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, 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 -- June 30, 1998 and December 31, 1997
Statements of Operations -- For the three months ended June 30, 1998
and June 30, 1997 and for the six months ended June 30, 1998
and June 30, 1997
Statements of Cash Flows -- For the six months ended June 30, 1998
and June 30, 1997
Notes to Financial Statements -- June 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 did not file any reports on Form 8-K during the
three months ended June 30, 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)
June 30, 1998 December 31, 1997
------------- -----------------
Assets
Real Estate Investments:
Income Producing Properties Held for Sale - Note B $26,928,387 $ 0
Income Producing Properties - Note B 0 27,159,596
Cash and Cash Equivalents (including temporary
investments at June 30, 1998 and December 31, 1997
of $467,324 and $509,955, respectively) - Note C 1,132,582 1,070,018
Restricted Cash Escrow - Note E 14,874 89,069
Accounts Receivable, Net 177,585 218,744
St. Andrews Recovery Receivables - Note J 0 145,000
Other Assets 467,919 485,604
---------- ----------
Total Assets $28,721,347 $29,168,031
========== ==========
Liabilities
Mortgages Payable - Note E $21,325,008 $21,402,270
Accounts Payable and Other Liabilities 689,199 769,689
St. Andrews Construction Loan - Note J 362,000 1,037,000
Due to General Partners and Affiliates - Note D 2,653,771 2,542,065
Cash Flow Protector Loan - Note G 3,149,734 4,849,734
---------- ----------
$28,179,712 $30,600,758
Partners' Equity (Deficit)
General Partners $ (238,996) $ (258,740)
Assignor and Assignee Limited Partners,
1,094,283 Units Issued and Outstanding 780,631 (1,173,987)
---------- ----------
541,635 (1,432,727)
---------- ----------
Total Liabilities and Partners' Equity (Deficit) $28,721,347 $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 Six For the Six
Months Ended Months Ended Months Ended Months End
June 30, 1998 June 30, 1997 June 30, 1998 June, 30, 1997
------------- ------------- ------------- --------------
REVENUE:
Rental $ 1,376,671 $ 1,318,243 $ 2,702,705 $ 2,507,332
Interest 7,824 11,352 16,569 16,285
---------- ---------- ---------- ----------
Total Revenue $ 1,384,495 $ 1,329,595 $ 2,719,274 $ 2,523,617
EXPENSES:
Property Operating - Note D 509,648 497,034 997,404 1,002,404
St. Andrews Repair and Legal Costs -
Note J 621 0 3,025 28,576
General and Administrative 31,521 32,491 62,285 65,092
Interest - Notes D and E 482,154 576,114 981,773 1,169,330
Depreciation and Amortization - Note B 42,720 337,547 400,425 658,545
---------- ---------- ---------- ----------
Total Expenses 1,066,664 1,443,186 2,444,912 2,923,947
---------- ---------- ---------- ----------
Income (Loss) Before Extraordinary
Item 317,831 (113,591) 274,362 (400,330)
Extraordinary Item:
Gain on Extinguishment of Debt -
Note G 1,700,000 0 1,700,000 0
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ 2,017,831 $ (113,591) $ 1,974,362 $ (400,330)
========== ========== ========== ==========
Net Income (Loss) Allocated to:
General Partners $ 20,178 $ (1,136) $ 19,744 $ (4,003)
Assignor and Assignee Limited
Partners 1,997,653 (112,455) 1,954,618 (396,327)
---------- ---------- ---------- ----------
$ 2,017,831 (113,591) $ 1,974,362 $ (400,330)
========== ========== ========== ==========
Net Income (Loss) per Unit Before
Extraordinary Item -- Note A
(Basic and Diluted) $ 0.29 $ (0.10) $ 0.25 $ (0.36)
========== ========== ========== ===========
Income per Unit from Extraordinary Item
-- Note G (Basic and Diluted) $ 1.54 $ 0 $ 1.54 $ 0
========== ========== ========== ===========
Net Income (Loss) per Unit -- Note A
(Basic and Diluted) $ 1.83 $ (0.10) $ 1.79 $ (0.36)
========== ========== ========== ===========
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 Six For the Six
Months Ended Months Ended
June 30, 1998 June 30, 1997
------------- -------------
Operating Activities
Net Income (Loss) $ 1,974,362 $ (400,330)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Gain on extinguishment of debt (1,700,000) 0
Depreciation and amortization 400,425 658,545
Change in net assets and liabilities related to
operating activities:
Decrease (increase) in restricted cash escrow 74,195 (33,837)
