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 September 30, 1998
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
FB0101
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 -- September 30, 1998 and December 31, 1997
Statements of Operations -- For the three months ended
September 30, 1998 and September 30, 1997 and for the nine
months ended September 30, 1998 and September 30, 1997
Statements of Cash Flows -- For the nine months ended
September 30, 1998 and September 30, 1997
Notes to Financial Statements -- September 30, 1998
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 filed a report on Form 8-K during the three
months ended September 30, 1998, dated September 18, 1998.
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)
September 30, 1998 December 31, 1997
------------------ -----------------
Assets
Real Estate Investments:
Income Producing Properties Held for Sale - Note B $16,083,350 $ 0
Income Producing Properties - Note B 0 27,159,596
Cash and Cash Equivalents (including temporary
investments at September 30, 1998 and December 31,
1997 of $3,732,953 and $509,955, respectively) - Note C 4,479,701 1,070,018
Restricted Cash Escrow - Note E 57,184 89,069
Accounts Receivable, Net 174,372 218,744
St. Andrews Recovery Receivables - Note J 0 145,000
Other Assets 357,087 485,604
---------- ----------
Total Assets $21,151,694 $29,168,031
========== ==========
Liabilities
Mortgages Payable - Note E $12,785,184 $21,402,270
Accounts Payable and Other Liabilities 573,273 769,689
St. Andrews Construction Loan - Note J 0 1,037,000
Due to General Partners and Affiliates - Note D 2,447,493 2,542,065
Cash Flow Protector Loan - Note G 0 4,849,734
---------- ----------
15,805,950 30,600,758
Partners' Equity (Deficit)
General Partners (190,955) (258,740)
Assignor and Assignee Limited Partners,
1,094,283 Units Issued and Outstanding 5,536,699 (1,173,987)
---------- ----------
5,345,744 (1,432,727)
---------- ----------
Total Liabilities and Partners' Equity (Deficit) $21,151,694 $29,168,031
========== ==========
</TABLE>
See accompanying notes to the financial statements.
<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 Nine For the Nine
Months Ended Months Ended Months Ended Months Ended
Sept. 30, 1998 Sept. 30, 1997 Sept. 30, 1998 Sept. 30, 1997
-------------- -------------- -------------- --------------
REVENUE:
Rental $1,274,754 $1,316,966 $3,977,459 $3,824,298
Interest 17,329 11,946 33,898 28,231
--------- --------- --------- ---------
Total Revenue 1,292,083 1,328,912 4,011,357 3,852,529
EXPENSES:
Property Operating - Note D 486,080 500,108 1,483,484 1,502,512
General and Administrative 35,937 35,127 98,221 100,219
Interest - Notes D and E 427,870 563,602 1,409,643 1,732,932
Depreciation and Amortization - Note B 42,051 348,938 442,477 1,007,483
--------- --------- --------- ---------
Total Expenses 991,938 1,447,775 3,433,825 4,343,146
OTHER REVENUE/(EXPENSES):
St. Andrews Repair and Legal Costs
Recoveries (Expenses) - Note J 167,000 (2,272) 163,975 (30,848)
Gain on Sale of Income Producing
Properties 4,336,964 0 4,336,964 0
--------- --------- --------- ---------
4,503,964 (2,272) 4,500,939 (30,848)
--------- --------- --------- ---------
Income (Loss) Before Extraordinary Item 4,804,109 (121,135) 5,078,471 (521,465)
EXTRAORDINARY ITEM:
Gain on Extinguishment of Debt - Note G 0 0 1,700,000 0
--------- --------- --------- ---------
NET INCOME (LOSS) $4,804,109 $ (121,135) $6,778,471 $ (521,465)
========= ========= ========= =========
Net Income (Loss) Allocated to:
General Partners $ 48,041 $ (1,211) $ 67,785 $ (5,215)
Assignor and Assignee Limited Partners 4,756,068 (119,924) 6,710,686 (516,250)
--------- --------- --------- ---------
$4,804,109 $ (121,135) $6,778,471 $ (521,465)
Net Income (Loss) per Unit Before ========= ========= ========= =========
Extraordinary Item -- Note A
(Basic and Diluted) $ 4.35 $ (0.11) $ 4.59 $ (0.47)
========= ========= ========= =========
Income per Unit from Extraordinary Item -- Note G
(Basic and Diluted) $ 0 $ 0 $ 1.54 $ 0
========= ========= ========= =========
Net Income (Loss) per Unit -- Note A
(Basic and Diluted) $ 4.35 $ (0.11) $ 6.13 $ (0.47)
========= ========= ========= =========
