Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 -- March 31, 1998 and December 31, 1997
Statements of Operations -- For the three months ended
March 31, 1998 and March 31, 1997
Statements of Cash Flows -- For the three months ended
March 31, 1998 and March 31, 1997
Notes to Financial Statements -- March 31, 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 March 31, 1998.
SIGNATURES
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
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USF&G/LEGG MASON REALTY PARTNERS LIMITED PARTNERSHIP
BALANCE SHEETS
(Unaudited)
<S> <C> <C>
March 31, 1998 December 31, 1997
-------------- -----------------
Assets
Real Estate Investments:
Income Producing Properties Held for Sale - Note B $26,886,123 $ 0
Income Producing Properties - Note B 0 27,159,596
Cash and Cash Equivalents (including temporary
investments at March 31, 1998 and December 31, 1997
of $396,521 and $509,955, respectively) - Note C 1,092,680 1,070,018
Restricted Cash Escrow - Note E 50,159 89,069
Accounts Receivable, Net 201,291 218,744
St. Andrews Recovery Receivables - Note J 5,000 145,000
Other Assets 451,456 485,604
---------- ----------
Total Assets $28,686,709 $29,168,031
========== ==========
Liabilities
Mortgages Payable - Note E $21,364,034 $21,402,270
Accounts Payable and Other Liabilities 715,749 769,689
St. Andrews Construction Loan - Note J 637,000 1,037,000
Due to General Partners and Affiliates - Note D 2,596,388 2,542,065
Cash Flow Protector Loan - Note G 4,849,734 4,849,734
---------- ----------
$30,162,905 $30,600,758
Partners' (Deficit) Equity
General Partners $ (259,174) $ (258,740)
Assignor and Assignee Limited Partners,
1,094,283 Units Issued and Outstanding (1,217,022) (1,173,987)
---------- ----------
(1,476,196) (1,432,727)
---------- ----------
Total Liabilities and Partners' (Deficit) Equity $28,686,709 $29,168,031
========== ==========
</TABLE>
See accompanying notes to the financial statements.
<PAGE>
USF&G/LEGG MASON REALTY PARTNERS LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three For the Three
Months Ended Months Ended
March 31, 1998 March 31, 1997
-------------- -------------
REVENUE:
Rental $1,326,034 $1,189,089
Interest 8,744 4,933
--------- ---------
Total Revenue 1,334,778 1,194,022
EXPENSES:
Property Operating - Note D 487,756 505,370
St. Andrews Repair and Legal Costs - Note J 2,404 28,576
General and Administrative 30,763 32,601
Interest - Notes D and E 499,619 593,216
Depreciation and Amortization 357,705 320,998
--------- ---------
Total Expenses 1,378,247 1,480,761
--------- ---------
NET LOSS $ (43,469) $ (286,739)
========= =========
Net Loss Allocated to:
General Partners $ (435) $ (2,867)
Assignor and Assignee Limited Partners (43,034) (283,872)
--------- ---------
$ (43,469) $ (286,739)
========= =========
Net Loss per Unit -- Note A (Basic and Diluted) $ (.04) $ (.26)
========= =========
Weighted Average Number of Units 1,094,283 1,094,283
========= =========
See accompanying notes to the financial statements.