Increase in due to general partners and affiliates 111,706 115,575
Decrease in accounts payable and other
liabilities (80,490) (474,372)
Decrease (increase) in accounts receivable 41,159 (32,884)
Decrease in St. Andrews recovery receivables 145,000 1,350,000
Increase in other assets (66,167) (234,993)
---------- ----------
Net Cash Provided by Operating Activities 900,190 947,704
---------- ----------
Investing Activities
Investment in income producing properties (85,364) (279,017)
---------- ----------
Net Cash Used in Investing Activities (85,364) (279,017)
---------- ----------
Financing Activities
Mortgage Loan Advances 0 5,000,000
Mortgage Principal Payments (77,262) (4,065,948)
St. Andrews Construction Loan Advances 0 215,000
St. Andrews Construction Loan Payments (675,000) (1,248,000)
---------- ----------
Net Cash Used in Financing Activities (752,262) (98,948)
---------- ----------
Increase in Cash and Cash Equivalents 62,564 569,739
Cash and Cash Equivalents, Beginning of Period 1,070,018 780,727
---------- ----------
Cash and Cash Equivalents, End of Period $ 1,132,582 $ 1,350,466
========== ==========
</TABLE>
See accompanying notes to the financial statements.
<PAGE>
USF&G/LEGG MASON REALTY PARTNERS LIMITED PARTNERSHIP
Notes to Financial Statements
June 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 six months ended June 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)
June 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 the dates
indicated:
June 30, 1998 December 31, 1997
------------- -----------------
Buildings and improvements $30,045,221 $29,959,857
Land 5,444,913 5,444,913
--------- ---------
35,490,134 35,404,770
Less: Accumulated depreciation (8,561,747) (8,245,174)
---------- ----------
$26,928,387 $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.
Consequently, the three properties are recorded as held for sale on the balance
sheet at June 30, 1998, in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 121. In addition, the Partnership will no longer record
depreciation on the Properties as of April 1, 1998 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 Six Months Ended
June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997
------------- ------------- ------------- -------------
Charged to Expenses:
Operating Expenses $ 21,144 $ 20,498 $ 42,476 $ 45,718
Interest Expense:
General Partner Loans 4,251 4,251 8,502 8,376
St. Andrews Construction Loan 13,095 44,485 34,327 106,104
Cash Flow Protector Loan 72,547 72,547 144,296 144,296
</TABLE>
<PAGE>
USF&G/LEGG MASON REALTY PARTNERS LIMITED PARTNERSHIP
Notes to Financial Statements (Continued)
June 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>
June 30, 1998 December 31, 1997
------------- -----------------
General Partner Loans $ 200,000 $ 200,000
Accrued Interest on General Partner Loans 61,425 52,923
Accrued Interest on the St. Andrews Construction Loan 3,540 16,600
Operating Expenses 4,500 32,532
--------- ---------
269,465 302,055
Asset Management Fees 423,990 423,990
Accrued Interest on the Cash Flow Protector Loan 1,960,316 1,816,020
--------- ---------
Amounts Subordinate to the return of Unitholder
contributions 2,384,306 2,240,010
--------- ---------
$2,653,771 $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 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)
June 30, 1998
(Unaudited)
NOTE E - Mortgages Payable
Mortgages payable consists of the following as of the dates indicated:
<TABLE>
<CAPTION>
<S> <C> <C>
June 30, 1998 December 31, 1997
------------- -----------------
Mortgage loan, secured by Northeast Business Campus,
due August 15, 1999, interest at 8.00% $ 7,906,507 $ 7,948,148
Mortgage loan, secured by St. Andrews at Westwood,
due October 2, 2000, floating rate, interest at 7.00%
at June 30, 1998 8,500,000 8,500,000
Mortgage loan, secured by a portion of Shadeland Retail
Center, due May 2002, interest at 7.60% 4,918,501 4,954,122
----------- -----------
$21,325,008 $21,402,270
=========== ===========
</TABLE>
The mortgage loans are non-recourse obligations except under certain defined
circumstances. Interest expense of $794,648 and $910,554 was incurred on these
mortgages for the six months ended June 30, 1998, and 1997, respectively.