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>
USF&G LEGG MASON REALTY PARTNERS LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
For the Nine For the Nine
Months Ended Months Ended
September 30, 1998 September 30, 1997
------------------ ------------------
Operating Activities
Net Income (Loss) $ 6,778,471 $ (521,465)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Gain on sale of income producing property (4,336,964) 0
Gain on extinguishment of debt (1,700,000) 0
Depreciation and amortization 442,477 1,007,483
Change in net assets and liabilities related to
operating activities:
Decrease in restricted cash escrow 31,885 78,968
Increase in due to general partners and affiliates 105,428 194,992
Decrease in accounts payable and other
liabilities (196,416) (357,915)
Decrease (increase) in accounts receivable 44,372 (45,133)
Decrease in St. Andrews recovery receivables 145,000 1,525,000
Decrease (increase) in other assets 2,613 (323,533)
----------- -----------
Net Cash Provided by Operating Activities 1,316,866 1,558,397
----------- -----------
Investing Activities
Proceeds from sale of income producing property 15,245,907 0
Investment in income producing properties (149,270) (448,787)
----------- -----------
Net Cash Provided by (Used in) Investing Activities 15,096,637 (448,787)
----------- -----------
Financing Activities
Mortgage Loan Advances 0 13,500,000
Mortgage Principal Payments (8,617,086) (12,577,137)
St. Andrews Construction Loan Advances 0 215,000
St. Andrews Construction Loan Payments (1,037,000) (1,748,000)
Cash Flow Protector Loan Payment (3,149,734) 0
General Partner Loans Payment (200,000) 0
----------- -----------
Net Cash Used in Financing Activities (13,003,820) (610,137)
----------- -----------
Increase in Cash and Cash Equivalents 3,409,683 499,473
Cash and Cash Equivalents, Beginning of Period 1,070,018 780,727
----------- -----------
Cash and Cash Equivalents, End of Period $ 4,479,701 $ 1,280,200
=========== ===========
</TABLE>
See accompanying notes to the financial statements.
<PAGE>
USF&G/LEGG MASON REALTY PARTNERS LIMITED PARTNERSHIP
Notes to Financial Statements
September 30, 1998
(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 nine months ended September 30, 1998 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998. 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, 1997.
Allocation of Net Income (Loss) from Operations
- -----------------------------------------------
Net income (loss) 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 income (loss) and cash distributions per Unit were
computed based upon net income (loss) 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 income (loss) from operations
to the General Partners is prorated for net income on the basis of 50% to USF&G
Realty Partners, Inc. (the "USF&G General Partner") and 50% to Legg Mason Realty
Partners, Inc. (collectively, the "General Partners") while net (loss) is
allocable on the basis of 80% to the USF&G General Partner and 20% to Legg Mason
Realty Partners, Inc.
<PAGE>
USF&G/LEGG MASON REALTY PARTNERS LIMITED PARTNERSHIP
Notes to Financial Statements (Continued)
September 30, 1998
(Unaudited)
NOTE B - Income Producing Properties Held for Sale and 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 December
31, 1997, and Northeast Business Campus and Shadeland Retail Center, the two
properties owned directly by the Partnership as of September 30, 1998:
September 30, 1998 December 31, 1997
------------------ -----------------
Buildings and improvements $18,392,251 $29,959,857
Land 2,916,995 5,444,913
---------- ----------
21,309,246 35,404,770
Less: Accumulated depreciation (5,225,896) (8,245,174)
---------- ----------
$16,083,350 $27,159,596
========== ==========
As of March 31, 1998, the General Partners determined that it was in the
Partnership's best interest to market the Properties for a possible sale. In
accordance with Statement of Financial Accounting Standards ("SFAS") No. 121,
the remaining properties are recorded as held for sale on the balance sheet at
September 30, 1998. In addition, as required by SFAS No. 121, as of April 1,
1998, the Partnership no longer records depreciation on the Properties as
required by SFAS No. 121.
