UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 1997
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _______to _____.
Commission File Number: 0-17149
PAINEWEBBER MORTGAGE PARTNERS FIVE, L.P.
----------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 04-2889712
- ------------------------------- ---------------
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
265 Franklin Street, Boston, Massachusetts 02110
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(Address of principal executive offices) Zip Code)
Registrant's telephone number, including area code (617) 439-8118
--------------
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 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.|_|
PAINEWEBBER MORTGAGE PARTNERS FIVE, L.P.
BALANCE SHEETS
November 30, 1997 and August 31, 1997 (Unaudited)
(In thousands)
ASSETS
November 30 August 31
----------- ---------
Real estate investments:
Investment properties held for sale, net $ 4,900 $ 4,900
Land 230 230
Mortgage loan receivable 1,270 1,270
-------- --------
6,400 6,400
Cash and cash equivalents 1,007 6,795
Interest and land rent receivable 10 21
Accounts receivable 63 48
Prepaid expenses 13 19
Deferred expenses, net 19 20
-------- --------
$ 7,512 $ 13,303
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable - affiliates $ 29 $ 33
Accounts payable and accrued expenses 212 298
Tenant security deposits 87 88
Deferred management fees 245 245
Partners' capital 6,939 12,639
-------- --------
$ 7,512 $ 13,303
======== ========
See accompanying notes.
PAINEWEBBER MORTGAGE PARTNERS FIVE, L.P.
STATEMENTS OF INCOME
For the three months ended November 30, 1997 and 1996 (Unaudited)
(In thousands, except per Unit amounts)
1997 1996
---- ----
Revenues:
Interest from mortgage loan $ 29 $ 29
Land rent 11 5
Other interest income 59 32
-------- --------
99 66
Expenses:
Management fees 31 34
General and administrative 61 62
Amortization of deferred expenses 1 1
-------- --------
93 97
-------- --------
Operating income (loss) 6 (31)
Income from operations of investment
properties held for sale, net 177 151
-------- --------
Net income $ 183 $ 120
======== ========
Net income per Limited
Partnership Unit $0.23 $0.15
===== =====
Cash distributions per Limited
Partnership Unit $7.57 $0.17
===== =====
The above net income and cash distributions per Limited Partnership Unit are
based upon the 776,988 Units ($50 per Unit) of Limited Partnership Interest
outstanding during each period.
See accompanying notes.
PAINEWEBBER MORTGAGE PARTNERS FIVE, L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
For the three months ended November 30, 1997 and 1996 (Unaudited)
(In thousands)
General Limited
Partners Partners
-------- --------
Balance at August 31, 1996 $(101) $12,617
Net income 1 119
Cash distributions (1) (132)
----- -------
Balance at November 30, 1996 $(101) $12,604
===== =======
Balance at August 31, 1997 $ (99) $12,738
Net income 2 181
Cash distributions (1) (5,882)
----- -------
Balance at November 30, 1997 $ (98) $ 7,037
===== =======
See accompanying notes.
PAINEWEBBER MORTGAGE PARTNERS FIVE, L.P.
STATEMENTS OF CASH FLOWS
For the three months ended November 30, 1997 and 1996 (Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1997 1996
---- ----
Cash flows from operating activities:
Net income $ 183 $ 120
Adjustments to reconcile net income
to net cash provided by operating activities:
Amortization of deferred expenses 1 1
Changes in assets and liabilities:
Accounts receivable (4) 30
Prepaid expenses 6 8
Accounts payable - affiliates (4) -
Accounts payable and accrued expenses (86) (39)
Tenant security deposits (1) (1)
-------- ------
Total adjustments (88) (1)
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Net cash provided by operating activities 95 119
Cash flows from financing activities:
Distributions to partners (5,883) (133)
-------- ------
Net decrease in cash and cash equivalents (5,788) (14)
Cash and cash equivalents, beginning of period 6,795 2,637
-------- ------
Cash and cash equivalents, end of period $ 1,007 $2,623
======== ======
See accompanying notes.
PAINEWEBBER MORTGAGE PARTNERS FIVE, L.P.
Notes to Financial Statements
(Unaudited)
1. General
-------
The accompanying financial statements, footnotes and discussion should be
read in conjunction with the financial statements and footnotes contained in the
Partnership's Annual Report for the year ended August 31, 1997. In the opinion
of management, the accompanying financial statements, which have not been
audited, reflect all adjustments necessary to present fairly the results for the
interim period. All of the accounting adjustments reflected in the accompanying
interim financial statements are of a normal recurring nature.
