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 OCTOBER 31, 1997
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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: 0-18076
PAINEWEBBER INSURED MORTGAGE PARTNERS 1-B, L.P.
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(Exact name of registrant as specified in its charter)
Delaware 04-3038480
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(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
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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 INSURED MORTGAGE PARTNERS 1-B, L.P.
BALANCE SHEETS
October 31, 1997 and July 31, 1997 (Unaudited)
(In thousands)
ASSETS
October 31 July 31
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Investments in Debt Securities (at market value):
Mortgage-Backed Securities available for sale $ 5,222 $ 5,379
Participating Insured Mortgage Loans
available for sale 18,561 18,586
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23,783 23,965
Cash and cash equivalents 1,429 1,310
Interest receivable 163 165
Deferred expenses, net 487 531
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$ 25,862 $ 25,971
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LIABILITIES AND PARTNERS' CAPITAL
Accounts payable - affiliates $ 29 $ 29
Accounts payable and accrued expenses 41 39
Partners' capital 25,792 25,903
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$ 25,862 $ 25,971
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STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
For the three months ended October 31, 1997 and 1996 (Unaudited)
(In thousands)
Corporate
Limited
General Partner and
Partner Unitholders
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Balance at July 31, 1996 $ 1 $ 29,161
Net unrealized holding gains
on debt securities - 134
Cash distributions (5) (688)
Net income 4 432
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Balance at October 31, 1996 $ - $ 29,039
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Balance at July 31, 1997 $ (2) $ 25,905
Net unrealized holding gains
on debt securities - 27
Cash distributions (5) (488)
Net income 4 351
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Balance at October 31, 1997 $ (3) $ 25,795
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See accompanying notes.
PAINEWEBBER INSURED MORTGAGE PARTNERS 1-B, L.P.
STATEMENTS OF INCOME
For the three months ended October 31, 1997 and 1996 (Unaudited)
(In thousands, except per Unit data)
1997 1996
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Revenues:
Interest income - Investments $ 475 $ 507
Interest income - Money Market 19 50
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494 557
Expenses:
Management fees 52 55
General and administrative 43 45
Amortization expense 44 21
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139 121
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Net income $ 355 $ 436
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Net income per Unit
of Depositary Receipt $ 0.64 $ 0.79
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Cash distributions per Unit
of Depositary Receipt $ 0.89 $ 1.25
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The above net income and cash distributions per Unit of Depositary Receipt are
based upon the 551,604 Units outstanding for each period.
See accompanying notes.
PAINEWEBBER INSURED MORTGAGE PARTNERS 1-B, L.P.
STATEMENTS OF CASH FLOWS
For the three months ended October 31, 1997 and 1996
Increase (Decrease) in Cash and Cash Equivalents (Unaudited)
(In thousands)
1997 1996
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Cash flows from operating activities:
Net income $ 355 $ 436
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization expense 44 21
Amortization of discount/premium on debt
securities 15 4
Changes in assets and liabilities:
Interest receivable 2 2
Accounts payable and accrued expenses 2 2
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Total adjustments 63 29
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Net cash provided by operating activities 418 465
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Cash flows from investing activities:
Principal collections on Mortgage-Backed Securities 174 258
Principal collections on Participating Insured
Mortgage Loans 20 18
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Net cash provided by investing activities 194 276
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Cash flows from financing activities:
Distributions to Unitholders and partners (493) (693)
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Net increase in cash and cash equivalents 119 48
Cash and cash equivalents, beginning of period 1,310 3,637
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Cash and cash equivalents, end of period $ 1,429 $ 3,685
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See accompanying notes.
PAINEWEBBER INSURED MORTGAGE PARTNERS 1-B, L.P.
Notes to Financial Statements
(Unaudited)
1. General
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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 July 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 requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities as of October 31, 1997 and July 31, 1997 and revenues and
expenses for each of the three-month period ended October 31, 1997 and 1996.
Actual results could differ from the estimates and assumptions used.
