UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 20212022
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 0-17686
DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
| Wisconsin | 39-1606834 | |
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) |
1900 W 75th Street, Suite 100, Prairie Village, KS 66208
(Address of principal executive offices, including zip code)
(816) 421-7444
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| None | N/A | N/A |
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 Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☒ Smaller Reporting Company ☒ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
TABLE OF CONTENTS
DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
FORM 10-Q
FOR THE PERIODPERIODS ENDED SEPTEMBER 30, 20212022
| 2 |
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
CONDENSED BALANCE SHEETS
September 30, 20212022 and December 31, 20202021
ASSETS
| September 30, | December 31, | Setpember 30, | December 31, | |||||||||||||
| 2021 | 2020 | 2022 | 2021 | |||||||||||||
| (unaudited) | (unaudited) | |||||||||||||||
| ASSETS | ||||||||||||||||
| INVESTMENT PROPERTIES: (Note 3) | ||||||||||||||||
| Land | $ | 2,527,947 | $ | 2,794,122 | $ | 1,944,934 | $ | 1,944,934 | ||||||||
| Buildings | 3,649,837 | 4,017,412 | 2,843,881 | 2,843,881 | ||||||||||||
| Accumulated depreciation | (3,646,204 | ) | (3,985,582 | ) | (2,843,881 | ) | (2,843,881 | ) | ||||||||
| Net investment properties | 2,531,580 | 2,825,952 | 1,944,934 | 1,944,934 | ||||||||||||
| Property held for sale | 250,859 | 583,013 | ||||||||||||||
| OTHER ASSETS: | ||||||||||||||||
| Cash | 234,208 | 72,244 | ||||||||||||||
| Cash and cash equivalents | 281,361 | 965,838 | ||||||||||||||
| Investments held in Indemnification Trust (Note 7) | 480,024 | 479,805 | 480,139 | 480,024 | ||||||||||||
| Security deposits escrow | 64,417 | 64,393 | 59,449 | 59,425 | ||||||||||||
| Rents and other receivables | 131,840 | 665,415 | 40,860 | 366,473 | ||||||||||||
| Deferred tenant award proceeds escrow | - | 18,290 | ||||||||||||||
| Deferred closing costs | 9,875 | 16,067 | ||||||||||||||
| Prepaid insurance | 507 | 5,068 | 1,034 | 5,685 | ||||||||||||
| Deferred closing costs | 36,064 | - | ||||||||||||||
| Properties held for sale | 266,175 | - | ||||||||||||||
| Deferred charges, net | 356,451 | 171,213 | 268,981 | 314,825 | ||||||||||||
| Total other assets | 1,569,686 | 1,476,428 | 1,141,699 | 2,791,350 | ||||||||||||
| Total assets | $ | 4,101,266 | $ | 4,302,380 | $ | 3,337,492 | $ | 4,736,284 | ||||||||
The accompanying notes to the financial statements are an integral part of these statements.
| 3 |
DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
CONDENSED BALANCE SHEETS
September 30, 20212022 and December 31, 20202021
LIABILITIES AND PARTNERS’ CAPITAL
| September 30, | December 31, | September 30, | December 31, | |||||||||||||
| 2021 | 2020 | 2022 | 2021 | |||||||||||||
| (unaudited) | (unaudited) | |||||||||||||||
| LIABILITIES AND PARTNERS’ CAPITAL | ||||||||||||||||
| CURRENT LIABILITIES: | ||||||||||||||||
| LIABILITIES: | ||||||||||||||||
| Accounts payable and accrued expenses | $ | 98,531 | $ | 16,047 | $ | 60,968 | $ | 27,207 | ||||||||
| Due to General Partner (Note 5) | 1,151 | 718 | 848 | 4,533 | ||||||||||||
| Deferred rent | 100,005 | 18,289 | ||||||||||||||
| Security deposits | 64,340 | 64,340 | 52,320 | 59,340 | ||||||||||||
| Total current liabilities | 264,027 | 99,394 | ||||||||||||||
| Unearned rental income | 103,440 | 73,891 | ||||||||||||||
| Total liabilities | 217,576 | 164,971 | ||||||||||||||
| CONTINGENCIES AND COMMITMENTS (Notes 6 and 7) | - | - | - | |||||||||||||
| PARTNERS’ CAPITAL: (Notes 1 and 4) | ||||||||||||||||
| General Partner - | ||||||||||||||||
| Cumulative net income (retained earnings) | 390,419 | 384,051 | 415,865 | 399,805 | ||||||||||||
| Cumulative cash distributions | (161,491 | ) | (158,944 | ) | (173,494 | ) | (166,024 | ) | ||||||||
| Total general partners’ capital | 228,928 | 225,107 | 242,371 | 233,781 | ||||||||||||
| Limited Partners (46,280.3 interests outstanding at September 30, 2021 and December 31, 2020) | ||||||||||||||||
| Limited Partners (46,280.3 interests outstanding at September 30, 2022 and December 31, 2021) | ||||||||||||||||
| Capital contributions | 46,280,300 | 46,280,300 | 46,280,300 | 46,280,300 | ||||||||||||
| Offering costs | (6,921,832 | ) | (6,921,832 | ) | (6,921,832 | ) | (6,921,832 | ) | ||||||||
| Cumulative net income (retained earnings) | 45,017,340 | 44,386,908 | 47,536,574 | 45,946,561 | ||||||||||||
| Cumulative cash distributions | (79,927,268 | ) | (78,927,268 | ) | (83,177,268 | ) | (80,127,268 | ) | ||||||||
| Total limited partners’ capital | 4,448,540 | 4,818,108 | 3,717,774 | 5,177,761 | ||||||||||||
| Former General Partner - | ||||||||||||||||
| Cumulative net income (retained earnings) | 707,513 | 707,513 | 707,513 | 707,513 | ||||||||||||
| Cumulative cash distributions | (1,547,742 | ) | (1,547,742 | ) | (1,547,742 | ) | (1,547,742 | ) | ||||||||
| Total former general partners’ capital | (840,229 | ) | (840,229 | ) | (840,229 | ) | (840,229 | ) | ||||||||
| Total partners’ capital | 3,837,239 | 4,202,986 | 3,119,916 | 4,571,313 | ||||||||||||
| Total liabilities and partners’ capital | $ | 4,101,266 | $ | 4,302,380 | $ | 3,337,492 | $ | 4,736,284 | ||||||||
The accompanying notes to the financial statements are an integral part of these statements.