<PAGE>
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USF&G LEGG MASON REALTY PARTNERS LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<S> <C> <C>
For the Three For the Three
Months Ended Months Ended
March 31, 1998 March 31, 1997
-------------- --------------
Operating Activities
Net Loss $ (43,469) $ (286,739)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 357,705 320,998
Change in net assets and liabilities related to
operating activities:
Decrease in restricted cash escrow 38,910 76,200
Increase in due to general partners and affiliates 54,323 48,531
Decrease in accounts payable and other
liabilities (53,940) (209,631)
Decrease (increase) in accounts receivable 17,453 (90,395)
Decrease in St. Andrews recovery receivables 140,000 1,350,000
Increase in other assets (6,984) (87,053)
--------- ---------
Net Cash Provided by Operating Activities 503,998 1,121,911
--------- ---------
Investing Activities
Investment in income producing properties (43,100) (71,256)
--------- ---------
Net Cash Used in Investing Activities (43,100) (71,256)
--------- ---------
Financing Activities
Mortgage principal payments (38,236) (11,620)
St. Andrews Construction Loan Advances 0 215,000
St. Andrews Construction Loan Principal Payments (400,000) (773,000)
--------- ---------
Net Cash Used in Financing Activities (438,236) (569,620)
--------- ---------
Increase in Cash and Cash Equivalents 22,662 481,035
Cash and Cash Equivalents, Beginning of Period 1,070,018 780,727
--------- ---------
Cash and Cash Equivalents, End of Period $1,092,680 $1,261,762
========= =========
</TABLE>
See accompanying notes to the financial statements.
<PAGE>
USF&G/LEGG MASON REALTY PARTNERS LIMITED PARTNERSHIP
Notes to Financial Statements
March 31, 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 three months ended March 31, 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 (Loss) Income from Operations
- -----------------------------------------------
Net (loss) income from operations is allocated first among the partners in
proportion to cash distributions and second, if there have been no cash
distributions, 99% to the assignee limited partners ("Unitholders") and 1% to
General Partners. Net (loss) income and cash distributions per Unit were
computed based upon net (loss) income allocated to and cash distributions paid
to Unitholders divided by the weighted average number of Units outstanding
during the periods indicated. The allocated 1% net (loss) income from operations
to the General Partners is prorated for net (loss) on the basis of 80% to
USF&G Realty Partners, Inc. (the "USF&G General Partner") and 20% to Legg Mason
Realty Partners, Inc. (collectively, the "General Partners") while net income
is allocable on the basis of 50% to the USF&G General Partner and 50% to Legg
Mason Realty Partners, Inc.
<PAGE>
USF&G/LEGG MASON REALTY PARTNERS LIMITED PARTNERSHIP
Notes to Financial Statements (Continued)
March 31, 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:
March 31, 1998 December 31, 1997
-------------- -----------------
Buildings and improvements $30,002,957 $29,959,857
Land 5,444,913 5,444,913
---------- ----------
35,447,870 35,404,770
Less: Accumulated depreciation (8,561,747) (8,245,174)
---------- ----------
$26,886,123 $27,159,596
========== ==========
The General Partners determined as of March 31, 1998 that a portfolio
disposition would be appropriate at this time. As a result, the General
Partners will begin marketing each property for sale during the second quarter
of 1998. Consequently, the three properties are recorded as held for sale on
the balance sheet at March 31, 1998, in accordance with Statement of Financial
Accounting Standards 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:
For the Three Months Ended
March 31, 1998 March 31, 1997
-------------- --------------
Charged to expenses:
Operating Expenses $ 21,332 $ 25,220
Interest Expense:
General Partner Loans 4,251 4,125
St. Andrews Construction Loan 21,232 61,619
Cash Flow Protector Loan 71,749 71,749
<PAGE>
USF&G/LEGG MASON REALTY PARTNERS LIMITED PARTNERSHIP
Notes to Financial Statements (Continued)
March 31, 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>
March 31, 1998 December 31, 1997
-------------- -----------------
General Partner Loans $ 200,000 $ 200,000
Accrued Interest on General Partner Loans 57,174 52,923
Accrued Interest on the St. Andrews Construction Loan 13,455 16,600
Operating Expenses 14,000 32,532
--------- ---------
284,629 302,055
--------- ---------
Asset Management Fees 423,990 423,990
Accrued Interest on the Cash Flow Protector Loan 1,887,769 1,816,020
--------- ---------
Amounts Subordinate to the return of Unitholder
contributions 2,311,759 2,240,010
--------- ---------
$2,596,388 $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)
March 31, 1998
(Unaudited)
NOTE E - Mortgages Payable
Mortgages payable consists of the following as of the dates indicated:
<TABLE>
<CAPTION>
<S> <C> <C>
March 31, 1998 December 31, 1997
-------------- -----------------
Mortgage loan, secured by Northeast Business Campus,
due August 15, 1999, interest at 8.00% $ 7,927,535 $ 7,948,148
Mortgage loan, secured by St. Andrews at Westwood,
due October 2, 2000, floating rate, interest at 6.98%
at March 31, 1998 8,500,000 8,500,000
Mortgage loan, secured by a portion of Shadeland Retail
Center, due May 2002, interest at 7.60% 4,936,499 4,954,122
---------- ----------
$21,364,034 $21,402,270
========== ==========
</TABLE>
The mortgage loans are non-recourse obligations except under certain defined
circumstances. Interest expense of $402,387 and $455,723 was incurred on these
mortgages for the three months ended March 31, 1998, and 1997, respectively.