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:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
For the Three Months Ended For the Nine Months Ended
Sept. 30, 1998 Sept. 30, 1997 Sept. 30, 1998 Sept. 30, 1997
-------------- -------------- -------------- --------------
Charged to Expenses:
Operating Expenses $ 14,646 $ 22,237 $ 57,123 $ 67,955
Interest Expense:
General Partner Loans 3,967 4,251 12,469 12,627
St. Andrews Construction Loan 6,607 31,907 40,934 138,011
Cash Flow Protector Loan 44,010 73,344 188,306 217,640
</TABLE>
<PAGE>
USF&G/LEGG MASON REALTY PARTNERS LIMITED PARTNERSHIP
Notes to Financial Statements (Continued)
September 30, 1998
(Unaudited)
NOTE D - Related Party Transactions (Continued)
Due to General Partners and affiliates consists of the following as of the
dates indicated:
<TABLE>
<CAPTION>
<S> <C> <C>
September 30, 1998 December 31, 1997
------------------ -----------------
General Partner Loans $ 0 $ 200,000
Accrued Interest on General Partner Loans 0 52,923
Accrued Interest on the St. Andrews Construction Loan 1,177 16,600
Operating Expenses 18,000 32,532
--------- ---------
19,177 302,055
--------- ---------
Asset Management Fees 423,990 423,990
Accrued Interest on the Cash Flow Protector Loan 2,004,326 1,816,020
--------- ---------
Amounts Subordinate to the return of Unitholder
contributions 2,428,316 2,240,010
--------- ---------
$2,447,493 $2,542,065
========= =========
</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 were in the form of loans
which accrued interest at the prime rate and were paid from proceeds from the
sale of St. Andrews Apartments at Westwood.
See Note G for a discussion of the Cash Flow Protector Loan from the USF&G
General Partner. The balance of the St. Andrews construction loan, the Cash Flow
Protector Loan (net of a discount of $1.7 million), and the $200,000 in General
Partner loans (described above) were paid from the sales proceeds of St.
Andrews Apartments at Westwood.
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)
September 30, 1998
(Unaudited)
NOTE E - Mortgages Payable
Mortgages payable consists of the following as of the dates indicated:
<TABLE>
<CAPTION>
<S> <C> <C>
September 30, 1998 December 31, 1997
------------------ -----------------
Mortgage loan, secured by Northeast Business Campus,
due August 15, 1999, interest at 8.00% $ 7,885,103 $ 7,948,148
Mortgage loan, secured by St. Andrews at Westwood,
due October 2, 2000, floating rate, interest at 7.00%
at September 18, 1998, date of loan payoff 0 8,500,000
Mortgage loan, secured by a portion of Shadeland Retail
Center, due May 2002, interest at 7.60% 4,900,081 4,954,122
---------- ----------
$12,785,184 $21,402,270
========== ==========
</TABLE>
The mortgage loans are non-recourse obligations except under certain defined
circumstances. Interest expense of $1,167,934 and $1,364,654 was incurred on
these mortgages for the nine months ended September 30, 1998, and 1997,
respectively. Interest payments of $1,157,939 and $1,440,889 were made for the
nine months ended September 30, 1998, and 1997, respectively.
The St. Andrews mortgage loan was paid as a result of the sale of the property
on September 18, 1998. The Shadeland Retail Center loan was paid as a result
of the sale of the property on November 10, 1998.
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 September 30, 1998, the
lender held a total of $57,184 of restricted cash escrow which included $8,924
in reserves and $48,260 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 also held $574,303 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 at September 30, 1998. See Note D - Related Party
Transactions and Note I - Commitments and Contingencies.
NOTE F - Distributions to Partners
The Partnership Agreement provides for cash distributions to the partners
allocated 99% to Unitholders and 1% to the General Partners.
<PAGE>
USF&G/LEGG MASON REALTY PARTNERS LIMITED PARTNERSHIP
Notes to Financial Statements (Continued)
September 30, 1998
(Unaudited)
NOTE F - Distributions to Partners (Continued)
As of September 30, 1998, 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. The General Partners have stated a
goal of liquidating the Partnership and making a final distribution to
investors in the current calendar year.
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 September 30, 1998, the USF&G General Partner had funded
$4,849,734 pursuant to the Cash Flow Protector Loan. The USF&G General Partner's
commitment to lend amounts pursuant to the Cash Flow Protector Loan expired on
July 13, 1993. The last distribution to Unitholders was made November 12, 1993.
The Cash Flow Protector Loan accrued 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 Cash Flow Protector Loan
was repaid on September 24, 1998 from excess proceeds from the sale of St.
Andrews. The related aggregate accrued interest of $2,004,326 as of September
30, 1998 is subordinate to the return of Unitholder capital contributions as
discussed in Note D.