| 4 |
DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
CONDENSED STATEMENTS OF INCOME
For the Three and Nine Month Periods Ended September 30, 20212022 and 20202021
| Three months ended | Nine months ended | |||||||||||||||
| September 30, | September 30, | September 30, | September 30, | |||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||
| OPERATING REVENUES: | ||||||||||||||||
| Rental income (Note 3) | $ | 415,633 | $ | 511,603 | $ | 1,122,570 | $ | 1,113,879 | ||||||||
| TOTAL OPERATING REVENUES | $ | 415,633 | $ | 511,603 | $ | 1,122,570 | $ | 1,113,879 | ||||||||
| EXPENSES: | ||||||||||||||||
| Partnership management fees (Note 5) | $ | 68,079 | $ | 72,075 | $ | 206,901 | $ | 215,371 | ||||||||
| Insurance | 1,520 | 1,495 | 4,561 | 4,441 | ||||||||||||
| General and administrative | 12,353 | 16,899 | 54,897 | 64,375 | ||||||||||||
| Advisory Board fees and expenses | 1,750 | 1,750 | 5,250 | 5,250 | ||||||||||||
| Professional services | 26,441 | 48,204 | 148,862 | 186,169 | ||||||||||||
| Depreciation | 5,449 | 15,795 | 28,198 | 76,360 | ||||||||||||
| Amortization | 12,465 | 6,899 | 37,395 | 20,697 | ||||||||||||
| TOTAL OPERATING EXPENSES | $ | 128,057 | $ | 163,117 | $ | 486,064 | $ | 572,663 | ||||||||
| OTHER INCOME | ||||||||||||||||
| Other interest income | 239 | 52 | 294 | 4,093 | ||||||||||||
| TOTAL OTHER INCOME | $ | 239 | $ | 52 | $ | 294 | $ | 4,093 | ||||||||
| NET INCOME | $ | 287,815 | $ | 348,538 | $ | 636,800 | $ | 545,309 | ||||||||
| NET INCOME ALLOCATED- GENERAL PARTNER | 2,878 | 3,485 | 6,368 | 5,453 | ||||||||||||
| NET INCOME ALLOCATED- LIMITED PARTNERS | 284,937 | 345,053 | 630,432 | 539,856 | ||||||||||||
| PER LIMITED PARTNERSHIP INTEREST, | ||||||||||||||||
| Based on 46,280.3 interests outstanding: (Basic and diluted) | ||||||||||||||||
| NET INCOME PER LIMITED PARTNERSHIP INTEREST | $ | 6.16 | $ | 7.46 | $ | 13.62 | $ | 11.66 | ||||||||
| September 30, | September 30, | September 30, | September 30, | |||||||||||||
| Three months ended | Nine months ended | |||||||||||||||
| September 30, | September 30, | September 30, | September 30, | |||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||
| OPERATING REVENUES: | ||||||||||||||||
| Rental income (Note 3) | $ | 351,179 | $ | 415,633 | $ | 999,354 | $ | 1,122,570 | ||||||||
| TOTAL OPERATING REVENUES | $ | 351,179 | $ | 415,633 | $ | 999,354 | $ | 1,122,570 | ||||||||
| EXPENSES: | ||||||||||||||||
| Partnership management fees (Note 5) | $ | 68,079 | $ | 68,079 | $ | 204,237 | $ | 206,901 | ||||||||
| Insurance | 1,550 | 1,520 | 4,651 | 4,561 | ||||||||||||
| General and administrative | 41,300 | 12,353 | 103,206 | 54,897 | ||||||||||||
| Advisory Board fees and expenses | 1,750 | 1,750 | 5,250 | 5,250 | ||||||||||||
| Professional services | 39,495 | 26,441 | 191,389 | 148,862 | ||||||||||||
| Depreciation | 0 | 5,449 | 0 | 28,198 | ||||||||||||
| Amortization | 10,588 | 12,465 | 32,666 | 37,395 | ||||||||||||
| TOTAL OPERATING EXPENSES | $ | 162,762 | $ | 128,057 | $ | 541,399 | $ | 486,064 | ||||||||
| OTHER INCOME | ||||||||||||||||
| Other income | 20 | 0 | 44,495 | 294 | ||||||||||||
| Other interest income | 98 | 239 | 416 | - | ||||||||||||
| Gain on sale of property | - | - | 1,103,208 | - | ||||||||||||
| TOTAL OTHER INCOME | 118 | 239 | 1,148,119 | 294 | ||||||||||||
| NET INCOME | $ | 188,535 | $ | 287,815 | $ | 1,606,074 | $ | 636,800 | ||||||||
| NET INCOME ALLOCATED- GENERAL PARTNER | 1,885 | 2,878 | 16,060 | 6,368 | ||||||||||||
| NET INCOME ALLOCATED- LIMITED PARTNERS | 186,650 | 284,937 | 1,590,014 | 630,432 | ||||||||||||
| PER LIMITED PARTNERSHIP INTEREST, | ||||||||||||||||
| Based on 46,280.3 interests outstanding: (Basic and diluted) | ||||||||||||||||
| NET INCOME PER LIMITED PARTNERSHIP INTEREST | $ | 4.03 | $ | 6.16 | $ | 34.36 | $ | 13.62 | ||||||||
The accompanying notes to the financial statements are an integral part of these statements.
| 5 |
DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
CONDENSED STATEMENTS OF CASH FLOWS
For the Nine Month Periods Ended September 30, 20212022 and 20202021
| Nine Months Ended | ||||||||
| September 30, 2021 | September 30, 2020 | |||||||
| (unaudited) | (unaudited) | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net income from continuing operations | $ | 636,800 | $ | 545,309 | ||||
| Adjustments to reconcile net income to net cash from operating activities: | ||||||||
| Depreciation and amortization | 65,593 | 97,056 | ||||||
| Changes in operating assets and liabilities | ||||||||
| Decrease in rents and other receivables | 532,604 | 169,847 | ||||||
| Increase in long-term rent receivable | 971 | (21,448 | ) | |||||
| Decrease in security deposit escrow | (24 | ) | 5,092 | |||||
| Increase in deferred closing costs | (36,064 | ) | - | |||||
| Decrease in deferred rent award escrow | - | (52 | ) | |||||
| Decrease in prepaid insurance | 4,561 | 4,484 | ||||||
| Decrease in accounts payable and accrued expenses | 82,484 | (1,073 | ) | |||||
| Increase in unearned rental income | 100,005 | 5,000 | ||||||
| Payment of leasing commission | (222,633 | ) | - | |||||
| Security deposit refund | - | (5,000 | ) | |||||
| Increase in due to General Partner | 433 | 49 | ||||||
| Net cash from operating activities | 1,164,730 | 799,264 | ||||||
| CASH FLOWS USED IN INVESTING ACTIVITIES: | ||||||||
| Interest applied to Indemnification Trust account | (219 | ) | (3,862 | ) | ||||
| Net cash used in investing activities | (219 | ) | (3,862 | ) | ||||
| CASH FLOWS USED IN FINANCING ACTIVITIES: | ||||||||
| Cash distributions to Limited Partners | (1,000,000 | ) | (700,000 | ) | ||||
| Cash distributions to General Partner | (2,547 | ) | (2,181 | ) | ||||
| Net cash used in financing activities | (1,002,547 | ) | (702,181 | ) | ||||
| NET INCREASE (DECREASE) IN CASH | 161,964 | 93,221 | ||||||
| CASH AT BEGINNING OF PERIOD | 72,244 | 39,221 | ||||||
| CASH AT END OF PERIOD | $ | 234,208 | $ | 132,442 | ||||
| September 30, | September 30, | |||||||
| Nine Months Ended | ||||||||
| September 30, | September 30, | |||||||
| 2022 | 2021 | |||||||
| (unaudited) | (unaudited) | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net income | $ | 1,606,074 | $ | 636,800 | ||||
| Adjustments to reconcile net income to net cash from operating activities: | ||||||||
| Depreciation and amortization | 32,666 | 65,593 | ||||||
| Changes in operating assets and liabilities | ||||||||
| Gain on sale of property | (1,103,208 | ) | - | |||||
| Decrease in rents and other receivables | 325,613 | 532,604 | ||||||
| Increase in long-term rent receivable | - | 971 | ||||||
| Increase in security deposit escrow | (24 | ) | (24 | ) | ||||
| Decrease (Increase) in deferred closing costs | 6,192 | (36,064 | ) | |||||
| Decrease in prepaid insurance | 4,651 | 4,561 | ||||||
| Decrease in accounts payable and accrued expenses | 33,760 | 82,484 | ||||||
| Increase in unearned rental income | 29,549 | 100,005 | ||||||
| Payment of leasing commission | - | (222,633 | ) | |||||
| Security deposit refund | (7,020 | ) | - | |||||
| (Decrease) Increase in due to General Partner | (3,685 | ) | 433 | |||||
| Net cash from operating activities | 924,568 | 1,164,730 | ||||||
| CASH FLOWS USED IN INVESTING ACTIVITIES: | ||||||||
| Proceeds from sale of Property, net | 1,448,540 | - | ||||||
| Interest applied to Indemnification Trust account | (115 | ) | (219 | ) | ||||
| Net cash used in investing activities | 1,448,425 | (219 | ) | |||||
| CASH FLOWS USED IN FINANCING ACTIVITIES: | ||||||||
| Cash distributions to Limited Partners | (3,050,000 | ) | (1,000,000 | ) | ||||
| Cash distributions to General Partner | (7,470 | ) | (2,547 | ) | ||||
| Net cash used in financing activities | (3,057,470 | ) | (1,002,547 | ) | ||||
| NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | (684,477 | ) | 161,964 | |||||
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 965,838 | 72,244 | ||||||
| CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 281,361 | $ | 234,208 | ||||
The accompanying notes to the financial statements are an integral part of these statements.