Interest payments of $406,063 and $427,870 were made for the three months ended
March 31, 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 March 31, 1998,
the lender held a total of $50,159 of restricted cash escrow which included
$8,723 in reserves and $41,436 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 $457,003 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 March 31, 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)
March 31, 1998
(Unaudited)
NOTE F - Distributions to Partners (Continued)
As of March 31, 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 March 31, 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
$1,887,769 as of March 31, 1998 is subordinate to the return of Unitholder
capital contributions as discussed in Note D.
The USF&G General Partner has agreed to reduce the outstanding principal
balance of the Cash Flow Protector Loan once a property is sold, with the
amount of the discount dependent upon when the loan is repaid. Any reduction
in the amount of the Cash Flow Protector Loan due to be paid to the USF&G
General Partner will increase the amount available for distribution to the
Unitholders. This Cash Flow Protector Loan 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
number of Units repurchased shall not exceed 50% of the Units outstanding. As
of March 31, 1998, the General Partners have repurchased 185,774 Units under
the Right of Presentment Program.
<PAGE>
USF&G/LEGG MASON REALTY PARTNERS LIMITED PARTNERSHIP
Notes to Financial Statements (Continued)
March 31, 1998
(Unaudited)
NOTE H - Right of Presentment (Continued)
The USF&G General Partner will repurchase Units under the 1998 Right of
Presentment at the 1998 Right of Presentment purchase price of $5.36 per unit.
If more than 13,886 Units are presented for purchase, 13,886 Units will be
purchased by the USF&G General Partner on a pro rata basis from the Unitholders
that present. The other General Partner may elect to purchase all or a portion
of the excess Units presented up to 447,312 additional Units due to the 50%
limit discussed above. Units will be purchased by June 30, 1998. A Certificate
of Assignee Units of Limited Partnership Interests representing any Units
tendered but not purchased will be issued. The purchasing General Partner is
entitled to the beneficial rights attributable to any purchased Units,
including the rights to cash distributions, and a percentage of the
Partnership's income, gains, losses, deductions and credits, but not voting
rights. For the administrative convenience of the Partnership and Unitholders,
the General Partners have modified certain procedures for exercising the Right
of Presentment from those outlined in the Prospectus and Partnership Agreement.
Presentment is now based upon acceptance of the announced per Unit purchase
price. There is no longer a withdrawal period. Unitholders offering Units for
purchase must present Units by June 5, 1998.
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 first quarter of 1998, the Partnership incurred $2,404 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.
<PAGE>
USF&G/LEGG MASON REALTY PARTNERS LIMITED PARTNERSHIP
Notes to Financial Statements (Continued)
March 31, 1998
(Unaudited)
NOTE J - St. Andrews Repair and Legal Costs (Continued)
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% 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 March 31, 1998, the outstanding balance of the
construction loan was $637,000 and no further advances on the loan are expected.
