FORM 10-QSB-QUARTERLY OR TRANSITIONAL REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
QUARTERLY OR TRANSITIONAL REPORT
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from.........to.........
Commission file number 0-14483
DAVIDSON DIVERSIFIED REAL ESTATE II LIMITED PARTNERSHIP
(Exact name of small business issuer as specified in its charter)
Delaware 62-1207077
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Insignia Financial Plaza
Greenville, South Carolina 29602
(Address of principal executive offices)
(864) 239-1000
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 for the past 90 days Yes X No .
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
a) DAVIDSON DIVERSIFIED REAL ESTATE II LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEET
(Unaudited)
(in thousands, except unit data)
September 30, 1997
Assets
Cash and cash equivalents:
Unrestricted $ 708
Restricted-tenant security deposits 191
Accounts receivable, net of allowance of $64 50
Escrow for taxes 550
Restricted escrows 1,233
Other assets 637
Investment properties:
Land $ 2,878
Buildings and related personal property 41,539
44,417
Less accumulated depreciation (20,928) 23,489
$ 26,858
Liabilities and Partners' Deficit
Liabilities
Accounts payable $ 176
Tenant security deposits 191
Accrued property taxes 688
Other liabilities 237
Mortgage notes payable 26,946
Partners' Deficit
General partners' $ (463)
Limited partners' (1,224.25 units
issued and outstanding) (917) (1,380)
$ 26,858
See Accompanying Notes to Consolidated Financial Statements
b) DAVIDSON DIVERSIFIED REAL ESTATE II LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except unit data)
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
Revenues:
Rental income $ 2,005 $ 2,157 $ 6,194 $ 6,497
Other income 196 160 607 545
Casualty gain -- 66 -- 252
Total revenues 2,201 2,383 6,801 7,294
Expenses:
Operating 802 817 2,372 2,393
General and administrative 71 76 204 236
Maintenance 336 407 860 875
Depreciation 518 495 1,515 1,448
Interest 588 627 1,846 1,870
Property taxes 187 192 540 537
Total expenses 2,502 2,614 7,337 7,359
Net loss $ (301) $ (231) $ (536) $ (65)
Net loss allocated
to general partners (2%) $ (6) $ (5) $ (11) $ (1)
Net loss allocated
to limited partners (98%) (295) (226) (525) (64)
Net loss $ (301) $ (231) $ (536) $ (65)
Net loss per limited
partnership unit $(240.96) $(184.60) $(428.83) $ (52.28)
See Accompanying Notes to Consolidated Financial Statements
c) DAVIDSON DIVERSIFIED REAL ESTATE II LIMITED PARTNERSHIP
STATEMENT OF CHANGES IN PARTNERS' DEFICIT
(Unaudited)
(in thousands, except unit data)
Limited
Partnership General Limited
Units Partners' Partners' Total
Original capital contributions 1,224.25 $ 1 $24,485 $24,486
Partners' deficit at
December 31, 1996 1,224.25 $ (450) $ (294) $ (744)
Net loss for the nine months
ended September 30, 1997 -- (11) (525) (536)
Distributions paid -- (2) (98) (100)
Partners' deficit at
September 30, 1997 1,224.25 $ (463) $ (917) $(1,380)
See Accompanying Notes to Consolidated Financial Statements
d) DAVIDSON DIVERSIFIED REAL ESTATE II LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months Ended
September 30,
1997 1996
Cash flows from operating activities:
Net loss $ (536) $ (65)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Depreciation 1,515 1,448
Amortization of loan costs, discounts
and lease commissions 183 198
Casualty gain -- (252)
Bad debt 64 --
Change in accounts:
Restricted cash (9) (14)
Accounts receivable (44) --
Escrow for taxes and insurance (173) (153)
Other assets (56) (22)
Accounts payable (32) 203
Tenant security deposit liabilities 8 10
Accrued property taxes 103 189
Other liabilities (10) (29)
Net cash provided by operating activities 1,013 1,513
Cash flows from investing activities:
Property improvements and replacements (638) (879)
Deposits to restricted escrow (507) (353)
Receipts from restricted escrow -- 44
Insurance proceeds from property damage -- 227
Net cash used in investing activities (1,145) (961)
Cash flows from financing activities:
Principal payments on notes payable (396) (349)
Repayment of mortgage note payable (6,720) --
Proceeds from long-term borrowings 7,325 --
Loan costs paid (273) (4)
Distributions to partners (100) (100)
Net cash used in financing activities (164) (453)
Net (decrease) increase in unrestricted cash (296) 99
and cash equivalents
Unrestricted cash and cash equivalents at beginning of period 1,004 714
Unrestricted cash and cash equivalents at end of period $ 708 $ 813
Supplemental disclosure of cash flow information:
Cash paid for interest $ 1,650 $ 1,675
See Accompanying Notes to Consolidated Financial Statements
e) DAVIDSON DIVERSIFIED REAL ESTATE II LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Davidson
Diversified Real Estate II Limited Partnership (the "Partnership") have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310(b)
of Regulation S-B. 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 Davidson Diversified Properties, Inc.