| 6 |
DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
CONDENSED STATEMENTS OF PARTNER’SPARTNERS’ CAPITAL (Unaudited)
For the Three and Nine Month Periods Ended September 30, 20212022 and 20202021
| General Partner | Limited Partners | |||||||||||||||||||||||||||||||||||
| Capital | ||||||||||||||||||||||||||||||||||||
| Contributions, | ||||||||||||||||||||||||||||||||||||
| Cumulative | Cumulative | Net of | Cumulative | Total | ||||||||||||||||||||||||||||||||
| Net Income | Cash Distributions | Total | Offering Costs | Cumulative Net Income | Cash Distribution | Reallocation | Total | Partners’ Capital | ||||||||||||||||||||||||||||
| BALANCE AT DECEMBER 31, 2020 | $ | 384,051 | $ | (158,944 | ) | $ | 225,107 | $ | 39,358,468 | $ | 44,386,908 | $ | (78,927,268 | ) | $ | (840,229 | ) | $ | 3,977,878 | $ | 4,202,986 | |||||||||||||||
| Q1 Net Income | 1,328 | - | 1,328 | - | 131,474 | - | - | 131,474 | 132,802 | |||||||||||||||||||||||||||
| Cash Distributions ($12.96 per limited partnership interest) | - | (531 | ) | (531 | ) | - | - | (600,000 | ) | - | (600,000 | ) | (600,531 | ) | ||||||||||||||||||||||
| BALANCE AT MARCH 31, 2021 | $ | 385,379 | $ | (159,475 | ) | $ | 225,904 | $ | 39,358,468 | $ | 44,518,381 | $ | (79,527,268 | ) | $ | (840,229 | ) | $ | 3,509,352 | $ | 3,735,256 | |||||||||||||||
| Q2 Net Income | 2,162 | - | 2,162 | - | 214,021 | - | - | 214,021 | 216,183 | |||||||||||||||||||||||||||
| Cash Distributions ($4.32 per limited partnership interest) | - | (865 | ) | (865 | ) | - | - | (200,000 | ) | - | (200,000 | ) | (200,865 | ) | ||||||||||||||||||||||
| BALANCE AT JUNE 30, 2021 | $ | 387,541 | $ | (160,340 | ) | $ | 227,201 | $ | 39,358,468 | $ | 44,732,402 | $ | (79,727,268 | ) | $ | (840,229 | ) | $ | 3,523,373 | $ | 3,750,574 | |||||||||||||||
| Q3 Net Income | 2,878 | - | 2,878 | - | 284,937 | - | - | 284,937 | 287,815 | |||||||||||||||||||||||||||
| Cash Distributions ($4.32 per limited partnership interest) | - | (1,151 | ) | (1,151 | ) | - | - | (200,000 | ) | - | (200,000 | ) | (201,151 | ) | ||||||||||||||||||||||
| BALANCE AT SEPTEMBER 30, 2021 | $ | 390,419 | $ | (161,491 | ) | $ | 228,928 | $ | 39,358,468 | $ | 45,017,340 | $ | (79,927,268 | ) | $ | (840,229 | ) | $ | 3,608,310 | $ | 3,837,239 | |||||||||||||||
| BALANCE AT DECEMBER 31, 2019 | $ | 376,804 | $ | (156,045 | ) | $ | 220,759 | $ | 39,358,468 | $ | 43,669,450 | $ | (78,127,268 | ) | $ | (840,229 | ) | $ | 4,060,421 | $ | 4,281,180 | |||||||||||||||
| Q1 Net Income | (289 | ) | - | (289 | ) | - | (28,637 | ) | - | - | (28,637 | ) | (28,926 | ) | ||||||||||||||||||||||
| Cash Distributions ($12.96 per limited partnership interest) | - | - | - | - | - | (600,000 | ) | - | (600,000 | ) | (600,000 | ) | ||||||||||||||||||||||||
| BALANCE AT MARCH 31, 2020 | $ | 376,515 | $ | (156,045 | ) | $ | 220,470 | $ | 39,358,468 | $ | 43,640,813 | $ | (78,727,268 | ) | $ | (840,229 | ) | $ | 3,431,784 | $ | 3,652,254 | |||||||||||||||
| Q2 Net Income | 2,257 | - | 2,257 | - | 223,440 | - | - | 223,440 | 225,697 | |||||||||||||||||||||||||||
| Cash Distributions | - | (787 | ) | (787 | ) | - | - | - | - | - | (787 | ) | ||||||||||||||||||||||||
| BALANCE AT JUNE 30, 2020 | $ | 378,772 | $ | (156,832 | ) | $ | 221,940 | $ | 39,358,468 | $ | 43,864,253 | $ | (78,727,268 | ) | $ | (840,229 | ) | $ | 3,655,224 | $ | 3,877,164 | |||||||||||||||
| BEGINNING BALANCE | $ | 378,772 | $ | (156,832 | ) | $ | 221,940 | $ | 39,358,468 | $ | 43,864,253 | $ | (78,727,268 | ) | $ | (840,229 | ) | $ | 3,655,224 | $ | 3,877,164 | |||||||||||||||
| Q3 Net Income | 3,485 | - | 3,485 | - | 345,053 | - | - | 345,053 | 348,538 | |||||||||||||||||||||||||||
| Net Income | 3,485 | - | 3,485 | - | 345,053 | - | - | 345,053 | 348,538 | |||||||||||||||||||||||||||
| Cash Distributions ($2.16 per limited partnership interest) | - | (1,394 | ) | (1,394 | ) | - | - | (100,000 | ) | - | (100,000 | ) | (101,394 | ) | ||||||||||||||||||||||
| Cash Distributions | - | (1,394 | ) | (1,394 | ) | - | - | (100,000 | ) | - | (100,000 | ) | (101,394 | ) | ||||||||||||||||||||||
| BALANCE AT SEPTEMBER 30, 2020 | $ | 382,257 | $ | (158,226 | ) | $ | 224,031 | $ | 39,358,468 | $ | 44,209,306 | $ | (78,827,268 | ) | $ | (840,229 | ) | $ | 3,900,277 | $ | 4,124,308 | |||||||||||||||
| ENDING BALANCE | $ | 382,257 | $ | (158,226 | ) | $ | 224,031 | $ | 39,358,468 | $ | 44,209,306 | $ | (78,827,268 | ) | $ | (840,229 | ) | $ | 3,900,277 | $ | 4,124,308 | |||||||||||||||
Cumulative Net Income | Cumulative Cash Distributions | Total | Capital Contributions, Net of Offering Costs | Cumulative Net Income | Cumulative Cash Distribution | Reallocation | Total | Total Partners’ Capital | ||||||||||||||||||||||||||||
| General Partner | Limited Partners | |||||||||||||||||||||||||||||||||||
Cumulative Net Income | Cumulative Cash Distributions | Total | Capital Contributions, Net of Offering Costs | Cumulative Net Income | Cumulative Cash Distribution | Reallocation | Total | Total Partners’ Capital | ||||||||||||||||||||||||||||
| BALANCE AT DECEMBER 31, 2021 | $ | 399,805 | $ | (166,024 | ) | $ | 233,781 | $ | 39,358,468 | $ | 45,946,561 | $ | (80,127,268 | ) | $ | (840,229 | ) | $ | 4,337,532 | $ | 4,571,313 | |||||||||||||||
| Net Income | 1,568 | - | 1,568 | - | 155,249 | - | - | 155,249 | 156,817 | |||||||||||||||||||||||||||
| Cash Distributions ($25.93 per limited partnership interest) | - | (949 | ) | (949 | ) | - | - | (1,200,000 | ) | - | (1,200,000 | ) | (1,200,949 | ) | ||||||||||||||||||||||
| BALANCE AT MARCH 31, 2022 | $ | 401,373 | $ | (166,973 | ) | $ | 234,400 | $ | 39,358,468 | $ | 46,101,810 | $ | (81,327,268 | ) | $ | (840,229 | ) | $ | 3,292,781 | $ | 3,527,181 | |||||||||||||||
| Net Income | 12,607 | - | 12,607 | - | 1,248,114 | - | - | 1,248,114 | 1,260,721 | |||||||||||||||||||||||||||
| Cash Distributions ($4.32 per limited partnership interest) | - | (5,673 | ) | (5,673 | ) | - | - | (200,000 | ) | - | (200,000 | ) | (205,673 | ) | ||||||||||||||||||||||
| BALANCE AT JUNE 30, 2022 | $ | 413,980 | $ | (172,646 | ) | $ | 241,334 | $ | 39,358,468 | $ | 47,349,924 | $ | (81,527,268 | ) | $ | (840,229 | ) | $ | 4,340,895 | $ | 4,582,229 | |||||||||||||||
| Net Income | 1,885 | - | 1,885 | - | 186,650 | - | - | 186,650 | 188,535 | |||||||||||||||||||||||||||
| Cash Distributions ($35.65 per limited partnership interest) | - | (848 | ) | (848 | ) | - | - | (1,650,000 | ) | - | (1,650,000 | ) | (1,650,848 | ) | ||||||||||||||||||||||
| BALANCE AT SEPTEMBER 30, 2022 | $ | 415,865 | $ | (173,494 | ) | $ | 242,371 | $ | 39,358,468 | $ | 47,536,574 | $ | (83,177,268 | ) | $ | (840,229 | ) | $ | 2,877,545 | $ | 3,119,916 | |||||||||||||||
| BALANCE AT DECEMBER 31, 2020 | $ | 384,051 | $ | (158,944 | ) | $ | 225,107 | $ | 39,358,468 | $ | 44,386,908 | $ | (78,927,268 | ) | $ | (840,229 | ) | $ | 3,977,878 | $ | 4,202,986 | |||||||||||||||
| Net Income | 1,328 | - | 1,328 | - | 131,474 | - | - | 131,474 | 132,802 | |||||||||||||||||||||||||||