The accompanying financial statements have been prepared on the accrual
basis of accounting in accordance with generally accepted accounting principles
which require management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities as of November 30, 1997 and August 31, 1997 and revenues and
expenses for the three-month periods ended November 30, 1997 and 1996. Actual
results could differ from the estimates and assumptions used.
2. Mortgage Loan and Land Investments
----------------------------------
The following first mortgage loan was outstanding at November 30, 1997 and
August 31, 1997 (in thousands):
Date of
Property Amount of Loan Interest Rate Loan and Term
-------- -------------- ------------- -------------
Park South Apartments $1,270 9% 12/29/88
Charlotte, North Carolina 13 years
The loan is secured by a first mortgage on the property and an assignment
of all tenant leases. Interest is payable monthly and the principal is due at
maturity, in December 2001.
The fair value of the Park South loan, which became prepayable subsequent
to the end of the first quarter, in December 1997, has been estimated using
discounted cash flow analysis and approximated the loan's carrying value as of
November 30, 1997 and August 31, 1997.
In addition to the above mortgage loan, the following land
purchase-leaseback transaction had also been entered into as of November 30,
1997 and August 31, 1997 (in thousands):
Cost of Land
Property to the Partnership Annual Base Rent
-------- ------------------ ----------------
Park South Apartments $ 230 $21 through 12/28/28
The land lease has a term of 40 years. Among the provisions of the lease
agreement, the Partnership is entitled to additional rent based upon gross
revenues in excess of a base amount, as defined. The Partnership received
additional rent of $6,000 during the three-month period ended November 30, 1997.
No additional rent was received during the quarter ended November 30, 1996. The
lessee has the option to repurchase the land for a specified period of time
beginning in December of 1997 at a price based on the fair market value, as
defined, but not less than the original cost to the Partnership.
The objectives of the Partnership with respect to its mortgage loan and
land investments are to provide current income from fixed mortgage interest
payments and base land rents, then to provide increases to this current income
through participation in the annual revenues generated by the property as they
increase above a specified base amount. In addition, the Partnership's
investment is structured to share in the appreciation in value of the underlying
real estate. Accordingly, upon either sale, refinancing, maturity of the
mortgage loan or exercise of the option to repurchase the land, the Partnership
will receive a 50% share of the appreciation above a specified base amount.
3. Investment Properties Held for Sale
-----------------------------------
At November 30, 1997 and August 31, 1997, the Partnership owned one
operating investment property (Hacienda Plaza) directly as a result of
foreclosure proceedings resulting from uncured defaults under the terms of a
first mortgage loan held by the Partnership. Until August 1997, the Partnership
had owned another operating property (Spartan Place) that it had acquired
through foreclosure proceedings. As discussed further below, this property was
sold to a third party on August 25, 1997. Descriptions of the transactions
through which the Partnership acquired these properties and of the properties
themselves are summarized below:
Hacienda Plaza
--------------
The Partnership assumed ownership of Hacienda Plaza on June 22, 1990. The
property, which is comprised of 78,415 square feet of leasable office and retail
space in Pleasanton, California, was 93% leased as of November 30, 1997. The
combined balance of the land and the mortgage loan investments at the time title
was transferred to the Partnership was $9,789,000. The estimated fair value of
the operating property at the date of foreclosure was $8,200,000. Accordingly, a
write-down of $1,589,000 was recorded in fiscal 1990. Since the date of the
foreclosure, the Partnership has recorded provisions for possible investment
loss totalling $3,300,000 to write down the net carrying value of the Hacienda
Plaza investment property to reflect additional declines in its estimated fair
value, net of selling expenses. The resulting net carrying value of the Hacienda
Plaza investment property at both November 30, 1997 and August 31, 1997 is
$4,900,000.