Interest expense of $21,232 and $61,619 was incurred and interest payments
totaling $24,378 and $84,936 were made on this loan for the three months ended
March 31, 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 March 31, 1998
increased $22,662 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 repayment 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 March
31, 1998, the lender held $50,159 in reserves and escrows and the Partnership
held $457,003 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. This policy reflects the commitment by the
General Partners to maintain adequate working capital reserves. The General
Partners believe that such a policy is prudent and is consistent with the
Partnership's objective to maintain and increase the value of the Properties.
Occupancy at Shadeland increased to 91% as of March 31, 1998 as compared to 88%
at December 31, 1997. The increase in occupancy was due to two new leases
for 3,200 square feet which were executed during the first quarter of 1998.
At March 31, 1998, occupancy at St. Andrews was 96%. The apartment market in
the area continues to be very strong and occupancies of St. Andrews' main
competitors range from 91% to 98%. Leasing activity at St. Andrews has remained
strong due to the strength of the market and the high number of corporate
leases in place.
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 first quarter of 1998, the Partnership incurred $2,404 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 $140,000 in settlements, which is included in the
$2,910,500 above, during the first 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% 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 March 31, 1998, the outstanding balance of the
construction loan was $637,000 and no further advances on the loan are expected.
The Partnership made a partial repayment of $400,000 from operating cash flow
and settlement recoveries during the first quarter of 1998. The Partnership
anticipates further principal repayments prior to maturity from operating cash
flow and from settlement recoveries.
<PAGE>
The General Partners determined as of March 31, 1998 that a portfolio
disposition would be appropriate at this time. As a result, the General
Partners will begin marketing each property for sale during the second quarter
of 1998. The General Partners will evaluate all sales offers from qualified
buyers and attempt to obtain sales proceeds for each property equal to or
greater than their current appraised values. In addition, the General Partners
will attempt to complete these sales and distribute the net proceeds in
accordance with section 4.4 of the Partnership agreement by the end of 1998.
However, there can be no assurances that the actual sales proceeds will equal
or exceed the current appraised values or that the transactions will close
before the end of 1998.
The USF&G General Partner has agreed to reduce the outstanding principal
balance of the Cash Flow Protector Loan once a property is sold, with the
amount of the discount dependent upon when the loan is repaid. Any reduction
in the amount of the Cash Flow Protector Loan due to be paid to the USF&G
General Partner will increase the amount available for distribution to the
Unitholders. 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 Fund 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.
Total distributions to a Unitholder pursuant to the above may result in future
per unit distributions that are greater than the announced purchase price
under the 1998 Right of Presentment Program, particularly in view of the fact
that the expected discounting of the Cash Flow Protector Loan was not taken
into account in determining such purchase price. Consequently, the General
Partners have recommended that Unitholders not offer their Units for purchase
under the 1998 Right of Presentment Program.
Results of Operations
Net Income (Loss) Net Income (Loss)
for the Three Months for the Three Months
Ended March 31, 1998 Ended March 31, 1997
-------------------- --------------------
NEBC $ 12,963 $ (63,827)
St. Andrews 20,206 (36,957)
St. Andrews Repair and Legal Costs (2,404) (28,576)
Shadeland 45,646 8,734
-------- --------
$76,411 $(120,626)
Partnership Expense (119,880) (166,113)
-------- --------
$ (43,469) $(286,739)
======== ========
<PAGE>
Three Months Ended March 31, 1998 ("Current Period")
as compared to March 31, 1997 ("Comparable Period")
----------------------------------------------------
The Partnership incurred a net loss of $43,469 for the three months ended
March 31, 1998 ("current period"). The decreased net loss was due primarily to
the improved operating performance at each property in 1998. Rental revenue
increased $136,945 to $1,326,034 for the current period as compared to
$1,189,089 for the three month period ended March 31, 1997 ("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 $17,614 to $487,756 for the current period from $505,370
for the comparable period. The decreased operating expenses were due primarily
to lower grounds and landscaping costs and lower real estate taxes at Shadeland
in 1998.