2. Mortgage-Backed Securities
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At October 31, 1997 and 1996 the Partnership held non-participating
mortgage-backed securities ("MBS") backed by single-family or multi-family
mortgage loans issued or originated in connection with the housing programs of
the Government National Mortgage Association ("GNMA"), and guaranteed by GNMA,
as follows (in thousands):
October 31, 1997 July 31, 1997
-------------------------------- ------------------------------------
Estimated Estimated
Market Face Amortized Market Face Amortized
Description Value Value Cost Value Value Cost
----------- ----- ----- ---- ----- ----- ----
9.5% GNMA Pool $ 1,739 $ 1,602 $ 1,591 $ 1,799 $ 1,664 $ 1,652
9.0% GNMA Pool 232 225 234 268 260 270
8.0% GNMA Pool 2,961 2,837 2,956 3,016 2,907 3,037
7.5% GNMA Pool 290 283 281 296 290 287
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$ 5,222 $ 4,947 $ 5,062 $ 5,379 $ 5,121 $ 5,246
======= ======= ======= ======= ======= =======
The Partnership's investments in MBS are carried at fair value as of
October 31, 1997 and July 31, 1997. Investments in MBS are valued based on
quoted market prices. The amortized cost of the MBS represents the face value of
the securities net of unamortized premium or discount. Investments in
non-participating MBS were limited to no more than 30% of the original net
offering proceeds per the terms of the Partnership's offering prospectus.
The 9.5% MBS, which were purchased at a discount on December 14, 1988,
carry a coupon interest rate of 9.5% per annum and include loans with scheduled
maturities between June 2009 and December 2009. The 9.0% MBS, which were
purchased at a premium on November 16, 1989, carry a coupon interest rate of
9.0% per annum and include loans with scheduled maturities between June 2001 and
September 2002. The 8.0% MBS, which were purchased at a premium on July 30,
1992, carry a coupon interest rate of 8.0% per annum and include loans with
scheduled maturities in June 2022. The 7.5% MBS, which were purchased at a
discount on October 30, 1992, carry a coupon interest rate of 7.50% per annum
and include loans with scheduled maturities in March 2022. The loans included in
these GNMA pool programs may be prepaid, without penalty, at any time.
3. Investments in Participating Insured Mortgage Loans
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Participating Insured Mortgage Loans secured by GNMA securities
outstanding at October 31, 1997 and July 31, 1997 are comprised of the following
(in thousands):
October 31, 1997 July 31, 1997
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GNMA Estimated Estimated
Certificate Interest Market Amortized Market Amortized
Number Property Rate Value Cost Value Cost
------ -------- ---- ----- ---- ----- ----
279985 Quarter Mill 8.50% $ 7,409 $ 7,158 $ 7,417 $ 7,166
279119 Emerald Cove 8.75% 11,152 10,628 11,169 10,645
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$ 18,561 $ 17,786 $ 18,586 $ 17,811
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The Partnership's investments in Participating Insured Mortgage Loans are
carried at fair value as of October 31, 1997 and July 31, 1997. Investments in
Participating Insured Mortgage Loans, for which quoted market prices are not
available, are valued by an independent pricing service which determines the
valuations based on the reported financial results of the underlying properties
and a comparison of recent market trades of securities with similar
characteristics. Because of the inherent uncertainty of valuations, estimated
values, as reflected herein, may differ from the values that would have been
used had a ready market for the securities existed. Descriptions of the
properties financed by the Partnership's loans and the loan agreements
themselves are summarized below:
Quarter Mill Apartments
-----------------------
The Partnership acquired a Participating Insured Mortgage Loan with
respect to a 266-unit apartment complex known as Quarter Mill Apartments located
in Richmond, Virginia (the "Virginia Project"). Construction of the Virginia
Project was completed in November of 1990. Initial closing of this Participating
Insured Mortgage loan took place on August 2, 1989. The project owner is Amurcon
Corporation. The Base Component of this Participating Insured Mortgage Loan is
coinsured by FHA and represented by GNMA Securities with an initial face value
of $7,316,600, which GNMA Securities bore interest at the rate of 10.25% during
construction of the Virginia Project and 8.50% thereafter. Effective May 1,
1991, the construction loan was converted to a permanent loan with a principal
balance of $6,525,000. On June 21, 1991 an additional $791,600 was funded,
completing the Partnership's investment of $7,316,600. Monthly payments of
principal and interest totalling approximately $53,533 are due through maturity,
on October 15, 2031. Scheduled principal repayments of $158,633 have been
received through October 31, 1997.