Interest payments of $803,274 and $933,611 were made for the six months ended
June 30, 1998, and 1997, 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, 1998, the
lender held a total of $14,874 of restricted cash escrow which included $8,823
in reserves and $6,051 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 $504,379 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 June 30, 1998. See Note D - Related Party Transactions
and Note I - Commitments and Contingencies.
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)
June 30, 1998
(Unaudited)
NOTE F - Distributions to Partners (Continued)
As of June 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.
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, 1998, 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 $1,960,316 as of
June 30, 1998 is subordinate to the return of Unitholder capital contributions
as discussed in Note D.
The USF&G General Partner has 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 will be repaid from any excess proceeds
from the sale of the Properties. 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)
June 30, 1998
(Unaudited)
NOTE H - Right of Presentment (Continued)
number of Units repurchased shall not exceed 50% of the Units outstanding. As
of June 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 six months ended June 30, 1998, the Partnership incurred
$3,025 of St. Andrews legal costs and there were no repair costs incurred
related to St. Andrews.
The Partnership continues to assert its claims against the remaining potentially
responsible parties, and accordingly, will incur future legal costs. The
Partnership is continuing to pursue these claims against the remaining
subcontractors and anticipates resolution of all outstanding claims by the end
of 1998. However, 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 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 continue to require monthly interest payments on advanced funds at
9.0% per annum and 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, 1998, the outstanding balance of the
construction loan was $362,000 and no further advances on the loan are
<PAGE>
USF&G/LEGG MASON REALTY PARTNERS LIMITED PARTNERSHIP
Notes to Financial Statements (Continued)
June 30, 1998
(Unaudited)
expected. Interest expense of $34,327 and $106,104 was incurred and interest
payments totaling $47,387 and $135,474 were made on this loan for the six
months ended June 30, 1998, and 1997, 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, 1998
increased $62,564 from December 31, 1997. The increase was primarily due to the
improved operating performance at each Property and the St. Andrews settlements
received during the period offset in part by the principal repayments on the
St. Andrews construction loan. 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 the
Properties; (2) increasing as net rental income and interest income are
received; and (3) decreasing as expenses (including debt service requirements
and construction loan repayments) 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, 1998, the lender held $14,874 in reserves and escrows and the Partnership
held $504,379 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, to
pay down the St. Andrews construction loan and mortgage debt 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 until the Properties are sold. 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 prior to sale.
Occupancy at Shadeland was 91% as of June 30, 1998 and March 31, 1998. The
average occupancy of Shadeland's main competitors in the retail market was 92%
as of June 30, 1998.
At June 30, 1998, occupancy at St. Andrews was 100%. The apartment market in
the area continues to be very strong and occupancies of St. Andrews' main
competitors range from 92% to 100%. Leasing activity at St. Andrews has remained
strong due to the strength of the market and the high number of corporate
leases in place.
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 six months ended June 30, 1998, the Partnership incurred
$3,025 of St. Andrews legal costs and there were no repair costs incurred
related to St. Andrews. The Partnership continues to assert its claims against
the remaining potentially responsible parties, and accordingly, will incur
future legal costs. The Partnership received $145,000 in settlements, which is
included in the $2,910,500 above, through the second quarter of 1998 from
several of the contractors who worked on the St. Andrews project. The
Partnership is continuing to pursue these claims against the remaining
subcontractors and anticipates resolution of all the outstanding claims by the
end of 1998. However, 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 permits 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 continue to require monthly interest payments on advanced funds at
9.0% per annum and also provide for early repayment from additional settlements
from the Partnership's lawsuit, net operating income after reserves, or sales
or refinancing proceeds. As of June 30, 1998, the outstanding balance of the
construction loan was $362,000 and no further advances on the loan are
expected. The Partnership made partial repayments of $675,000 from operating
cash flow and settlement recoveries through the second quarter of 1998. The
Partnership anticipates further principal repayments prior to maturity from
operating cash flow, settlement recoveries and sales proceeds.