Rental revenue at NEBC increased $87,524 to $494,924 for the current period as
compared to $407,400 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 97% as of March 31, 1998 as
compared to 93% as of March 31, 1997. The occupancy for NEBC's office and
service center space at March 31, 1998 was 97% and 96% respectively, as compared
to 90% and 100% respectively, at March 31, 1997. The increased occupancy in
office space was due primarily to the move-in of a new tenant and the expansion
of an existing tenant, offset in part by the move-out of a tenant, all in
Building 5, since the first quarter of 1997. The increase in expense
reimbursements is due primarily to greater occupancy in Building 5 during the
current period and the issuance of expense reimbursement credits during the
comparable period. The average net rental rate at March 31, 1998 decreased to
$8.41 per square foot for office space, and increased to $7.10 per square
foot for service center space as compared to $8.70, excluding free-rent
allowances, and $6.76, respectively, at March 31, 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. Operating expenses at NEBC
increased $761 to $189,079 for the current period as compared to $188,318 for
the comparable period.
Rental revenue at St. Andrews increased $24,572 to $538,065 for the current
period as compared to $513,493 for the comparable period. The increase in rental
revenue was due to the increased rental rates offset in part by a lower number
of corporate leases in place during the current period. The average occupancy
at St. Andrews was 97% for the current and comparable periods. The average
monthly rental rate during the current period increased to $712 per unit as
compared to $638 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 twenty-six at March 31, 1998 from forty-three at March 31,
1997. Operating expenses at St. Andrews increased $9,922 to $239,536 for the
current period as compared to $229,614 for the comparable period. The increase
in operating expenses was primarily due to an increase in corporate unit
expenses which include furnishings, cable and utilities. The increase in
corporate unit expense was due to the recognition of expenses during the current
period related to corporate unit leases that expired at the end of 1997 and
early 1998.
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 $2,404 of St. Andrews legal costs and there were no
<PAGE>
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 $24,849 to $293,045 for the current
period as compared to $268,196 for the comparable period. The increase was due
to increased occupancy and rental rates in the current period. The average
rental rate was $10.93 per square foot at March 31, 1998 and $10.36 at March 31,
1997. The increased average rental rate is due primarily to scheduled rent
escalations in the existing leases. Occupancy at Shadeland was 91% for the
current period as compared to 88% for the comparable period. The increase in
occupancy was due to net tenant additions since the first quarter of 1997.
Operating expenses at Shadeland decreased $28,297 to $59,141 for the current
period as compared to $87,438 for the comparable period. The decrease was
primarily due to lower grounds and landscaping costs, real estate taxes and
legal costs. Grounds and landscaping costs decreased due to lower snow removal
costs associated with the mild winter in 1998. Real estate taxes decreased
due to a tax assessment that was lower than the amount anticipated and accrued
for in the comparable period. Legal costs decreased due to a higher number of
prospective leases in 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 the St. Andrews construction loan offset in part by interest earned
on temporary investments. The decrease in Partnership expense of $46,233 to
$119,880 for the current period as compared to $166,113 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 $1,838 to $30,763 for
the current period as compared to $32,601 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 $93,597 to
$499,619 for the current period as compared to $593,216 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 increased by $36,707 to $357,705 for the
current period as compared to $320,998 for the comparable period primarily due
to the depreciation of tenant improvement additions at NEBC, Shadeland and St.
Andrews and the amortization of the St. Andrews and Shadeland mortgage loan
refinance costs in 1998.
<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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,092,680
<SECURITIES> 0
<RECEIVABLES> 206,291
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 35,447,870
<DEPRECIATION> 8,561,747
<TOTAL-ASSETS> 28,686,709
<CURRENT-LIABILITIES> 0
<BONDS> 21,364,034
0
0
<COMMON> (1,476,196)
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 28,686,709
<SALES> 0
<TOTAL-REVENUES> 1,334,778
<CGS> 0
<TOTAL-COSTS> 878,628
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 499,619
<INCOME-PRETAX> (43,469)
<INCOME-TAX> 0
<INCOME-CONTINUING> (43,469)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (43,469)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