| Cash Distributions ($12.96 per limited partnership interest) | - | (531 | ) | (531 | ) | - | - | (600,000 | ) | - | (600,000 | ) | (600,531 | ) | ||||||||||||||||||||||
| BALANCE AT MARCH 31, 2021 | $ | 385,379 | $ | (159,475 | ) | $ | 225,904 | $ | 39,358,468 | $ | 44,518,382 | $ | (79,527,268 | ) | $ | (840,229 | ) | $ | 3,509,352 | $ | 3,735,257 | |||||||||||||||
| Net Income | 2,162 | - | 2,162 | - | 214,021 | - | - | 214,021 | 216,183 | |||||||||||||||||||||||||||
| Cash Distributions ($4.32 per limited partnership interest) | - | (865 | ) | (865 | ) | - | - | (200,000 | ) | - | (200,000 | ) | (200,865 | ) | ||||||||||||||||||||||
| BALANCE AT JUNE 30, 2021 | $ | 387,541 | $ | (160,340 | ) | $ | 227,201 | $ | 39,358,468 | $ | 44,732,403 | $ | (79,727,268 | ) | $ | (840,229 | ) | $ | 3,523,373 | $ | 3,750,575 | |||||||||||||||
| BEGINNING BALANCE | $ | 387,541 | $ | (160,340 | ) | $ | 227,201 | $ | 39,358,468 | $ | 44,732,403 | $ | (79,727,268 | ) | $ | (840,229 | ) | $ | 3,523,373 | $ | 3,750,575 | |||||||||||||||
| Net Income | 2,878 | - | 2,878 | - | 284,937 | - | - | 284,937 | 287,815 | |||||||||||||||||||||||||||
| Cash Distributions ($4.32 per limited partnership interest) | - | (1,151 | ) | (1,151 | ) | - | - | (200,000 | ) | - | (200,000 | ) | (201,151 | ) | ||||||||||||||||||||||
| BALANCE AT SEPTEMBER 30, 2021 | $ | 390,419 | $ | (161,491 | ) | $ | 228,928 | $ | 39,358,468 | $ | 45,017,340 | $ | (79,927,268 | ) | $ | (840,229 | ) | $ | 3,608,310 | $ | 3,837,239 | |||||||||||||||
| ENDING BALANCE | $ | 390,419 | $ | (161,491 | ) | $ | 228,928 | $ | 39,358,468 | $ | 45,017,340 | $ | (79,927,268 | ) | $ | (840,229 | ) | $ | 3,608,310 | $ | 3,837,239 | |||||||||||||||
The accompanying notes to the financial statements are an integral part of these statements.
| 7 |
DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
The condensed statements included herein have been prepared by the registrant, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission, and reflect all adjustments which are, in the opinion of management, necessary to a fair statement of the results of operations for the interim period, on a basis consistent with the annual audited statements. The adjustments made to these condensed statements consist only of normal recurring adjustments. Certain information, accounting policies, and footnote disclosures normally included in financial statements prepared in accordance with United States Generally Accepted Accounting Principles (US GAAP) have been condensed or omitted pursuant to such rules and regulations, although the registrant believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these condensed financial statements be read in conjunction with the financial statements and the summary of significant accounting policies and notes thereto included in the registrant’s latest annual report on Form 10-K.
1. ORGANIZATION:
DiVall Insured Income Properties 2 LP (the “Partnership”) was formed on November 20, 1987, pursuant to the Uniform Limited Partnership Act of the State of Wisconsin. The initial capital, contributed during 1987, consisted of $300, representing aggregate capital contributions of $200 by the former general partners and $100 by the initial limited partner. A subsequent offering of limited partnership interests closed on February 22, 1990, with 46,280.3 limited partnership interests having been sold in that offering, resulting in total proceeds to the Partnership, net of underwriting compensation and other offering costs, of $39,358,468.
The Partnership is currently engaged in the business of owning and operating its investment portfolio of commercial real estate properties (each a “Property”, and collectively, the “Properties”). The Properties are leased on a triple net basis primarily to, and operated by, franchisors or franchisees of national, regional, and local retail chains under primarily long-term leases. The lessees are operators of fast food, family style, and casual/theme restaurants. As of September 30, 2021,2022, the Partnership owned 108 Properties, which are located in a total of 3three states.
The Limited Partnership Agreement, as amended from time to time (collectively, the “Partnership Agreement”), stipulates that the Partnership is scheduled to be dissolved on November 30, 2023, or earlier upon the prior occurrence of any of the following events: (a) the disposition of all its Properties; (b) the written determination by the General Partner, that the Partnership’s assets may constitute “plan assets” for purposes of ERISA; (c) the agreement of limited partners owning a majority of the outstanding limited partner interests to dissolve the Partnership; or (d) the dissolution, bankruptcy, death, withdrawal, or incapacity of the last remaining General Partner, unless an additional General Partner is elected by a majority of the limited partners. During the second and third quarters of the nine odd numbered years from 2001 through 2017, consent solicitations were circulated to the Partnership’s limited partners which, if approved by the limited partners, would have authorized the General Partner to initiate the potential sale of all of the Properties and the dissolution of the Partnership (each a “Consent”). Limited partners owning a majority of the outstanding limited partnership interests did not vote in favor of any of the Consents. Therefore, the Partnership continues to operate as a going concern.
During the 2020 consent solicitation process, the Limited Partners approved two separate amendments to the Partnership Agreement. The amendments served to: (i) extend the term of the Partnership by three (3) years to November 30, 2023, and (ii) permit the General Partner to effect distributions at times that it deems appropriate, but no less often than semi-annually.
2. RECENTLY ISSUED ACCOUNTING PRINCIPLES:
In April 2020,Management has reviewed recently issued, but not yet effective, accounting pronouncements and does not expect the Financial Accounting Standards Board (FASB) issuedimplementation of the pronouncements to have a question-and-answer document (the “Lease Modification Q&A”) focusedsignificant effect on the application of lease accounting guidance to lease concessions provided as a result of a novel strain of coronavirus (“COVID-19”). Under existing lease guidance, an entity would have to determine, on a lease by lease basis, if a lease concession was the result of a new arrangement reached with the tenant or if a lease concession was under the enforceable rights and obligations within the existing lease agreement. The Lease Modification Q&A clarifies that entities may elect to not evaluate whether lease-related relief that lessors provide to mitigate the economic effects of COVID-19 on lessees is a lease modification under current lease guidance. Instead, an entity that elects not to evaluate whether a concession directly related to COVID-19 is a modification can then elect whether to apply the modification guidance.