Spartan Place Shopping Center
-----------------------------
The Partnership assumed ownership of the Spartan Place Shopping Center,
which is a 151,489 square foot retail center in Spartanburg, South Carolina, on
February 12, 1991. The combined balance of the land and the mortgage loan
investment at the time title was transferred, including the unamortized balance
of deferred costs associated with the original acquisition of the Spartan Place
investments, was $8,419,000. Management estimated that the fair value of the
property, net of selling expenses, at the time of the foreclosure was
$7,840,000. Accordingly, a loss of $579,000 was recorded in fiscal 1991 to
adjust the carrying value to this estimate and the investment was reclassified
to investment properties held for sale. Subsequent to the date of the
foreclosure, the Partnership recorded provisions for possible investment loss
totalling $3,840,000 to write down the net carrying value of the Spartan Place
investment property to reflect additional declines in its estimated fair value,
net of selling expenses. On August 25, 1997, the Partnership sold the Spartan
Place property to an unrelated third party for $4,450,000. After closing costs
and adjustments, the Partnership realized net proceeds of approximately
$4,381,000 from the sale of Spartan Place. As a result of the sale of the
Spartan Place Shopping Center, a Special Distribution of approximately
$5,750,000, or $148 per original $1,000 investment, was made on October 15, 1997
to unitholders of record as of August 25, 1997. The Special Distribution
included the net proceeds from the sale of the Spartan Place Shopping Center as
well as substantially all of the proceeds of the $1.5 million letter of credit
that was collected from the Spartan Place borrower at the time of the original
default and foreclosure on February 12, 1991. Approximately $180,000 of those
proceeds were retained by the Partnership to provide for the potential capital
needs of the Partnership's wholly-owned Hacienda Plaza property.
The Partnership recognizes income from its investment properties held for
sale in the amount of the excess of the properties' gross revenues over the sum
of property operating expenses (including capital improvement expenses and
leasing commissions), taxes and insurance. Combined summarized operating results
for Hacienda Plaza for the three-month period ended November 30, 1997 and for
Hacienda Plaza and Spartan Place for the three-month period ended November 30,
1996 are as follows (in thousands):
1997 1996
---- ----
Revenues:
Rental income and
expense reimbursements $ 347 $ 394
Other income 3 2
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350 396
Expenses:
Property operating expenses 105 161
Property taxes and insurance 68 84
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173 245
------ ------
Income from operations of
investment properties held
for sale, net $ 177 $ 151
====== ======
4. Related Party Transactions
--------------------------
The Adviser earned basic management fees of $31,000 and $34,000 for the
three-month periods ended November 30, 1997 and 1996, respectively. Accounts
payable - affiliates at November 30, 1997 and August 31, 1997 consists of
management fees of $29,000 and $33,000, respectively, payable to the Adviser.
Included in general and administrative expenses for the three months ended
November 30, 1997 and 1996 is $33,000 and $36,000, respectively, representing
reimbursements to an affiliate of the Managing General Partner for providing
certain financial, accounting and investor communication services to the
Partnership.
Also included in general and administrative expenses for the three months
ended November 30, 1997 and 1996 is $4,000 and $3,000, respectively,
representing fees earned by an affiliate, Mitchell Hutchins Institutional
Investors, Inc., for managing the Partnership's cash assets.
PAINEWEBBER MORTGAGE PARTNERS FIVE, L. P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
- -------------------------------
On August 25, 1997, the Partnership sold the Spartan Place property to an
unrelated third party for $4,450,000. After closing costs and adjustments, the
Partnership realized net proceeds of approximately $4,381,000 from the sale of
Spartan Place. As a result of the sale of the Spartan Place Shopping Center, a
Special Distribution of approximately $5,750,000, or $148 per original $1,000
investment, was made on October 15, 1997 to unitholders of record as of August
25, 1997. The Special Distribution included the net proceeds from the sale of
the Spartan Place Shopping Center as well as substantially all of the proceeds
of the $1.5 million letter of credit that was collected from the Spartan Place
borrower at the time of the original default and foreclosure on February 12,
1991. Approximately $180,000 of those proceeds were retained by the Partnership
to provide for the potential capital needs of the Partnership's wholly-owned
Hacienda Plaza property. As previously reported, the Partnership had begun to
examine the possibility of selling Spartan Place in fiscal 1996 and had engaged
in selective marketing efforts over the past two years. After careful evaluation
of the potential benefits of a sale in an "as-is" condition versus the risks of
continuing to search for tenants to replace the two anchor stores that closed
their operations during fiscal 1995, an agreement was signed during the third
quarter of fiscal 1997 which gave a prospective third-party buyer a 60-day
exclusive right to purchase the property. Although the agreement expired during
the fourth quarter of fiscal 1997, negotiations continued with this prospective
buyer and eventually resulted in the sale of the Spartan Place Shopping Center
on August 25, 1997. The sale price of $4,450,000, while substantially less than
the Partnership's original investment of $9.8 million in the land and mortgage
loan secured by Spartan Place, compares favorably with the most recent
independent appraisal of the property. Due to the Spartan Place Special
Distribution and the resulting decrease in the Partnership's cash flow, the
Partnership's annualized distribution rate has been adjusted from 2% to 1%
beginning with the distribution for the quarter ended November 30, 1997, which
will be made on January 15, 1998.