The USF&G General Partner agreed to discount the outstanding principal balance
of the Cash Flow Protector Loan by $1,700,000 to $3,149,734 as of June 30,
1998. The reduction in the principal amount of the Cash Flow Protector Loan
originally due to be paid by the Partnership to the USF&G General Partner will
increase the amount available for distribution to the Unitholders. The discount
will be allocated pro-rata to all Unitholders based on their respective
ownership percentages at the time of distribution.
The Cash Flow Protector Loan discount was recorded as an extraordinary gain on
the Statement of Operations during the second quarter of 1998, in accordance
with Statement of Financial Accounting Standards No. 15. This discount was not
taken into account in determining the 1998 Right of Presentment purchase
price.
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
<PAGE>
USF&G/LEGG MASON REALTY PARTNERS LIMITED PARTNERSHIP
Notes to Financial Statements (Continued)
September 30, 1998
(Unaudited)
NOTE H - Right of Presentment (Continued)
number of Units repurchased shall not exceed 50% of the Units outstanding. As
of September 30, 1998, the General Partners have repurchased 188,219 Units
under the Right of Presentment Program.
On June 30, 1998, the USF&G General Partner purchased all of the 2,445 Units
presented under the 1998 Right of Presentment Program. The Units were purchased
at a price per unit of $5.36 from all Unitholders that presented.
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 substantially complete by the end of
1996. The Partnership recognized cumulative costs of $4,568,000 and $712,000
related to assessing and repairing the construction problems and pursuing legal
remedies, respectively, which were offset by cumulative settlement and
insurance recoveries of $2,910,500 through the four year period ended December
31, 1997. During the nine months ended September 30, 1998, the Partnership
received settlement and insurance recoveries of $170,000 and incurred $6,025 of
legal and repair costs and costs related to St. Andrews. All outstanding
claims have been resolved, hence no further recoveries are expected.
The Partnership executed an agreement for a construction loan with the USF&G
General Partner during the third quarter of 1995 which permitted the Partnership
to borrow up to $3,500,000 to complete the necessary repairs at St. Andrews.
Under its original terms, the loan matured on September 1, 1997. The USF&G
General Partner extended the construction loan on November 7, 1997, effective
as of September 1, 1997, until October 2, 2000. The construction loan was
extended to coincide with the maturity of the new St. Andrews mortgage loan.
The terms required monthly interest payments on advanced funds at 9.0% per
annum and also provided for early repayment from additional recoveries from the
Partnership's lawsuit, net operating income after reserves, or sales or
refinancing proceeds. As of September 30, 1998, the outstanding balance of the
construction loan had been repaid from the excess proceeds from the sale of
St. Andrews. Interest expense of $40,934 and $138,011 was incurred and interest
payments totaling $56,357 and $180,559 were made on this loan for the nine
months ended September 30, 1998, and 1997, respectively (see Note D).
NOTE K - Subsequent Events
As discussed in Note E, the sale of the Shadeland Retail Center was consummated
on November 10, 1998 for a contract price of approximately $11.750 million. Net
proceeds from the sale, after satisfaction of outstanding mortgage obligations,
a prepayment penalty for early retirement of the mortgage, pro-ration of
taxes and rents, closing expenses, and other customary adjustments, were
approximately $6.3 million. The Partnership will recognize a gain in the fourth
quarter of 1998 as a result of this sale.
<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. The sale
of the St. Andrews property occurred on September 18, 1998, and the sale of
Shadeland occurred on November 10, 1998. The General Partners have executed a
sale contract for NEBC for an amount in excess of its current appraised value
with a closing scheduled in December 1998. Although the contract purchaser's
deposit of $500,000 is subject to forfeiture in the event the transaction is
not consummated there can be no assurance that the sale will in fact be
consummated.
Liquidity and Capital Resources
- -------------------------------
The cash and cash equivalents position of the Partnership at September 30, 1998
increased $3,409,683 from December 31, 1997. The increase was primarily due
to the sale of St. Andrews. Proceeds of approximately $15 million were used to
pay the outstanding mortgage obligation on St. Andrews, the Cash Flow
Protector Loan (net of a discount of $1.7 million), the balance of the St.
Andrews construction loan and $200,000 of General Partner loans and the accrued
interest on the General Partner loans. 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 September 30, 1998,
the lender held $57,184 in reserves and escrows and the Partnership held
$574,303 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>
Occupancy at Shadeland was 89% as of September 30, 1998. The average occupancy
of Shadeland's main competitors in the retail market was 92% as of September
30, 1998.