Emerald Cove Apartments
-----------------------
The Partnership acquired a Participating Insured Mortgage Loan with
respect to a 276-unit apartment complex known as Emerald Cove Apartments in
Charlotte, North Carolina (the "North Carolina Project"). Initial closing of
this Participating Insured Mortgage Loan took place on October 16, 1989. The
project owners are Ronald Curry and Ralph Abercia. The Base Component of this
Participating Insured Mortgage Loan is coinsured by FHA and represented by GNMA
Securities with an initial face value of $10,783,900 at closing, which GNMA
Securities bore interest at the rate of 10.25% during construction of the North
Carolina Project and 8.75% thereafter. During fiscal 1992, the Partnership
funded its remaining commitment on the investment of approximately $1,184,000
and, effective May 1, 1992, the investment was converted to a permanent loan
with a principal balance of $10,776,500. The Partnership paid a premium of
$107,840 to the GNMA issuer to obtain the original loan commitment due to the
fact that the permanent loan interest rate was higher than comparable market
rates at the time of the initial closing. Prior to fiscal 1998, the premium had
been amortized on the straight-line method over a 15-year amortization period.
Beginning in fiscal 1998, the amortization rate has been increased to reflect a
reduction in the remaining expected holding period of the investment. Monthly
payments of principal and interest totalling approximately $81,114 are due
through maturity, on August 15, 2031. Scheduled principal repayments of $208,223
have been received through July 31, 1997.
4. Related Party Transactions
--------------------------
Management fees earned by the General Partner and its affiliates for
services rendered in managing the business of the Partnership aggregated $52,000
and $55,000 for the three months ended October 31, 1997 and 1996, respectively.
Of these amounts, $9,000 and $10,000, respectively, represent additional asset
management fees paid to PWPI which are based on the Partnership's cash
distributions of operating income. Accounts payable - affiliates at both October
31, 1997 and July 31, 1997 consists of management fees of $29,000 payable to the
General Partner and its affiliates.
Included in general and administrative expenses for the three months ended
October 31, 1997 and 1996 is $23,000 and $24,000, respectively, representing
reimbursements to an affiliate of the General Partner for providing certain
financial, accounting and investor communication services to the Partnership.
Also included in general and administrative expenses for each of the
three-month periods ended October 31, 1997 and 1996 is $1,000, representing fees
earned by an affiliate, Mitchell Hutchins Institutional Investors, Inc., for
managing the Partnership's cash assets.
PAINEWEBBER INSURED MORTGAGE PARTNERS 1-B, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Information Relating to Forward-Looking Statements
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The following discussion of financial condition includes forward-looking
statements which reflect management's current views with respect to future
events and financial performance of the Partnership. These forward-looking
statements are subject to certain risks and uncertainties, including those
identified in Item 7 of the Partnership's Annual Report on Form 10-K for the
year ended July 31, 1997 under the heading "Certain Factors Affecting Future
Operating Results", which could cause actual results to differ materially from
historical results or those anticipated. The words "believe", "expect",
"anticipate," and similar expressions identify forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which were made based on facts and conditions as they existed as of
the date of this report. The Partnership undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
Liquidity and Capital Resources
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The Partnership is currently analyzing potential disposition strategies
for its remaining investments. As part of these efforts, the Partnership is
evaluating the current economic benefits it would receive if the owners of the
Emerald Cove Apartments and the Quarter Mill Apartments were to prepay their
participating loans within the next two to three years. While the Partnership
cannot require either of the owners to prepay their loans, the Partnership could
possibly sell one or both of the participating loans and some or all of the
non-participating mortgage-backed securities pools. In this regard, a key
consideration is the strength of the buying markets for these types of
investments. Also, as part of any sale of its two participating mortgage loans,
the Partnership would expect to receive fair value for its entitlement to
participate in potential cash flow increases and capital appreciation from each
property as well as for its entitlement to receive prepayment penalties if
either of the participating loans were prepaid by the property owners. The
prepayment penalties would apply if the participating loans were prepaid before
June 2001 for its Quarter Mill investment and May 2002 for its Emerald Cove
investment.