With the sale of Spartan Place, the Partnership has two remaining real
estate assets which consist of the mortgage loan and ground lease secured by the
Park South Apartments and the wholly-owned Hacienda Plaza, a mixed-use
office/retail property. The first mortgage loan secured by Park South opened to
prepayment without penalty subsequent to the quarter-end, on December 29, 1997.
As discussed further below, the borrower of the mortgage loan secured by Park
South has indicated an intent to prepay the loan and repurchase the underlying
land in early calendar year 1998. In addition, as discussed further below, the
Partnership is currently working on a leasing program at Hacienda Plaza that is
expected to increase the value of the property and position it for a possible
sale in the near term. Given the Park South owner's indication of its intent to
prepay the first mortgage loan and repurchase the underlying land and
management's intent to market the Hacienda Plaza property for sale in 1998, it
is possible that a liquidation of the Partnership could be completed in calendar
year 1998. However, there are no assurances that the disposition of the
remaining real estate assets and the liquidation of the Partnership will be
completed within this time frame.
The wholly-owned Hacienda Plaza office and retail complex was 93% leased
as of November 30, 1997, up from 92% as of August 31, 1997. As previously
reported, overall occupancy levels for the local Pleasanton, California office
market have improved considerably over the past two years, reaching the
mid-to-high 90% range. Such improvement is primarily the result of the
resurgence in the growth of the high technology industries. As a result, rental
rates in the Pleasanton office market have been improving during this period as
well. In addition, a significant number of build-to-suit office and multi-family
residential properties have been constructed within the past year in the planned
development area in which Hacienda Plaza is located, which has substantially
reduced the amount of available land that could be developed for competing
speculative office properties. As a result of these conditions, operations of
the Hacienda Plaza investment property have stabilized after several years of
intense local office and retail market competition. During the past six months,
leases representing approximately 35% of the center's rentable area were
renewed. Because market rents have been increasing, these leases have been
renewed or signed at significantly higher rental rates. Over the next two years,
22% of the property's leases will expire (10% in calendar 1998 and 12% in 1999).
The occupancy in the retail portion of the property remained at 97% during the
first quarter of fiscal 1998, unchanged from the fourth quarter of fiscal 1997.
Only one retail space of approximately 1,100 square feet remains available for
lease at Hacienda Plaza. Occupancy of the office portion of the property
increased to 91% as of November 30, 1997, up from a level of 89% as of August
31, 1997. As discussed further in the Annual Report, negotiations were underway
with two prospective new office tenants as of the fiscal year-end. While one of
these potential tenants never executed a lease, a lease was signed with the
other tenant to occupy approximately 2,400 square feet of space. In addition,
two current tenants decided to renew their leases during the first quarter at
significantly higher rental rates. Two smaller tenants occupying a total of
approximately 1,700 square feet of space decided not to renew when their leases
expired during the quarter. In response to changing market conditions in recent
months, the leasing and management teams at Hacienda Plaza have sought to
combine some of the smaller vacant units that are adjacent to one another into
larger units in the 2,000-4,000 square foot range. Spaces of this size seem to
be in higher demand than spaces under 2,000 square feet in the Pleasanton
market, and the property's leasing team reports that these larger, combined
spaces are generating increased interest from prospective tenants. The leasing
team is currently negotiating with two prospective new tenants, one of which is
interested in one of the new combined spaces. These two new tenants would
potentially occupy a total of approximately 3,700 square feet. As discussed in
the Annual Report, plans have been developed to improve the common areas of the
office portion of the property. These improvements are expected to be completed
during the second quarter of fiscal 1998. Also, an exterior stairway to the
office portion of the property was replaced during the first quarter, and a
project to improve the exterior lighting around the retail portion of the
property commenced.