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 substantially complete by the end of 1996. The
Partnership recognized cumulative costs of $4,568,000 and $712,000 related to
assessing and repairing the construction problems and pursuing legal remedies,
respectively, which were offset by cumulative settlement and insurance
recoveries of $2,910,500 through the four year period ended December 31, 1997.
During the nine months ended September 30, 1998, the Partnership incurred
$6,025 of St. Andrews legal and repair costs related to St. Andrews. During the
third quarter of 1998, the Partnership received $170,000 in insurance
settlements, which is in addition to the $2,910,500 above. All outstanding
claims have been resolved, hence no further recoveries are expected.
The Partnership executed an agreement for a construction loan with the USF&G
General Partner during the third quarter of 1995 which permitted the Partnership
to borrow up to $3,500,000 to complete the necessary repairs at St. Andrews.
Under its original terms, the loan matured on September 1, 1997. The USF&G
General Partner extended the construction loan on November 7, 1997, effective
as of September 1, 1997, until October 2, 2000. The construction loan was
extended to coincide with the maturity of the new St. Andrews mortgage loan.
The terms continued to require monthly interest payments on advanced funds at
9.0% per annum and also provided for early repayment from additional settlements
from the Partnership's lawsuit, net operating income after reserves, or sales
or refinancing proceeds. As of September 30, 1998, the outstanding balance of
the construction loan has been repaid and no further advances on the loan are
expected. The Partnership made repayments of $1,037,000 from operating cash
flow, settlement recoveries and sale proceeds.
The Partnership began marketing St. Andrews for sale in May of 1998. During
the marketing process for St. Andrews, the Partnership received a number of bids
from interested purchasers. The General Partners reviewed each of the bids and
in July, 1998, the Partnership executed a sales contract for St. Andrews.
The General Partner's determination to sell St. Andrews was based on, among
other things, their review of the operating performance of St. Andrews and the
recent increase in sales prices for similar apartment projects.
The sale of St. Andrews was consummated on September 18, 1998 for a contract
price of $15.5 million. Net proceeds of approximately $15 million were used to
repay the outstanding mortgage obligation of $8.5 million, the Cash Flow
Protector Loan (net of a discount of $1.7 million) of $3.1 million, the balance
of the St. Andrews construction loan of $362,000 and the General Partner loans
and accrued interest of $265,392. The Partnership recognized a gain for federal
income tax purposes on the sale of St. Andrews in the amount of $4,336,964.
The Partnership began marketing NEBC and Shadeland for sale in June and July
of 1998, respectively. The General Partners reviewed each of the bids and
executed sales contracts for both properties for amounts in excess of their
current appraised values. In determining to offer NEBC and Shadeland for sale,
the General Partners considered, among other things, the Property's operating
performance, the terms of the participating debt encumbering the Property,
recent sales prices for similar projects in the market and the future prospects
of the Properties.
<PAGE>
The sale of Shadeland was consummated on November 10, 1998 for a contract
price of approximately $11.750 million. Net proceeds from the sale, after
satisfaction of outstanding mortgage obligations, a prepayment penalty for
early retirement of the mortgage, pro-ration of taxes and rents, closing
expenses, and other customary adjustments, were approximately $6.3 million.
The Partnership will recognize a gain in the fourth quarter of 1998 as a
result of this sale.
The closing for NEBC is scheduled in December 1998. Although the contract
purchaser's deposit of $500,000 is subject to forfeiture in the event the
transaction is not consummated there can be no assurance that the sale will
in fact be consummated.
There can be no assurance that the Partnership will complete the sale of NEBC
by the end of 1998. The General Partners plan to distribute the net proceeds
from Property sales in accordance with Section 4.4 of the Partnership Agreement
upon completion of the sale process.
The USF&G General Partner agreed to discount the outstanding principal balance
of the Cash Flow Protector Loan by $1,700,000 to $3,149,734 as of June 30,
1998. The Cash Flow Protector Loan was repaid from excess proceeds from the sale
of St. Andrews. The reduction in the principal amount of the Cash Flow
Protector Loan originally due to be paid by the Partnership to the USF&G
General Partner will increase the amount available for distribution to the
Unitholders. The discount will be allocated pro-rata to all Unitholders based
on their respective ownership percentages at the time of distribution. This
Cash Flow Protector Loan discount was not taken into account in determining the
1998 Right of Presentment purchase price.
Under section 4.4 of the Partnership Agreement and based on the anticipated net
proceeds and liabilities, property sales proceeds will be applied as follows:
* first applied to repay the mortgages secured by the Property;
* second to fund reserves for future Partnership expenses;
* third to repay any debts owned to the Partners or Affiliates,
including the Cash Flow Protector Loan;
* the remaining proceeds will be distributed to the Unitholders and the
General Partners.