<PAGE>
The Partnership began marketing St. Andrews for sale in May of 1998. During the
marketing process for St. Andrews, the Partnership received numerous 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 for
a purchase price significantly above its current appraised value with a closing
scheduled for September, 1998. The General Partner determination to sell St.
Andrews was based, among other things, on their review of the operating
performance of St. Andrews and the recent increase in sales prices for similar
apartment projects. The sales contract allows the contract purchaser to
terminate its obligation to close by giving the Partnership written notice
during a thirty day due diligence period. There can be no assurance that the
contract purchaser will close under the sales contract.
The Partnership began marketing NEBC for sale in June of 1998. The General
Partners currently intend to seek bids from interested purchasers through August
14, 1998. In determining to offer NEBC 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 Property.
The Partnership began marketing Shadeland for sale in July of 1998. The General
Partners currently intend to seek bids from interested purchasers through
August 28, 1998. In determining to seek proposals from prospective purchasers
of Shadeland, the General Partners considered, among other things, the
Property's operating performance, recent sales prices for similar retail
projects in the market, and the likelihood of appreciation or depreciation in
the future.
There can be no assurance that the Partnership will complete the sale of
Properties by the end of 1998, nor can there be any assurance in the event
that the Properties are sold that the actual sales proceeds will equal or
exceed the current appraised values. 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 has 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 will be repaid from any excess
proceeds from the sale of the Properties. 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.
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 Six Months for the Six Months
Ended June 30, 1998 Ended June 30, 1997
------------------- -------------------
NEBC $ 113,954 $ (82,657)
St. Andrews 206,796 (49,080)
St. Andrews Repair and Legal Costs (3,025) (28,576)
Shadeland 190,838 69,540
------------ ----------
$ 508,563 $ (90,773)
Partnership Expense (234,201) (309,557)
Gain on Extinguishment of Debt 1,700,000 0
------------ ----------
$ 1,974,362 $ (400,330)
============ ==========
Six Months Ended June 30, 1998 ("Current Period")
as compared to June 30, 1997 ("Comparable Period")
--------------------------------------------------
The Partnership had net income of $1,974,362 for the six months ended June 30,
1998 ("the current period") as compared to a net loss of $400,330 for the six
months ended June 30, 1997 ("the comparable period"). The increase in net
income was due primarily to the 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. Depreciation decreased by $104,088 at NEBC,
$110,217 at St. Andrews and $67,853 at Shadeland in the current period as a
result of this. Rental revenue increased $195,373 to $2,702,705 for the current
period as compared to $2,507,332 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 $5,000 to $997,404
for the current period from $1,002,404 for the comparable period. The decreased
operating expenses were due to lower operating expenses at Shadeland in 1998,
offset in part by increased operating expenses at NEBC.
Rental revenue at NEBC increased $113,835 to $992,844 for the current period as
compared to $879,009 for the comparable period. The increase in rental
revenue is due to an increase in occupancy and greater expense reimbursements
in 1998. The occupancy at NEBC increased to 98% as of June 30, 1998 as
compared to 96% as of June 30, 1997. The occupancy for NEBC's office and service
center space at June 30, 1998 was 97% and 100% respectively, as compared to
95% and 100% respectively, at June 30, 1997. The increased occupancy in office
space was due to the expansion of an existing tenant in Building 1 offset in
part by the move-out of a tenant in Building 5 during the fourth quarter of
1997. The increase in expense reimbursements is due primarily to greater
occupancy during the current period and the issuance of expense reimbursement
credits during the comparable period. The average net rental rate at June 30,
1998 decreased to $8.43 per square foot for office space, and increased to $7.17
per square foot for service center space as compared to $8.48, excluding
free-rent allowances, and $7.06, respectively, at June 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 $22,180 to $408,734 for the current period
as compared to $386,554 for the comparable period. The increase was primarily
due to higher third-party management fees and maintenance costs 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.