Occupancy at the Park South Apartments in Charlotte, North Carolina,
averaged 95% for the quarter ended November 30, 1997, compared to 92% for the
previous quarter. The property management team attributes the increase in
occupancy to the continued selective use of rental concessions on new leases and
conservative rental rate increases on renewals. Operations of the property
continue to fully support the debt service and ground lease payments owed to the
Partnership despite a weakening in market conditions for existing properties in
the greater Charlotte area over the past year. A significant number of new
apartment units have been added to the overall Charlotte market during this time
period, including several hundred new units which are in Park South's
sub-market, and a substantial amount of additional units are currently either
under construction or in the planning stages. In order to remain competitive
with these new units, Park South currently offers reduced rental rates and/or
discounted move-in rates to prospective tenants. As an incentive to renew
leases, current tenants are offered minimal increases at the expiration of their
leases. The use of rental concessions and renewal incentives is expected to
continue for the near term. Notwithstanding the current market conditions,
management believes that the long-term prospects for the Park South property
remain positive due to the property's strong position within the marketplace and
the region's outlook for job and population growth over the next several years.
The first mortgage loan secured by Park South matures on December 28,
2001; however, it opened to prepayment without penalty subsequent to the
quarter-end, on December 29, 1997. The owner of the Park South Apartments has
recently indicted that it may prepay the first leasehold mortgage loan and
repurchase the underlying land in early 1998 in conjunction with a sale of the
property. However, there are no assurances that this sale transaction and the
resulting prepayments of the Partnership's investments will occur within this
time frame. The Partnership's Park South land investment contains a
participation feature which entitles the Partnership to share in the
appreciation of the property upon a sale or refinancing. Based on recent
third-party valuations, this property has an estimated value that is higher than
the Partnership's combined original loan and land investments. As a result, it
is anticipated that the Partnership will realize its original net investments
plus some portion of the appreciated value of the property when it is sold. If
the sale of Park South closes in early calendar year 1998 as expected, the
Partnership would likely begin to market the Hacienda Plaza property for sale
during the second half of calendar 1998 with a goal of completing a sale and a
liquidation of the Partnership by December 31, 1998.
At November 30, 1997, the Partnership had available cash and cash
equivalents of $1,007,000. Such cash and cash equivalents will be used for the
working capital requirements of the Partnership, distributions to the partners
and, if necessary, for capital improvements and/or leasing costs at Hacienda
Plaza. The source of future liquidity and distributions to the partners is
expected to be from the operations and future sale of the remaining wholly-owned
investment property, mortgage interest and land rent payments from the
Partnership's mortgage loan and ground lease investments, interest income on the
Partnership's cash reserves, the repayment of the mortgage loan receivable and
the sale of the underlying parcel of land.
Results of Operations
Three Months Ended November 30, 1997
- ------------------------------------
The Partnership's net income increased by $63,000 for the three months
ended November 30, 1997, when compared to the same period in the prior year. The
increase in net income was due to a $26,000 increase in income from the
operations of investment properties held for sale and a $37,000 decrease in the
Partnership's operating loss. Income from operations of investment properties
held for sale increased due to an increase in net operating income of $94,000 at
Hacienda Plaza. Net operating income was higher at Hacienda Plaza mainly due to
an $81,000 increase in rental income and decreases in capital expenditures and
leasing commissions, which are expensed currently in accordance with the
Partnership's accounting policy for assets held for sale. Rental income
increased at Hacienda Plaza due to an increase in occupancy, from 84% at
November 30, 1996 to 93% at November 30, 1997, as well as an increase in average
rental rates over the past year.
The Partnership's operating loss also decreased due to an increase in
other interest income of $22,000. This increase in interest income is primarily
due to the sale of Spartan Place during the fourth quarter of fiscal 1997 and
the temporary investment of the net proceeds prior to the Special Distribution
during the current period, as discussed further above. Also, the Partnership
received $6,000 of additional land rent income from the Park South Apartments
during the quarter ended November 30, 1997. No additional land rent was received
during the first quarter of the prior fiscal year.
PART II
Other Information
Item 1. Legal Proceedings NONE
Item 2. through 5. NONE
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: NONE
(b) Reports on Form 8-K:
A Current Report on Form 8-K dated August 25, 1997 was filed by the
registrant during the first quarter of fiscal 1998 to report the sale of the
wholly-owned Spartan Place Shopping Center and is hereby incorporated by
reference.
PAINEWEBBER MORTGAGE PARTNERS FIVE, L.P.
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.
PAINEWEBBER MORTGAGE PARTNERS FIVE, L.P.
By: FIFTH MORTGAGE PARTNERS, INC.
Managing General Partner
By: /s/ Walter V. Arnold
--------------------
Walter V. Arnold
Senior Vice President and Chief
Financial Officer
Dated: January 9, 1998