded in February, 1996.
Depreciation and amortization expense increased by $15,131 to $320,998 for the
current period as compared to $305,867 for the comparable period primarily due
to the depreciation of tenant improvement additions at NEBC in 1996.
<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: __________ _______________________________
Joseph A. Wesolowski
Vice President and Chief
Accounting Officer
<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
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<PERIOD-END> MAR-31-1997
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