Maintenance costs were higher due primarily to greater roof and plumbing repair
costs in 1998. Utilities were lower due to a decrease in gas usage in the
current period.
Rental revenue at St. Andrews increased $45,060 to $1,093,957 for the current
period as compared to $1,048,897 for the comparable period. The increase in
rental revenue was due primarily to an increase in rental rates in the current
period. The average occupancy at St. Andrews was 98% and 97% for the current
and comparable periods, respectively. The average monthly rental rate during the
current period increased to $713 per unit as compared to $648 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 55 at
June 30, 1998 from 58 at June 30, 1997. Operating expenses at St. Andrews
increased $280 to $456,003 for the current period as compared to $455,723 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 $9,406 of St. Andrews
repair and legal costs, respectively, during the comparable period. In 1998,
the Partnership incurred $3,025 of St. Andrews legal costs and there were no
repair costs incurred related to St. Andrews. No insurance recoveries or
settlement payments were netted against these costs in 1997 or 1998.
Rental revenue at Shadeland increased $36,478 to $615,904 for the current period
as compared to $579,426 for the comparable period. The increase was due to
increased occupancy and rental rates in the current period. The average rental
rate was $11.01 per square foot at June 30, 1998 and $10.54 per square foot
at June 30, 1997. The increased average rental rate is due primarily to
scheduled rent escalations in the existing leases. Occupancy at Shadeland
increased to 91% as of June 30, 1998 as compared to 88% as of June 30, 1997.
The increase in occupancy was due to three new tenant move-ins since the second
quarter of 1997. Operating expenses at Shadeland decreased $27,460 to $132,667
for the current period as compared to $160,127 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 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 Partnership expense of $75,356 to
$234,201 for the current period as compared to $309,557 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 in the
current period.
<PAGE>
Total general and administrative expenses decreased by $2,807 to $62,285 for
the current period as compared to $65,092 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 $187,557 to
$981,773 for the current period as compared to $1,169,330 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 in the current period.
Depreciation and amortization expense decreased by $258,120 to $400,425 for
the current period as compared to $658,545 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.
Results of Operations
Net Income (Loss) Net Income (Loss)
for the Three Months for the Three Months
Ended June 30, 1998 Ended June 30, 1997
-------------------- --------------------
NEBC $ 100,993 $ (18,830)
St. Andrews 186,588 (12,123)
St. Andrews Repair and Legal Costs (621) 0
Shadeland 145,191 60,806
----------- ----------
$ 432,151 $ 29,853
Partnership Expense (114,320) (143,444)
Gain on Extinguishment of Debt 1,700,000 0
----------- ----------
$ 2,017,831 $ (113,591)
=========== ==========
Three Months Ended June 30, 1998 ("Current Period")
as compared to June 30, 1997 ("Comparable Period")
--------------------------------------------------
The Partnership had net income of $2,017,831 for the three months ended June 30,
1998 ("the current period") as compared to a net loss of $113,591 for the
three months ended June 30, 1997 ("the comparable period"). The increase in net
income was due primarily to the 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. Depreciation decreased by $113,517 at NEBC,
$113,493 at St. Andrews and $77,051 at Shadeland in the current period as a
result of this. Rental revenue increased $58,428 to $1,376,671 for the current
period as compared to $1,318,243 for the comparable period. The increased
rental revenue was primarily due to higher occupancy and greater expense
reimbursements at NEBC and higher rental rates at St. Andrews during 1998.
Property operating expenses increased $12,614 to $509,648 for the current period
from $497,034 for the comparable period. The increased operating expenses were
due to higher operating expenses at NEBC in 1998, offset in part by lower
operating expenses at St. Andrews.