During the year ended December 31, 2020, the Partnership provided a lease concession to one tenant in response to the impact of COVID-19, in the form of a short term rent reduction. The Partnership has made an election to account for such lease concession consistent with how this concession would be accounted for under lease guidance if enforceable rights and obligations for this concession had already existed in the lease. This election is available for concessions related to the effects of the COVID-19 pandemic that do not result in a substantial increase in the rights as lessor, including concessions that result in the total payments required by the modified lease being substantially the same as or less than total payments required by the original lease.
The Partnership’s concession provided for a reduction of payments with no substantive changes to the consideration in the original lease. The reduction affected the amount of the lease payments during the months of April, May and June of 2020. The Partnership is accounting for this reduction as if no changes to the lease were made. During the year ended December 31, 2020, the Partnership entered into one lease modification that eliminated an amount that was immaterial to the Partnership.financial statements.
| 8 |
DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
3. INVESTMENT PROPERTIES AND PROPERTIES HELD FOR SALE::
The total cost of the Properties includes the original purchase price plus acquisition fees and other capitalized costs paid to an affiliate of the former general partners of the Partnership.
As of September 30, 2021,2022, the Partnership owned 10eight Properties, nineall of which contained fully constructed fast-food/casual dining restaurant facilities. The following are operated by tenants at the aforementioned Properties: eightseven separate Wendy’s restaurants, and an Applebee’s restaurant and a Brakes 4 Less store.restaurant. The10 Properties are located in a total of 3three states.
On April 23, 2020, the Partnership executed three Amended and Restated Restaurant Absolutely Net Leases to the Original Leases dated January 30, 1989, by and between the Partnership and Wendgusta LLC (“Tenant”, as successor in interest to Wensouth Corporation) with the intent that these Leases will amend, restate and replace the Original Leases. Effective January 1, 2021, for the restaurant property located at 1901 Whiskey Road, Aiken, South Carolina, per the terms of the Amendment, the Tenant will pay $210,632 annually in rent, in addition to 7% of sales over an annual breakpoint of $2,632,900 over the term of the lease extension (January 1, 2021 to December 31, 2040).
Effective January 1, 2021, for the restaurant property located at 1004 Richland Ave, Aiken, South Carolina, per the terms of the Amendment, the Tenant will pay $167,500 annually in rent, in addition to 7% of sales over an annual breakpoint of $2,093,750 over the term of the lease extension (January 1, 2021 to December 31, 2040). Effective January 1, 2021, for the restaurant property located at 3013 Peach Orchard Road, Augusta, Georgia per the terms of the Amendment, the Tenant will pay $188,000 annually in rent, in addition to 7% of sales over an annual breakpoint of $2,350,000 over the term of the lease extension (January 1, 2021 to December 31, 2040).
On April 28, 2020, the Partnership executed a Third Amendment to Lease with RMH Franchise Corporation in response to changed circumstances arising from the COVID-19 pandemic. The term of the amendment was April 1, 2020 through June 30, 2020 and during that time suspended the amount and timing of the payment of the monthly base rent, as defined in the Lease. The revised monthly base rent for the months of April and May 2020 was equal to six percent of the monthly gross sales. The revised monthly base rent for the month of June 2020 was a fixed amount of $5,750. Full monthly base rent resumed July 1, 2020.
On July 21, 2020, the Partnership executed two Amended and Restated Restaurant Absolutely Net Leases to the Original Leases dated January 30, 1989, by and between the Partnership and WendCharles I, LLC (“Tenant”, as successor in interest to Wensouth Corporation) with the intent that these Leases will amend, restate and replace the Original Leases. Effective January 1, 2021, for the restaurant property located at 361 Highway 17 Bypass, Mt. Pleasant, South Carolina, per the terms of the Amendment, the Tenant will pay $146,520 annually in rent, in addition to 7% of sales over an annual breakpoint of $1,831,500 over the term of the lease extension (January(January 1, 2021 to December 31, 2040). Effective January 1, 2021, for the restaurant property located at 343 Folly Road, Charleston, South Carolina, per the terms of the Amendment, the Tenant will pay $136,000 annually in rent, in addition to 7% of sales over an annual breakpoint of $1,700,000 over the term of the lease extension(January (January 1, 2021 to December 31, 2040).
Sale of Walton Way Property
On April 22, 2022, the Partnership sold the property located at 1730 Walton Way, Augusta, GA for $1,600,000. The gain on the sale was approximately $1,103,000.
Property Held for Sale
The Brakes 4 LessWalton Way property in Martinez,Augusta, GA, was listed for sale on July 5, 2021. A signed offer of $890,000 was accepted on September 27, 2021. The sale closed on October 29, 2021 and the Partnership recognized a gain of $478,098was sold on April 22, 2022. The Martintown Rd property in North Augusta, SC was listed for sale on December 22, 2021..
The components of property held for sale in the balance sheets as of September 30, 20212022 and December 31, 20202021 are outlined below:
SCHEDULE OF PROPERTY HELD FOR SALE
| September 30, 2021 | December 31, 2020 | September 30, 2022 | December 31, 2021 | |||||||||||||
| Balance Sheet: | ||||||||||||||||
| Land | $ | 266,175 | $ | - | $ | 250,859 | $ | 583,013 | ||||||||
| Building | 367,575 | - | 396,659 | 805,956 | ||||||||||||
Accumulated Depreciation | (367,575 | ) | - | (396,659 | ) | (805,956 | ) | |||||||||
| Properties held for sale | $ | 266,175 | $ | - | $ | 250,859 | $ | 583,013 | ||||||||
| 9 |
DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
4. PARTNERSHIP AGREEMENT:
The Partnership Agreement was amended, effective as of October 20, 2020, to extend the term of the Partnership to November 30, 2023, or until dissolution prior thereto pursuant to the consent of limited partners owning a majority of the outstanding limited partnership interests.
Under the terms of the Partnership Agreement, as amended, net profits or losses from operations are allocated 99% to the limited partners and 1% to the current General Partner. The November 9, 2009 amendment also provided for distributions from Net Cash Receipts, as defined, to be made 99% to limited partners and 1% to The Provo Group, Inc. (“TPG”, or the “General Partner”), the current General Partner, provided that quarterly distributions are cumulative and are not to be made to the current General Partner unless and until each limited partner has received a distribution from Net Cash Receipts in an amount equal to 10% per annum, cumulative simple return on his, her or its Adjusted Original Capital, as defined, from the Return Calculation Date, as defined, except to the extent needed by the General Partner to pay its federal and state income taxes on the income allocated to it attributable to such year.
The provisions regarding distribution of Net Proceeds, as defined, provide that Net Proceeds are to be distributed as follows: (a) to the limited partners, an amount equal to 100% of their Adjusted Original Capital; (b) then, to the limited partners, an amount necessary to provide each limited partner a liquidation preference equal to a 13.513.5%% per annum, cumulative simple return on Adjusted Original Capital from the Return Calculation Date including in the calculation of such return on all prior distributions of Net Cash Receipts and any prior distributions of Net Proceeds under this clause, except to the extent needed by the General Partner to pay its federal and state income tax on the income allocated to it attributable to such year; and (c) then, to limited partners, 99%, and to the General Partner, 1%, of remaining Net Proceeds available for distribution.
| 10 |
DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
5. TRANSACTIONS WITH GENERAL PARTNER AND ITS AFFILIATES:
Pursuant to the terms of the Permanent Manager Agreement (“PMA”) executed in 1993 and renewed for an additional two-year term as of January 1, 2021, the General Partner receives a base fee (the “Base Fee”) for managing the Partnership equal to 4four percent percent of gross receipts, subject initially to a minimum annual Base Fee. The PMA also provides that the Partnership is responsible for reimbursement of the General Partner for office rent and related office overhead (“Expenses”) up to an initial annual maximum of $13,250. Both the Base Fee and Expenses reimbursement are subject to annual Consumer Price Index based adjustments. Effective March 1, 2021, Management has elected to roll back the last five years of CPI increases to their 2016 level and suspend any future CPI adjustments for the base fee. Therefore, the minimum annual Base Fee decreased by 5.54% from the prior year to $272,316. The maximum annual Expenses reimbursement remained the same at $23,256 and any potential future CPI adjustments have been suspended.