(the "Managing General Partner"), all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three and nine month periods ended
September 30, 1997, are not necessarily indicative of the results that may be
expected for the fiscal year ending December 31, 1997. For further information,
refer to the consolidated financial statements and footnotes thereto included in
the Partnership's annual report on Form 10-KSB for the fiscal year ended
December 31, 1996.
Certain reclassifications have been made to the 1996 information to conform to
the 1997 presentation.
NOTE B - TRANSACTIONS WITH AFFILIATED PARTIES
The Partnership has no employees and is dependent on the Managing General
Partner and its affiliates for the management and administration of all
partnership activities. The Partnership Agreement provides for payments to
affiliates for services and as reimbursement of certain expenses incurred by
affiliates on behalf of the Partnership. The following amounts were paid or
accrued to the Managing General Partner and affiliates in 1997 and 1996:
Nine Months Ended
September 30,
1997 1996
(in thousands)
Property management fees (included in operating expenses) $330 $285
Reimbursement for services of affiliates, including
approximately $31,000 and $17,000 of construction oversight
reimbursements in 1997 and 1996, respectively (included in
general and administrative expenses, maintenance expenses
and investment properties) 172 182
During 1996, Shoppes At River Rock (formerly Outlet's Ltd. Mall) was managed by
a third party. As of January 1997, an affiliate of the Managing General Partner
assumed management of the day to day operations.
For the period of January 1, 1996 to August 31, 1997, the Partnership insured
its properties under a master policy through an agency and insurer unaffiliated
with the Managing General Partner. An affiliate of the Managing General Partner
acquired, in the acquisition of a business, certain financial obligations from
an insurance agency which was later acquired by the agent who placed the master
policy. The agent assumed the financial obligations to the affiliate of the
Managing General Partner who received payments on these obligations from the
agent. The amount of the Partnership's insurance premiums accruing to the
benefit of the affiliate of the Managing General Partner by virtue of the
agent's obligations is not significant.
On September 26, 1997, an affiliate of the General Partner purchased Lehman
Brothers' class "D" subordinated bonds of SASCO, 1992-M1. These bonds are
secured by 55 multi-family apartment mortgage loan pairs held in Trust,
including Big Walnut Apartments and Greensprings Manor Apartments owned by the
Partnership.
NOTE C - DISTRIBUTION TO PARTNERS
In February 1997, the Partnership distributed approximately $100,000 to the
partners. The limited partners received approximately $98,000 ($80.05 per
limited partnership unit) and the general partners received approximately
$2,000.
NOTE D - MORTGAGE NOTES PAYABLE
On August 6, 1997, the Partnership refinanced the mortgage note payable
encumbering Lafontenay Apartments. The refinancing replaced indebtedness on
Lafontenay in the amount of approximately $6,720,000 which carried an interest
rate of 9.25% and had a maturity date of August 1, 1997. The new mortgage
indebtedness of $7,325,000 carries a stated interest rate of 7.5% and matures on
September 1, 2007.
The MultiFamily Housing Revenue Bonds and Note Agreement collateralized by The
Trails Apartments were called and, therefore, payable in full on February 1,
1997 in accordance with the terms of the agreements. On June 30, 1997 the
Partnership entered into a Modification of Bond Documents with the issuer.
Pursuant to the modification, the call notice was rescinded. The modification
converted the monthly payments from interest only to principal and interest
payments with an amortization period of twenty years. The note and bond mature
on December 1, 2009 with a balloon payment. Pursuant to the modified terms, the
Bondholder shall not exercise the call right of the Bond on a date prior to the
fifth anniversary of the modification.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The Partnership's investment properties consist of four apartment complexes and
one commercial property. The following table sets forth the average occupancy
of the properties for each of the nine months ended September 30, 1997 and 1996:
Average
Occupancy
1997 1996
Big Walnut Apartments
Columbus, Ohio 94% 96%
Lafontenay Apartments
Louisville, Kentucky 94% 94%
The Trails Apartments
Nashville, Tennessee 94% 93%
Greensprings Manor Apartments
Indianapolis, Indiana 87% 93%
Shoppes At River Rock
(Formerly Outlet's Ltd. Mall)
Murfreesboro, Tennessee 73% 83%
The Managing General Partner attributes the decrease in occupancy at
Greensprings Manor Apartments to numerous evictions in the current quarter.