<PAGE>
Rental revenue at NEBC increased $26,313 to $497,922 for the current period as
compared to $471,609 for the comparable period. The increase in rental
revenue is due to an increase in occupancy and greater expense reimbursements
in 1998. The occupancy at NEBC increased to 98% as of June 30, 1998 as
compared to 96% as of June 30, 1997. The occupancy for NEBC's office and service
center space at June 30, 1998 was 97% and 100% respectively, as compared to
95% and 100% respectively, at June 30, 1997. The increased occupancy in office
space was due to the expansion of an existing tenant in Building 1 offset in
part by the move-out of a tenant in Building 5 during the fourth quarter of
1997. The increase in expense reimbursements is due primarily to greater
occupancy during the current period. The average net rental rate at June 30,
1998 decreased to $8.43 per square foot for office space, and increased to
$7.17 per square foot for service center space as compared to $8.48, excluding
free-rent allowances, and $7.06, respectively, at June 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 to higher rental rates of tenants in
Building 3 in the current period.
Operating expenses at NEBC increased $21,420 to $219,655 for the current period
as compared to $198,235 for the comparable period. The increase was primarily
due to higher maintenance costs, real estate taxes and third-party management
fees. Maintenance costs were higher due primarily to greater roof and plumbing
repair costs in the current period. Real estate taxes were higher in the current
period due to a tax assessment that was higher than the amount anticipated and
accrued for in the comparable period. Third-party management fees were higher
due to increased rental collections in 1998.
Rental revenue at St. Andrews increased $20,487 to $555,891 for the current
period as compared to $535,404 for the comparable period. The increase in rental
revenue was primarily due to higher rental rates in the current period. The
average occupancy at St. Andrews was 99% and 97% for the current and comparable
periods, respectively. The average monthly rental rate during the current period
increased to $715 per unit as compared to $657 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 55 at June 30, 1998 from
58 at June 30, 1997. Operating expenses at St. Andrews decreased $9,642
to $216,467 for the current period as compared to $226,109 for the comparable
period. The decrease in operating expenses was primarily due to lower
maintenance costs, utility costs and corporate unit expenses offset in party
by higher real estate taxes. Maintenance costs were lower in the current period
due to the power-washing of the vinyl siding in the comparable period. The
manufacturer and engineering consultant recommended periodic power-washing to
maintain the siding's appearance in the Florida climate. Utility costs were
lower due to a water bill that was less than anticipated and accrued for in the
prior period. Corporate unit expenses which may include furnishings, cable and
utilities were lower due to decreased corporate unit rentals in the current
period. Real estate taxes were higher due to a higher anticipated tax assessment
in 1998.
<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 $621 of St. Andrews legal costs and
there were no repair costs incurred related to St. Andrews. The Partnership
incurred no repair and legal costs at St. Andrews during the comparable period.
No insurance recoveries or settlement payments were netted against these
costs in 1997 or 1998.
Rental revenue at Shadeland increased $11,628 to $322,858 for the current
period as compared to $311,230 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 $11.01 per
square foot at June 30, 1998 and $10.54 per square foot at June 30, 1997.
Occupancy at Shadeland increased to 91% as of June 30, 1998 as compared to 88%
as of June 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 $836 to $73,526 for the current period as compared
to $72,690 for 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 decrease in Partnership expense of $29,124 to
$114,320 for the current period as compared to $143,444 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 in the
current period.
Total general and administrative expenses decreased by $970 to $31,521 for the
current period as compared to $32,491 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 $93,960 to
$482,154 for the current period as compared to $576,114 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 in the current period.
Depreciation and amortization expense decreased by $294,827 to $42,720 for the
current period as compared to $337,547 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,132,582
<SECURITIES> 0
<RECEIVABLES> 177,585
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 35,490,134
<DEPRECIATION> 8,561,747
<TOTAL-ASSETS> 28,721,347
<CURRENT-LIABILITIES> 0
<BONDS> 21,325,008
0
0
<COMMON> 541,635
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 28,721,347
<SALES> 0
<TOTAL-REVENUES> 2,719,274
<CGS> 0
<TOTAL-COSTS> 1,463,139
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 981,773
<INCOME-PRETAX> 274,362
<INCOME-TAX> 0
<INCOME-CONTINUING> 274,362
<DISCONTINUED> 0
<EXTRAORDINARY> 1,700,000
<CHANGES> 0
<NET-INCOME> 1,974,362
<EPS-PRIMARY> 1.79
<EPS-DILUTED> 1.79
</TABLE>