For purposes of computing the four percent overall fee paid to the General Partner, gross receipts include amounts recovered in connection with the misappropriation of assets by the former general partners and their affiliates. The fee received by the General Partner from the Partnership on any amounts recovered reduce the four percent minimum fee by that same amount.
Amounts paid and/or accrued to the General Partner and its affiliates for the threethree- and six monthnine-month periods ended September 30, 20212022 and 20202021 are as follows:
SCHEDULE OF AMOUNTS PAID AND/OR ACCRUED TO GENERAL PARTNER AND ITS AFFILIATESAFFLIATES
| Incurred for the | Incurred for the | Incurred for the | Incurred for the | |||||||||||||
| Three Months Ended | Three Months Ended | Nine Months Ended | Nine Months Ended | |||||||||||||
| September 30, 2021 | September 30, 2020 | September 30, 2021 | September 30, 2020 | |||||||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||
| General Partner | ||||||||||||||||
| Management fees | $ | 68,079 | $ | 72,075 | $ | 206,901 | $ | 215,371 | ||||||||
| Overhead allowance | 5,814 | 5,814 | 17,442 | 17,374 | ||||||||||||
| Leasing commissions | - | - | 222,633 | - | ||||||||||||
| Reimbursement for out-of-pocket expenses | - | - | 2,500 | 2,500 | ||||||||||||
| Cash distribution | 1,151 | 1,394 | 2,547 | 2,181 | ||||||||||||
| Amounts paid and/or accrued to the General Partner | $ | 75,044 | $ | 79,283 | $ | 452,023 | $ | 237,426 | ||||||||
| Incurred for the | Incurred for the | Incurred for the | Incurred for the | |||||||||||||
| Three Months Ended | Three Months Ended | Nine Months Ended | Nine Months Ended | |||||||||||||
| September 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | |||||||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||
| General Partner | ||||||||||||||||
| Management fees | $ | 68,079 | $ | 68,079 | $ | 204,237 | $ | 206,901 | ||||||||
| Overhead allowance | 5,814 | 5,814 | 17,442 | 17,442 | ||||||||||||
| Leasing commissions | - | - | - | 222,633 | ||||||||||||
| Reimbursement for out-of-pocket expenses | - | - | 2,500 | 2,500 | ||||||||||||
| Cash distribution | 848 | 1,151 | 7,470 | 2,547 | ||||||||||||
| Amounts paid and/or accrued to the General Partner | $ | 74,741 | $ | 75,044 | $ | 231,649 | $ | 452,023 | ||||||||
At September 30, 20212022 and December 31, 2020,2021, $73,784848 and $7184,533, respectively, was payable to the General Partner. Effective with the six Wendy’s lease amendments on January 1, 2021, the General Partner earned a leasing commission of $222,633 representing 3% of only the first 10 years of a 20 year term and reduced by the unamortized portion of previously earned commissions on the six Wendy’s in the amount of $81,935.The commission was included in accounts payable and accrued expenses as of the end of the first quarter. One $75,000 installment payment was made during each of the second and third quarters. The General Partner will determine the available cash flow throughout 2021 to satisfy the obligation, which will entail installment payments. In no event will the sales commissions earned on liquidation of these six Wendy’s and the unamortized portion of the above noted commissions, at the sale date, exceed an aggregate commission of 3% to the General Partner.
| 11 |
DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
As of September 30, 2021,2022, Jesse Small, an Advisory Board Member, beneficially owned greater than ten percent of the Partnership’s outstanding limited partnership interests. Amounts paid to Mr. Small for his services as a member of the Advisory Board for the three- and nine-month periods ended September 30, 20212022 and 20202021 are as follows:
SCHEDULE OF ADVISORY BOARD FEES PAID TO JESSE SMALL
| Three Month Period ended September 30, 2021 | Three Month Period ended September 30, 2020 | Nine Month Period ended September 30, 2021 | Nine Month Period ended September 30, 2020 | |||||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
| Advisory Board Fees paid | $ | 875 | $ | 875 | $ | 2,625 | $ | 2,625 | ||||||||
| Three Month Period ended September 30, 2022 | Three Month Period ended September 30, 2021 | Nine Month Period ended September 30, 2022 | Nine Month Period ended September 30, 2021 | |||||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
| Advisory Board Fees paid | $ | 875 | $ | 875 | $ | 2,625 | $ | 2,625 | ||||||||
At September 30, 20212022 and December 31, 20202021 there were 0no outstanding Advisory Board fees accrued and payable to Jesse Small.
6. CONTINGENT LIABILITIES:
According to the Partnership Agreement, TPG, as General Partner may receive a disposition fee not to exceed 3three percent percent of the contract price on the sale of the properties of the Partnership and two affiliated publicly registered limited partnerships, DiVall Insured Income Fund Limited Partnership (“DiVall 1”), which was dissolved December of 1998, and DiVall Income Properties 3 Limited Partnership, which was dissolved in December 2003 (“DiVall 3”), and together with the Partnership and DiVall 1 (the “three original partnerships”). In addition, fifty percent of all such disposition fees earned by TPG were to be escrowed until the aggregate amount of recovery of the funds misappropriated from the three original partnerships by the former general partners was greater than $4,500,000.$4,500,000. Upon reaching such recovery level, full disposition fees would thereafter be payable, and 50fifty percent of the previously escrowed amounts would be paid to TPG. At such time as the recovery exceeded $6,000,000$6,000,000 in the aggregate, the remaining escrowed disposition fees were to be paid to TPG. If such levels of recovery were not achieved, TPG would contribute the amounts escrowed toward the recovery until the three original partnerships were made whole. In lieu of a disposition fee escrow, fifty percent of all such disposition fees previously discussed were paid directly to a restoration account and then distributed among the three original partnerships; whereby the three original partnerships recorded the recoveries as income. After the recovery level of $4,500,000 was exceeded, fifty percent of the total disposition fee amount paid to the three original partnerships recovery through the restoration account (in lieu of the disposition fee escrow) was refunded to TPG during March 1996. The remaining fifty percent amount allocated to the Partnership through the restoration account, and which was previously reflected as Partnership recovery income, may be owed to TPG if the $6,000,000 recovery level is met. As of September 30, 2021,2022, the Partnership may owe TPG $16,296 if the $6,000,000 recovery level is achieved. TPG does not expect any future refund, as it is uncertain that such a $6,000,000 recovery level will be achieved.
7. PMA INDEMNIFICATION TRUST:
The PMA provides that TPG will be indemnified from any claims or expenses arising out of, or relating to, TPG serving in the capacity of General Partner or as substitute general partner, so long as such claims do not arise from fraudulent or criminal misconduct by TPG. The PMA provides that the Partnership will fund this indemnification obligation by establishing a reserve of up to $250,000 of Partnership assets which would not be subject to the claims of the Partnership’s creditors. An Indemnification Trust (the “Trust”) serving such purposes has been established at United Missouri Bank, N.A. The corpus of the Trust has been fully funded with Partnership assets. Funds are invested in U.S. Treasury securities at fair value at level 1 (see Note 8). In addition, $230,024230,139 of earnings has been credited to the Trust as of September 30, 2021.2022. The rights of TPG to the Trust shall be terminated upon the earliest to occur of the following events: (i) the written release by TPG of any and all interest in the Trust; (ii) the expiration of the longest statute of limitations relating to a potential claim which might be brought against TPG and which is subject to indemnification; or (iii) a determination by a court of competent jurisdiction that TPG shall have no liability to any person with respect to a claim which is subject to indemnification under the PMA. At such time as the indemnity provisions expire or the full indemnity is paid, any funds remaining in the Trust will revert back to the general funds of the Partnership.
| 12 |
DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
8. FAIR VALUE DISCLOSURES:
The Partnership has determined the fair value based on hierarchy that gives the highest priority to quoted prices in active markets for identical assets and liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). Inputs are broadly defined as assumptions market participants would use in pricing an asset or liability. The three levels of the fair value hierarchy under the accounting principle are described below:
| Level 1. | Quoted prices in active markets for identical assets or liabilities. | |
| Level 2. | Quoted prices for similar investments in active markets, quoted prices for identical or similar investments in markets that are not active, and inputs other than quoted prices that are observable for the investment. | |
| Level 3. | Unobservable inputs for which there is little, if any, market activity for the investment. The inputs into the determination of fair value are based upon the best information in the circumstances and may require significant management judgment or estimation and the use of discounted cash flow models to value the investment. |
The fair value hierarchy is based on the lowest level of input that is significant to the fair value measurements. The Partnership’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment. The assets held in indemnification trust account are invested in one year treasury bills which are measured using level 1 fair value inputs.