The Partnership's non-participating MBS have coupon interest rates ranging
from 7.5% to 9.5%. Based on current market interest rate levels, the aggregate
market value of these securities at the present time is slightly above both the
aggregate face value and amortized cost, which includes any unamortized
discounts or premiums. As of October 31, 1997, the Partnership's two remaining
Participating Insured Mortgage Loans, which carry coupon interest rates of 8.5%
and 8.75%, had estimated market values slightly above their face values due to a
variety of factors, including the participation features. Increases in market
interest rates and/or deterioration in general real estate market conditions in
the near term could cause the aggregate market value of the Participating
Insured Mortgage Loans and the portfolio of MBS investments to fall below face
value and/or amortized cost. In the event that such circumstances were to occur,
management is not prohibited from selling any security at a loss and may do so
if it is believed that such a sale would be in the best interests of the
Partnership.
As previously reported, generally low market interest rates have prompted
a high level of refinancing activity over the past several years, resulting in
significant prepayments on the Partnership's non-participating mortgage-backed
securities. Such prepayments had the effect of reducing the Partnership's
investment income and cash flows from operating activities and increasing the
outstanding balance of the Partnership's cash reserves. Since it was deemed
unlikely that there would be a default on either of the Partnership's two
remaining multi-family participating loans, and since the current rates of
return available on non-participating mortgage-backed security investments did
not warrant reinvestment by the Partnership, management concluded during fiscal
1997 that it would be in the best interests of the Unitholders to return the
portion of the Partnership's cash reserves which exceeded expected future
requirements. Consequently, the Partnership distributed $2,600,000 of its excess
reserves, or $47.13 per original $1,000 investment, in a special distribution
made on March 14, 1997. Regular quarterly distributions are comprised of
investment income and return of capital which results from the scheduled
amortization of mortgage principal on all of the debt securities as well as
principal prepayments from the non-participating GNMA mortgage-backed
securities. Such principal prepayments are unpredictable and, as noted above,
have been high during recent years but declined during fiscal 1997, resulting in
a reduction in cash flows from investing activities. Based on this decline in
the rate of principal prepayments and the expectation that this decline would
continue in the future, the Partnership reduced the regular quarterly
distribution rate effective for the payment made on June 13, 1997 for the third
quarter of fiscal 1997. The distribution rate declined from 8.25% per annum to
6.5%, of which approximately 5.5% is expected to represent net investment income
and 1% is expected to be a return of capital. If the actual prepayment levels
exceed anticipated levels through the second quarter of fiscal 1998, the
Partnership is expected to make a Special Distribution of these excess amounts
in March 1998, and each subsequent March, if warranted by future principal
prepayment levels. Based on the actual prepayments received to date through the
first quarter of fiscal 1998, the Partnership expects to make a special capital
distribution of approximately $10.00 per original $1,000 investment in March
1998.
The Partnership's two remaining Participating Insured Mortgage Loans are
secured by the Emerald Cove and Quarter Mill apartment complexes. The occupancy
level at Emerald Cove averaged 95% for the first quarter of fiscal 1998 compared
to 94% for the fourth quarter of fiscal 1997 and 96% for the same period in the
prior year. As discussed further in the Annual Report, due to the increased
competition during fiscal 1997 in the overall Charlotte, North Carolina market
from new rental units, the use of rental concessions had been necessary at
Emerald Cove to maintain the property's occupancy levels. However, because the
property's occupancy has been increasing over the past year, the property's
leasing team has recently discontinued offering rental concessions on both new
leases and on current leases as they are being renewed. Despite the competitive
conditions, rental rates on new leases currently being signed at the property
have increased by approximately 4% over the rates obtained one year ago.