Accrued interest on the Cash Flow Protector Loan and certain accrued asset
management fees payable to the USF&G General Partner and its affiliate are
subordinated to the return of Unitholder contributions under Section 4.4 of
the Partnership Agreement.
<PAGE>
Results of Operations
- ---------------------
Net Income (Loss) Net Income (Loss)
for the Nine Months for the Nine Months
Ended Sept. 30, 1998 Ended Sept. 30, 1997
-------------------- --------------------
NEBC $ 227,530 $ (99,447)
St. Andrews 357,329 (54,706)
St. Andrews Repair and Legal Costs 163,975 (30,848)
Shadeland 300,725 107,670
--------- --------
1,049,559 (77,331)
Partnership Expense (308,052) (444,134)
Gain on Extinguishment of Debt 1,700,000 0
Gain on Sale of Income Producing Property 4,336,964 0
--------- --------
$6,778,471 $(521,465)
========= ========
Nine Months Ended September 30, 1998 ("Current Period")
-------------------------------------------------------
as compared to September 30, 1997 ("Comparable Period")
-------------------------------------------------------
The Partnership had net income of $6,778,471 for the nine months ended
September 30, 1998 ("the current period") as compared to a net loss of
$521,465 for the nine months ended September 30, 1997 ("the comparable period").
The increase in net income was due primarily to the gain on sale of St. Andrews
on September 18, 1998, gain on extinguishment of debt, improved operating
performance at each Property in 1998 and the Partnership no longer recording
depreciation on the Properties as of April 1, 1998 due to the Properties being
held for sale. As a result, depreciation decreased by $221,933 at NEBC,
$224,597 at St. Andrews and $148,626 at Shadeland in the current period. Rental
revenue increased $153,161 to $3,977,459 for the current period as compared
to $3,824,298 for the comparable period. The increased rental revenue was
primarily due to higher occupancy and greater expense reimbursements at NEBC
during 1998. Property operating expenses decreased $19,028 to $1,483,484 for
the current period from $1,502,512 for the comparable period. The decreased
operating expenses were due to lower operating expenses at Shadeland and St.
Andrews in 1998, offset in part by increased operating expenses at NEBC.
Rental revenue at NEBC increased $125,692 to $1,497,625 for the current period
as compared to $1,371,933 for the comparable period. The increase in rental
revenue is due to an increase in rental rates and greater expense reimbursements
in 1998. The occupancy at NEBC decreased to 97% as of September 30, 1998 as
compared to 99% as of September 30, 1997. The occupancy for NEBC's office and
service center space at September 30, 1998 was 96% and 100% respectively, as
compared to 99% and 100% respectively, at September 30, 1997. The decreased
occupancy in office space was due to one tenant vacating in Building 5. This
space has been leased to the anchor tenant, CIGNA, which will raise the
occupancy to 100% by year end. The increase in expense reimbursements is due
primarily to higher expenses and the issuance of expense reimbursement credits
during the comparable period. The average net rental rate at September 30,
1998 decreased to $7.21 per square foot for office space, and increased to
$8.18 per square foot for service center space as compared to $7.98, excluding
free-rent allowances, and $7.07, respectively, at September 30, 1997. 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 primarily to higher
rental rates of tenants in Building 3 in the current period.
<PAGE>
Operating expenses at NEBC increased $22,544 to $622,167 for the current
period as compared to $599,623 for the comparable period. The increase was
primarily due to higher third-party management fees and cleaning expenses
offset in part by lower utility costs. Third-party management fees were higher
due to increased rental collections and a 1997 billing adjustment in 1998.
Utilities were lower due to a decrease in gas usage in the current period.
Rental revenue at St. Andrews decreased $11,198 to $1,575,266 for the current
period as compared to $1,586,464 for the comparable period. The decrease in
rental revenue was due primarily to the sale of St. Andrews on September 18,
1998. 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 $716 per unit as compared to $656 during the comparable period.
The increase was due to the strength of the rental market which resulted in a
decline in rental concessions offered to prospective tenants in the current
period. The number of corporate units decreased to 52 at September 18, 1998
from 61 at September 30, 1997. Operating expenses at St. Andrews decreased
$23,866 to $653,415 for the current period as compared to $677,282 for the
comparable period.