Management is evicting tenants who are not complying with the collection policy
in an effort to improve the tenant base. Occupancy at the Shoppes At River Rock
has also decreased due to increased competition. The property is not located in
the retail corridor which makes it difficult to position the property. The
Managing General Partner is in the process of exploring different concepts such
as "big box", entertainment, and specialty center in an effort to reposition the
Mall in hopes of reestablishing occupancy levels.
The Partnership's net loss for the three and nine month periods ended September
30, 1997, was approximately $301,000 and $536,000, respectively, compared to net
losses of approximately $231,000 and $65,000, respectively, for the
corresponding periods of 1996. The increase in net loss is primarily
attributable to a decrease in rental income and a casualty gain of $252,000 for
the nine months ended September 30, 1996. The decrease in rental income is due
to decreases in occupancy at Shoppes At River Rock and Greensprings Manor, as
discussed above. The Partnership recorded a net casualty gain in 1996 resulting
from two fires at the Trails Apartments which destroyed four apartment units and
caused minor smoke damage in one unit. The damage resulted in a net gain of
approximately $252,000 as of September 30, 1996 arising from proceeds from the
Partnership's insurance carrier which exceeded the basis of the property and
expenses to reconstruct the four destroyed apartment units and to repair the
other unit which incurred minor smoke damage. Offsetting the above increases to
net loss is an increase in other income and a decrease in general and
administrative expense. The increase in other income is due to increases in
tenant charges at Greensprings Apartments and lease cancellation fees for
Shoppes At River Rock. The decrease in general and administrative expense is
attributable to a decrease in partnership administration cost reimbursements.
Included in maintenance expense is approximately $118,000 of major repairs and
maintenance comprised of new gas service lines, water saving devices, and
window coverings for the nine months ended September 30, 1997. For the nine
months ended September 30, 1996, approximately $237,000 of major repairs and
maintenance is included in maintenance expense comprised of exterior building
repairs, interior building improvements, and major landscaping.
As part of the ongoing business plan of the Partnership, the Managing General
Partner monitors the rental market environment of each of its investment
properties to assess the feasibility of increasing rents, maintaining or
increasing occupancy levels and protecting the Partnership from increases in
expenses. As part of this plan, the Managing General Partner attempts to
protect the Partnership from the burden of inflation-related increases in
expenses by increasing rents and maintaining a high overall occupancy level.
However, due to changing market conditions which can result in the use of rental
concessions and rental reductions to offset softening market conditions, there
is no guarantee that the Managing General Partner will be able to sustain such a
plan.
The Partnership had unrestricted cash and cash equivalents of approximately
$708,000 at September 30, 1997, compared to unrestricted cash and cash
equivalents of approximately $813,000 at September 30, 1996. Net cash provided
by operating activities decreased primarily due to the increase in net loss as
discussed above. Net cash used in investing activities increased due to the
receipt in 1996 of insurance proceeds related to the casualty gain at The Trails
as discussed above. Net cash used in financing activities decreased due to the
refinancing of the mortgage on Lafontenay Apartments as discussed in Note D.
The sufficiency of existing liquid assets to meet future liquidity and capital
expenditure requirements is directly related to the level of capital
expenditures required at the various properties to adequately maintain the
physical assets and other operating needs of the Partnership. Such assets are
currently thought to be sufficient for any near-term needs of the Partnership.
The mortgage indebtedness of approximately $26,946,000, net of discount, with
stated interest rates of 7.5% to 10.125%, has maturity dates ranging from
January 2000 to December 2009. During the first nine months of 1996
distributions in the amount of $100,000 were paid. In February 1997, the
Partnership distributed approximately $100,000 to the partners. The limited
partners received approximately $98,000 ($80.05 per limited partnership unit)
and the general partners received approximately $2,000. Future cash
distributions will depend on the levels of net cash generated from operations,
refinancings, property sales and the availability of the cash reserves.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
Exhibit 10 MM(a), Multifamily Note secured by a Mortgage or Deed
of Trust dated August 6, 1997, between La Fontenay, L.L.C. and
Patrician Financial Company Limited Partnership related to
Lafontenay Apartments, is filed as an exhibit to this report.
Exhibit 27, Financial Data Schedule, is filed as an exhibit to
this report.
b) Reports on Form 8-K:
None filed during the quarter ended September 30, 1997.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DAVIDSON DIVERSIFIED REAL ESTATE II
By: Davidson Diversified Properties, Inc.
Managing General Partner
By: /s/ Carroll D. Vinson
Carroll D. Vinson
President
By: /s/ Robert D. Long, Jr.
Robert D. Long, Jr.
Vice President/CAO
Date: November 13, 1997