Prepayment of the Partnership's Emerald Cove Participating Insured Mortgage Loan
was restricted through March 1997 and then requires a prepayment penalty which
declines ratably, from 5% to 2%, over the next four years. Although the owner of
Emerald Cove has initiated discussions of prepayment on several occasions over
the past three fiscal years, no viable prepayment transaction has materialized
from such discussions. There are no ongoing prepayment discussions with the
Emerald Cove owner at the present time.
The Quarter Mill Apartments continued its strong operating performance
during the first quarter of fiscal 1998, with an average occupancy level of 98%,
compared to 99% for the fourth quarter of 1997 and 98% for the same period in
the prior year. Because the Quarter Mill Apartments participates in the Low
Income Housing Tax Credit Program, its rental rates are based on the
metropolitan area's median family income, rather than on market rent levels. A
strong local rental market, combined with below market rental rates at Quarter
Mill, has resulted in consistently high occupancy levels at the property.
Although there has been new multi-family construction activity in the Richmond
area, there is no new directly competitive development under construction or
planned in the property's immediate market area. Property operations continue to
generate small amounts of excess cash flow, a portion of which is payable to the
Partnership as Contingent Interest. During fiscal 1997, 1996 and 1995, the
Partnership received approximately $49,000, $46,000 and $37,000, respectively,
representing its 30% share of the surplus cash, as defined. The Quarter Mill
Participating Insured Mortgage Loan became open to prepayment in February 1996
with a specified prepayment penalty which declines ratably, from 10% to 2%, over
five years. To date, no proposals to prepay the loan have been received from the
owner of Quarter Mill.
At October 31, 1997, the Partnership had cash and cash equivalents of
approximately $1,429,000. Such amounts will be utilized for distributions to the
Unitholders and for the working capital requirements of the Partnership. The
source of future liquidity and distributions to the Unitholders is expected to
be primarily through interest income and principal repayments from the
Partnership's mortgage securities, money-market interest income from invested
cash reserves, and to a lesser extent from Contingent Interest from
Participating Insured Mortgage Loans and Net Project Residuals from the sale or
refinancing of the properties securing such investments.
Results of Operations
Three Months Ended October 31, 1997
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The Partnership reported net income of $355,000 for the three months ended
October 31, 1997, as compared to net income of $436,000 for the same period in
the prior year. This decrease of $81,000 in net income resulted from a decline
in total revenues of $63,000 and an increase in total expenses of $18,000. The
decline in revenues can be attributed to a $32,000 decrease in interest income
from investments and a $31,000 reduction in money market interest income. The
decrease in interest income from investments resulted from a decline in the
average outstanding principal balances of Participating Insured Mortgage Loans
and non-participating MBS due to scheduled principal amortization on all of the
debt securities and prepayments on the MBS. The decline in money market interest
income resulted from a decline in the average outstanding balance of the
Partnership's invested cash reserves due to the $2.6 million special
distribution of excess cash reserves made on March 14, 1997, as discussed
further above. The increase in total expenses is attributable to an increase in
amortization expense as a result of an acceleration in the amortization rate of
the Partnership's deferred expenses. Beginning in fiscal 1998, the Partnership
reduced the expected holding period of the remaining investments which resulted
in higher non-cash amortization charges for the current three-month period.
PART II
Other Information
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Item 1. through 5. NONE
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Item 6. Exhibits and Reports on Form 8-K
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(a) Exhibits: NONE
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed by the registrant during the quarter
for which this report is filed.
PAINEWEBBER INSURED MORTGAGE PARTNERS 1-B, L.P.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Partnership has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
PAINEWEBBER INSURED MORTGAGE PARTNERS 1-B, L.P.
By: FIRST INSURED MORTGAGE PARTNERS, INC.
Managing General Partner
Date: December 10, 1997 By: /s/ Walter V. Arnold
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Walter V. Arnold
Senior Vice President and
Chief Financial Officer