The Partnership incurred repair costs in 1997 that related to engineering fees
necessary to assess additional repairs during the warranty period related to
the original construction contract. Additionally, the Partnership incurred legal
costs related to pursuing legal remedies against responsible and potentially
responsible parties. The Partnership incurred $19,170 and $11,678 of St.
Andrews repair and legal costs, respectively, during the comparable
period. In 1998, the Partnership incurred $6,025 of St. Andrews legal and
repair costs related to St. Andrews. Insurance recoveries of $170,000 were
netted against these costs in 1998.
Rental revenue at Shadeland increased $38,667 to $904,568 for the current
period as compared to $865,901 for the comparable period. The increase was
primarily due to increased rental rates in the current period. The average
rental rate was $11.18 per square foot at September 30, 1998 and $10.73 per
square foot at September 30, 1997. The increased average rental rate is due
primarily to scheduled rent escalations in the existing leases. Occupancy at
Shadeland increased to 89% as of September 30, 1998 as compared to 88% as of
September 30, 1997. The increase in occupancy was due to one new tenant move-in
since the second quarter of 1998. Operating expenses at Shadeland decreased
$17,705 to $207,902 for the current period as compared to $225,607 for the
comparable period. The decrease was primarily due to lower real estate taxes,
grounds and landscaping costs and legal costs offset in part by higher
third-party management fees. Real estate taxes decreased due to a tax
assessment that was lower than the amount anticipated and accrued for in the
comparable period. Grounds and landscaping costs decreased due to lower snow
removal costs associated with the mild winter in 1998. Legal costs decreased
due to a higher number of prospective leases in the comparable period.
Third-party management fees increased due to an increase in the management
fee rate from 3.5% to 4% of gross receipts, and higher rental collections,
resulting from increased occupancy and rental rates.
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 decrease in net Partnership expense of $136,082 to
$308,052 for the current period as compared to $444,134 was primarily due to
lower interest expense. The decrease in interest expense was related to lower
outstanding principal balances on the St. Andrews construction loan and the
Cash Flow Protector Loan in the current period.
<PAGE>
Total general and administrative expenses decreased by $1,998 to $98,221 for
the current period as compared to $100,219 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 decreased $323,289 to
$1,409,643 for the current period as compared to $1,732,932 for the comparable
period. The decrease in interest expense was primarily due to refinancing the
St. Andrews mortgage loan at a lower floating rate than the prior fixed rate
mortgage loan and lower outstanding principal balances on the St. Andrews
construction loan and Cash Flow Protector Loan in the current period.
Depreciation and amortization expense decreased by $565,006 to $442,477 for the
current period as compared to $1,007,483 for the comparable period primarily
due to the Partnership no longer recording depreciation on the Properties as of
April 1, 1998, since the Properties are recorded as held for sale on the
balance sheet.
<PAGE>
Results of Operations
- ---------------------
Net Income (Loss) Net Income (Loss)
for the Three Months for the Three Months
Ended Sept. 30, 1998 Ended Sept. 30, 1997
-------------------- --------------------
NEBC $ 113,576 $ (16,790)
St. Andrews 150,535 (5,626)
St. Andrews Repair and Legal Costs 167,000 (2,272)
Shadeland 109,889 38,130
--------- --------
541,000 13,442
Partnership Expense (73,855) (134,577)
Gain on Sale of Income Producing Property 4,336,964 0
--------- --------
$4,804,109 $(121,135)
========= ========
Three Months Ended September 30, 1998 ("Current Period")
--------------------------------------------------------
as compared to September 30, 1997 ("Comparable Period")
-------------------------------------------------------
The Partnership had net income of $4,804,109 for the three months ended
September 30, 1998 ("the current period") as compared to a net loss of $121,135
for the three months ended September 30, 1997 ("the comparable period"). The
increase in net income was due primarily to the gain on sale of St. Andrews,
improved operating performance at each Property in 1998, and the Partnership
no longer recording depreciation on the Properties as of April 1, 1998 due to
the Properties being held for sale. As a result, depreciation decreased by
$117,845 at NEBC, $114,380 at St. Andrews and $80,773 at Shadeland in the
current period. Rental revenue decreased $42,212 to $1,274,754 for the current
period as compared to $1,316,966 for the comparable period. The decreased rental
revenue was primarily due to a partial month's revenue at St. Andrews due to
the sale on September 18, 1998. Property operating expenses decreased $14,028
to $486,080 for the current period from $500,108 for the comparable period.