The Partnership assesses the levels of the investments at each measurement date, and transfers between levels are recognized on the actual date of the event or change in circumstances that caused the transfer in accordance with the Partnership’s accounting policy regarding the recognition of transfers between levels of the fair value hierarchy. For the nine-month period ended September 30, 20212022 and for the year ended December 31, 2020,2021, there were 0no such transfers.
9. SUBSEQUENT EVENTS:
We have reviewed all material events through the issuance of this report in accordance with ASC 855-10.
| 13 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
CAUTIONARY STATEMENT
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements are not historical facts but are the intent, belief or current expectations of management of DiVall Insured Income Properties 2 Limited Partnership (the “Partnership”) based on its knowledge and understanding of the business and industry. Words such as “may,” “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “would,” “could,” “should” and variations of these words and similar expressions are intended to identify forward-looking statements. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we can give no assurance that these expectations will prove to have been correct. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements.
Examples of forward-looking statements include, but are not limited to, statements we make regarding:
| ● | our expectations regarding financial condition or results of operations in future periods; | |
| ● | our future sources of, and needs for, liquidity and capital resources; | |
| ● | our expectations regarding economic and business conditions; | |
| ● | our business strategies; | |
| ● | our decisions and policies with respect to the potential retention or disposition of one or more Properties; | |
| ● | our ability to find a suitable purchaser for any marketed Properties; | |
| ● | our ability to agree on an acceptable purchase price or contract terms; | |
| ● | our ability to collect rents on our leases; | |
| ● | our ability to maintain relationships with our tenants, and when necessary identify new tenants; | |
| ● | future capital expenditures; and | |
| ● | other risks and uncertainties described from time to time in our filings with the Securities and Exchange Commission (the “SEC”). |
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Critical Accounting Policies and Estimates
Management’s discussion and analysis of financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with US GAAP. The preparation of these financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On a regular basis, we evaluate these estimates, including investment impairment. These estimates are based on management’s historical industry experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates, and the difference could be material.
The Partnership believes that its most critical accounting policies deal with:
Depreciation methods and lives- Depreciation of the Properties is provided on a straight-line basis over the estimated useful life of the buildings and improvements. While the Partnership believes these are the appropriate lives and methods, use of different lives and methods could result in different impacts on net income. Additionally, the value of real estate is typically based on market conditions and property performance, so depreciated book value of real estate may not reflect the market value of real estate assets.
Revenue recognition- Rental revenue from investment properties is recognized on a straight-line basis over the life of the respective lease when collectability is assured. Percentage rents are accrued only when the tenant has reached the sales breakpoint stipulated in the lease.
Impairment- The Partnership periodically reviews its long-lived assets, primarily real estate, for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The Partnership’s review involves comparing current and future operating performance of the assets, the most significant of which is undiscounted operating cash flows, to the carrying value of the assets. Based on this analysis, if deemed necessary, a provision for possible loss is recognized.
Investment Properties
As of September 30, 2021,2022, the Partnership owned 10eight Properties, nineseven of which contained fully constructed fast-food/casual dining restaurant facilities. The following are operated by tenants at the aforementioned Properties: eightseven separate Wendy’s restaurants, and an Applebee’s restaurant and a Brakes 4 Less store.restaurant. The 10 Properties are located in a total of three states.
The Brakes 4 Less property in Martinez, GA, was listed for sale on July 5, 2021. A signed offer of $890,000 was accepted on September 27, 2021, and the sale closed on October 29, 2021.
Property taxes, general maintenance, insurance and ground rent on the Properties are the responsibility of the tenant. However, when a tenant fails to make the required tax payments or when a Property becomes vacant, the Partnership makes the appropriate property tax payments to avoid possible foreclosure of the property.
There were no building improvements capitalized during the three-month period ending September 30, 2021.
Factors Which May Influence Results of Operations
The Partnership is not aware of any material trends or uncertainties, other than national economic conditions affecting real estate generally, that may reasonably be expected to have a material impact, favorable or unfavorable, on revenues and investment property value. However, due to the recent outbreak of the coronavirus (COVID-19) in the U.S. and globally, our tenants and operating partners may be impacted. The impact of the coronavirus on our future results could still be significant and will largely depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus, the success of actions taken to contain or treat the coronavirus, and reactions by consumers, companies, governmental entities and capital markets.2022.
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Results of Operations
Three-month period ended September 30, 20212022 as compared to the three-month period ended September 30, 2020:2021:
Net income from continuing operations for the three-month periods ended September 30, 2022 and 2021 was $188,535 and 2020 was $287,815, and $348,538, respectively. Net income per limited partnership interest for the three-month periods ended September 30, 2022 and 2021 was $4.03 and 2020 was $6.16, and $7.46, respectively.
Operating Rental Income: Rental income for the three-month periods ended September 30, 2022 and 2021 was $351,179 and 2020 was $415,633, and $511,603, respectively. The rental income was comprised primarily of monthly lease obligations and includes recognition of annual percentage rents earned year-to-date and adjustments for straight-line rent.year-to-date. The decrease is primarily the result of lower monthly base rents and accrued percentage rents as a result of increased monthly rental revenue resulting fromtwo property sales within the six Wendy’s locations whose leases renewed as of January 1, 2021.last 12 months.
General and Administrative Expense: General and administrative expenses for the three-month periods ended September 30, 2022 and 2021 were $41,300 and 2020 were $12,353, and $16,899, respectively. General and administrative expenses were comprised of management expense, state/city registration and annual report filing fees, XBRL outsourced fees, office supplies, printing costs, outside storage expenses, copy/fax costs, postage and shipping expenses, long-distance telephone expenses, website fees, bank fees and state income tax expenses. The increase is primarily the result of higher state income tax paid in 2022 for 2021 income related to the sale of the Brakes 4 Less property in late 2021.
Professional services: Professional services expenses for the three-month periods ended September 30, 2022 and 2021 were $39,495 and 2020 were $26,441, and $48,204, respectively. Professional services expenses were primarily comprised of investor relations data processing, investor mailings processing, website design, legal, auditing and tax preparation fees, and SEC report conversion and processing fees. The decreaseincrease is primarily related to a decreasean increase in investor relations expenses along with a decrease in legal fees. Legalhourly billing fees were higher in 2020 duerelated to the negotiationnew process of emailing 2021 K-1’s to the Wendy’s lease renewals.investors.
Nine-month period ended September 30, 20212022 as compared to the nine-month period ended September 30, 2020:2021:
Net income from continuing operations for the nine-month periods ended September 30, 2022 and 2021 were $1,606,074 and 2020 were $636,800, and $545,309, respectively. The increase is primarily the result of increasedthe sale of the Walton Way Wendy’s property in April 2022 slightly offset by a decrease in base monthly rental revenue resulting fromrents and accrued percentage rents as a result of two property sales within the six Wendy’s locations whose leases renewed as of January 1, 2021, combined with lower operating expenses in 2021 compared to 2020.last 12 months.