QThe decreased operating expenses were due to lower operating expenses at St.
Andrews because of the sale.
Rental revenue at NEBC increased $11,855 to $504,780 for the current period
as compared to $492,925 for the comparable period. The increase in rental
revenue is due to an increase in rental rates and greater expense reimbursements
in 1998. The occupancy at NEBC decreased to 97% as of September 30, 1998 as
compared to 99% as of September 30, 1997. The occupancy for NEBC's office and
service center space at September 30, 1998 was 96% and 100% respectively, as
compared to 99% and 100% respectively, at September 30, 1997. The decreased
occupancy in office space was due to the move-out of a tenant in Building 5.
The increase in expense reimbursements is due primarily to greater expenses.
The average net rental rate at September 30, 1998 increased to $8.18 per square
foot for office space, and increased to $7.21 per square foot for service
center space as compared to $7.98, excluding free-rent allowances, and $7.07,
respectively, at September 30, 1997. The increase in the office and service
center space average rental rates is due to higher rental rates for new leases.
Operating expenses at NEBC minimally increased $363 to $213,433 for the current
period as compared to $213,070 for the comparable period.
Rental revenue at St. Andrews decreased $56,256 to $481,310 for the current
period as compared to $537,566 for the comparable period. The decrease in rental
revenue was primarily due to the mid-month sale. Operating expenses at St.
Andrews decreased $24,147 to $197,412 for the current period as compared to
$221,559 for the comparable period. The decrease in operating expenses was
primarily due to lower grounds and landscaping, turnover, and corporate unit
expenses.
<PAGE>
The Partnership incurred legal costs at St. Andrews related to pursuing legal
remedies against responsible and potentially responsible parties. During the
current period, the Partnership incurred $3,000 of St. Andrews legal and repair
costs compared to $2,272 during the comparable period. Insurance recoveries
of $170,000 were netted against these costs during the current period.
Rental revenue at Shadeland increased $2,190 to $288,665 for the current
period as compared to $286,475 for the comparable period. The increase was
due to increased occupancy and rental rates offset in part by lower expense
reimbursements in the current period. The average rental rate was $11.18 per
square foot at September 30, 1998 and $10.73 per square foot at September 30,
1997. Occupancy at Shadeland increased to 89% as of September 30, 1998 as
compared to 88% as of September 30, 1997. The decrease in expense reimbursements
was due to a timing difference in the collection of property taxes from the
anchor tenants. Operating expenses increased $9,756 to $75,235 for the
current period as compared to $65,479 for the comparable period primarily due
to grounds and landscaping expenses.
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 decrease in Partnership expense of $60,723 to
$73,854 for the current period as compared to $134,577 was primarily due to
lower interest expense. The decrease in interest expense was related to lower
outstanding principal balances on the St. Andrews construction loan and Cash
Flow Protector Loan in the current period.
Total general and administrative expenses increased by $810 to $35,937 for the
current period as compared to $35,127 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 decreased $135,732 to
$427,870 for the current period as compared to $563,602 for the comparable
period. The decrease in interest expense was primarily due to refinancing and
the payoff of the St. Andrews mortgage loan, lower outstanding principal
balances and subsequent payoff of the St. Andrews construction loan, the
General Partner loans and the Cash Flow Protector Loan in the current period.
Depreciation and amortization expense decreased by $306,887 to $42,051 for the
current period as compared to $348,938 for the comparable period primarily due
to the Partnership no longer recording depreciation on the Properties as of
April 1, 1998, since the Properties are recorded as held for sale on the
balance sheet.
<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
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 4,479,701
<SECURITIES> 0
<RECEIVABLES> 174,372
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 21,309,246
<DEPRECIATION> 5,225,896
<TOTAL-ASSETS> 21,151,694
<CURRENT-LIABILITIES> 0
<BONDS> 12,785,184
0
0
<COMMON> 5,345,744
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 21,151,694
<SALES> 0
<TOTAL-REVENUES> 8,512,296
<CGS> 0
<TOTAL-COSTS> 2,024,182
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,409,643
<INCOME-PRETAX> 6,778,471
<INCOME-TAX> 0
<INCOME-CONTINUING> 6,778,471
<DISCONTINUED> 0
<EXTRAORDINARY> 1,700,000
<CHANGES> 0
<NET-INCOME> 6,778,471
<EPS-PRIMARY> 6.13
<EPS-DILUTED> 6.13
</TABLE>