See paragraphs below for further information as to the primary factors that contributed to the variances in operating income and expense items from the 20202021 periods to the 20212022 periods.
Operating Rental Income: Rental income for the nine-month periods ended September 30, 20212022 and 2021 was $1,122,570$999,354 and $1,113,879,$1,122,570, respectively. The rental income was comprised primarily of monthly lease obligations and includes accruals for annual percentage rents earned year-to-date and adjustments for straight line rent. The decrease relatesis primarily to increasedthe result of lower monthly rental revenue year-to-date due tobase rents and accrued percentage rents as a result of two property sales within the six Wendy’s leases that were effective on January 1, 2021, offset by decreased accrual for percentage accrual due to the increase in the percentage rent breakpoint for the same six Wendy’s whose leases were extended as of January 1, 2021.last 12 months.
General and Administrative Expense: General and administrative expenses for the nine-month periods ended September 30, 2022 and 2021 were $103,206 and 2020 were $54,897, and $64,375, respectively. General and administrative expenses were comprised of management expense, state/city registration and annual report filing fees, office supplies, printing costs, outside storage expenses, copy/fax costs, postage and shipping expenses, long-distance telephone expenses, website fees, bank fees, state income tax expenses and bad debt allowance. The decreaseincrease is due primarily the result of higher state income tax paid in 2022 for 2021 income related to the decreasesale of the Brakes 4 Less property in state income taxes paid for 2020 and estimates paid for 2021, which are lower than what was paid in 2020.late 2021.
Professional services: Professional services expenses for the nine-month periods ended September 30, 2022 and 2021 were $191,389 and 2020 were $148,862, and $186,169, respectively. Professional services expenses were primarily comprised of investor relations data processing, investor mailings processing, website design, legal, auditing and tax preparation fees, and SEC report conversion and processing fees. The decrease year-over-yearincrease is dueprimarily related to primarily to lower legal fees. In 2020, our legalan increase in investor relations hourly billing fees were higher related to the work onnew process of emailing 2021 K-1’s to the six Wendy’s lease extensions.investors.
Cash Flow Analysis
Net cash flows provided by operating activities for the nine-month periods ended September 30, 2022 and 2021 were $924,568 and 2020 were $1,164,730, and $799,264, respectively. The increasedecrease is attributed to higherlower net income period over period (exclusive of the property sale) in addition to lower accrued percentage rents and higher unearned rental incomethan in 2021.
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Cash flows used in investing activities for the nine-month periods ended September 30, 2022 and 2021 were $1,448,425 and 2020 were $219, and $3,862, respectively. The amounts represent2022 amount represents the proceeds from the sale of the Walton Way property offset partially by interest applied to the indemnification trust account. The 2021 amount is interest applied to the indemnification trust account.
For the nine-month period ended September 30, 2022, cash flows used in financing activities was $3,057,470 and consisted of aggregate limited partner distributions of $3,050,000, and general partner distributions of $7,470.
For the nine-month period ended September 30, 2021, cash flows used in financing activities was $1,002,547 and consisted of aggregate limited partner distributions of $1,000,000, and general partner distributions of $2,547.
For the nine-month period ended September 30, 2020, cash flows used in financing activities was $702,181 and consisted of aggregate limited partner distributions of $700,000, and general partner distributions of $2,181.
Liquidity and Capital Resources
The Partnership’s cash balance was $234,208$281,361 at September 30, 2021.2022. Cash of $200,000$175,000 is anticipated to be used to fund the 20212022 third quarter aggregate distribution to limited partners on or about November 15, 2021.2022.
The Partnership’s principal demands for liquidity historically have been, and are expected to continue to be, for the payment of operating expenses and distributions. Management anticipates that cash generated through the operations of the Properties and potential sales of Properties will primarily provide the sources for future Partnership liquidity and limited partner distributions of cash flows from operations. The Partnership is in competition with sellers of similar properties to locate suitable purchasers for its Properties. The two primary liquidity risks in the absence of mortgage debt with respect to the on-going operations of the Properties are the Partnership’s inability to collect rent receivables and near-term or chronic property vacancies. The amount of cash to be distributed to our limited partners is determined by the General Partner and is dependent on a number of factors, including funds available for payment of distributions, capital expenditures, and taxable income recognition matching, which is primarily attributable to percentage rents and property sales.
As of September 30, 2021,2022, the current teneight Properties were 100% leased. In addition, the Partnership collected 100% of its base rent from current operating tenants for the period ended September 30, 20212022 and the year ended December 31, 2020,2021, which we believe is a good indication of overall tenant quality and stability.
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Item 3. Quantitative and Qualitative Disclosure About Market Risk
As a smaller reporting company, the Partnership is not required to provide the information required by Item 305 of Regulation S-K.
Item 4. Controls and Procedures
Controls and Procedures
Controls and Procedures:
As of September 30, 20212022 the Partnership’s management, including the persons performing the functions of the Partnership’s principal executive officer and principal financial officer, have concluded that the Partnership’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report were effective based on the evaluation of these controls and procedures as required by paragraph (b) of Rule 13a-15 or Rule 15d-15 under the Exchange Act.
Changes in Internal Control over Financial Reporting:
There has been no change in the Partnership’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal quarter ending September 30, 20212022 that has materially affected, or is reasonably likely to materially affect, the Partnership’s internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
As of the date of this report, there are no material pending legal proceedings to which the Partnership is a party.
Item 1a. Risk Factors
Not Applicable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
| (a) | Listing of Exhibits |
| 3.1 | Certificate of Limited Partnership dated November 20, 1987, filed as Exhibit 3.7 to the Partnership’s Annual Report on Form 10-K filed March 22, 2013, Commission File 0-17686, and incorporated herein by reference. | |
| 4.1 | Agreement of Limited Partnership dated as of November 20, 1987, amended as of November 25, 1987, and February 20, 1988, filed as Exhibit 3A to Amendment No. 1 to the Partnership’s Registration Statement on Form S-11 as filed on February 22, 1988, and incorporated herein by reference. | |
| 4.2 | Amendments to Amended Agreement of Limited Partnership dated as of June 21, 1988, included as part of Supplement dated August 15, 1988, filed under Rule 424(b)(3), Commission File 0-17686, and incorporated herein by reference. | |
| 4.3. | Amendment to Amended Agreement of Limited Partnership dated as of February 8, 1993, filed as Exhibit 3.3 to the Partnership’s Annual Report on Form 10-K for the year ended December 31, 1992, Commission File 0-17686, and incorporated herein by reference. | |
| 4.4 | Amendment to Amended Agreement of Limited Partnership dated as of May 26, 1993, filed as Exhibit 3.4 to the Partnership’s Annual Report on Form 10-K for the year ended December 31, 1993, Commission File 0-17686, and incorporated herein by reference. | |
| 4.5 | Amendment to Amended Agreement of Limited Partnership dated as of June 30, 1994, filed as Exhibit 3.5 to the Partnership’s Annual Report on Form 10-K for the year ended December 31, 1994, Commission File 0-17686, and incorporated herein by reference. | |
| 4.6 | Amendment to Amended Agreement of Limited Partnership dated as of November 9, 2009, filed as Exhibit 4.1 to the Partnership’s Quarterly Report on Form 10-Q filed November 12, 2009, Commission File 0-17686, and incorporated herein by reference. | |
4.7 |
| |
| 31.1 | Sarbanes-Oxley Section 302 Certification | |
| 31.2 | Sarbanes-Oxley Section 302 Certification | |
| 32.1 | Certification of Periodic Financial Report Pursuant to 18 U.S.C. Section 1350. | |
| 99.1 | Correspondence to the Limited Partners, anticipated to be mailed on | |
| 101 | The following materials from the Partnership’s Quarterly Report on Form 10-Q for the quarter ended, formatted in XBRL (Extensible Business Reporting Language): (i) Unaudited Condensed Balance Sheets at September 30, |
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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.
DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
| By: | /s/ Lynette L. DeRose | |
| Lynette L. DeRose | ||
| (Chief Financial Officer and | ||
| Duly Authorized Officer of the Partnership) | ||
| Date: | November |
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