SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------ FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ---------------------------------------------------------------------- For Quarter Ended June 30, 1997 Commission File Number 0-13323 NEW ENGLAND LIFE PENSION PROPERTIES II; A REAL ESTATE LIMITED PARTNERSHIP (Exact name of registrant as specified in its charter) Massachusetts 04-2803902 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 225 Franklin Street, 25th Fl. Boston, Massachusetts 02110 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (617) 261-9000 - ---------------------------------------------------------------------------- Former name, former address and former fiscal year if changed since last report 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 twelve (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 NEW ENGLAND LIFE PENSION PROPERTIES II; A REAL ESTATE LIMITED PARTNERSHIP FORM 10-Q FOR QUARTER ENDED JUNE 30, 1997 PART I FINANCIAL INFORMATION ---------------------- BALANCE SHEETS (Unaudited) June 30, 1997 December 31, 1996 ------------- ----------------- ASSETS Real estate investments: Ground leases and mortgage loans, net $12,894,558 $12,896,144 Property, net 16,451,267 16,795,323 Deferred leasing costs and other assets, net 850,934 809,629 ----------- ----------- 30,196,759 30,501,096 Cash and cash equivalents 3,942,917 7,877,668 Short-term investments 1,579,430 1,912,918 Interest and rent receivable 36,051 46,982 ----------- ----------- $35,755,157 $40,338,664 =========== =========== LIABILITIES AND PARTNERS' CAPITAL Accounts payable $ 878,407 $ 1,014,398 Accrued management fee 53,475 62,089 Deferred disposition fees 472,312 472,312 ----------- ----------- Total liabilities 1,404,194 1,548,799 ----------- ----------- Partners' capital: Limited partners ($766.04 and $889.89 per unit, respectively; 110,000 units authorized, 39,917 units issued and outstanding) 34,275,052 38,719,002 General partner 75,911 70,863 ----------- ----------- Total partners' capital 34,350,963 38,789,865 ----------- ----------- $35,755,157 $40,338,664 =========== =========== (See accompanying notes to financial statements) STATEMENTS OF OPERATIONS (Unaudited) Quarter Ended Six Months Ended Quarter Ended Six Months Ended June 30, 1997 June 30, 1997 June 30, 1996 June 30, 1996 -------------- ---------------- ------------- ---------------- INVESTMENT ACTIVITY Property rentals $ 823,238 $1,544,865 $ 553,371 $1,127,444 Property operating expenses (197,235) (415,235) (230,037) (488,048) Depreciation and amortization (189,847) (379,693) (174,610) (331,754) ---------- ---------- --------- ---------- 436,156 749,937 148,724 307,642 Provision for impaired mortgage loans - - (310,000) (310,000) Ground rentals and interest on mortgage loans 525,266 1,007,766 630,948 1,263,431 ---------- ---------- --------- ---------- Total real estate activity 961,422 1,757,703 469,672 1,261,073 Interest on cash equivalents and short term investments 57,672 131,934 69,026 132,996 ---------- ---------- --------- ---------- Total investment activity 1,019,094 1,889,637 538,698 1,394,069 ---------- ---------- --------- ---------- PORTFOLIO EXPENSES Management fee 53,475 109,702 62,088 124,177 General and administrative 39,205 78,816 38,869 89,077 ---------- ---------- --------- ---------- 92,680 188,518 100,957 213,254 ---------- ---------- --------- ---------- Net Income $ 926,414 $1,701,119 $ 437,741 $1,180,815 ========== ========== ========= ========== Net income per limited partnership unit $ 22.98 $ 42.19 $ 10.86 $ 29.29 ========== ========== ========= ========== Quarter Ended Six Months Ended Quarter Ended Six Months Ended June 30, 1997 June 30, 1997 June 30, 1996 June 30, 1996 -------------- ---------------- ------------- ---------------- Cash distributions per limited partnership unit $ 14.10 $ 153.52 $ 15.57 $ 31.14 ========== ========== ========= ========== Number of limited partnership units outstanding during the period 39,917 39,917 39,917 39,917 ========== ========== ========= ========== (See accompanying notes to financial statements) STATEMENTS OF PARTNERS' CAPITAL (Unaudited) Quarter Ended Six Months Ended Quarter Ended Six Months Ended June 30, 1997 June 30, 1997 June 30, 1996 June 30, 1996 -------------------- -------------------- --------------------- -------------------- General Limited General Limited General Limited General Limited Partner Partners Partner Partners Partner Partners Partner Partners ------- --------- ------- -------- -------- -------- ------- -------- Balance at beginning of period $ 72,332 $ 33,920,732 $ 70,863 $ 38,719,002 $ 66,041 $ 38,241,581 $ 64,888 $ 38,127,446 Cash distributions (5,685) (562,830) (11,963) (6,128,058) (6,278) (621,508) (12,556) (1,243,016) Net income 9,264 917,150 17,011 1,684,108 4,377 433,364 11,808 1,169,007 -------- ------------ -------- ------------ -------- ------------ -------- ------------ Balance at end of period $ 75,911 $ 34,275,052 $ 75,911 $ 34,275,052 $ 64,140 $ 38,053,437 $ 64,140 $ 38,053,437 ======== ============ ======== ============ ======== ============ ======== ============ (See accompanying notes to financial statements) SUMMARIZED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended June 30, ------------------------- 1997 1996 ----------- ----------- Net cash provided by operating activities $ 1,885,210 $ 1,718,763 ----------- ----------- Cash flows from investing activities: Net proceeds from sale of investment - 836,852 Capital expenditures on owned property (13,428) (246,538) Decrease in short-term investments, net 333,488 645,668 Deferred disposition fee - 27,450 ----------- ----------- Net cash provided by investing activities 320,060 1,263,432 ----------- ----------- Cash flows from financing activity: Distributions to partners (6,140,021) (1,255,572) ----------- ----------- Net (decrease)increase in cash and cash equivalents (3,934,751) 1,726,623 Cash and cash equivalents: Beginning of period 7,877,668 2,731,930 ----------- ----------- End of period $ 3,942,917 $ 4,458,553 =========== =========== (See accompanying notes to financial statements) NOTES TO FINANCIAL STATEMENTS (Unaudited) In the opinion of management, the accompanying unaudited financial statements contain all adjustments necessary to present fairly the Partnership's financial position as of June 30, 1997 and December 31, 1996 and the results of its operations, its cash flows and partners' capital for the interim periods ended June 30, 1997 and 1996. These adjustments are of a normal recurring nature. See notes to financial statements included in the Partnership's 1996 Annual Report on Form 10-K for additional information relating to the Partnership's financial statements. NOTE 1 - ORGANIZATION AND BUSINESS - ---------------------------------- New England Life Pension Properties II; A Real Estate Limited Partnership (the "Partnership") is a Massachusetts limited partnership organized for the purpose of investing primarily in newly constructed and existing income producing real properties. It primarily serves as an investment for qualified pension and profit sharing plans and other entities intended to be exempt from federal income tax. The Partnership commenced operations in June, 1984 and acquired six real estate investments through 1986, three of which have been sold as of June 30, 1997. It intends to dispose of its investments within twelve years of their acquisition, and then liquidate; however, the general partner could extend the investment period if it is in the best interest of the limited partners. NOTE 2 - INVESTMENTS IN GROUND LEASES AND MORTGAGE LOANS - -------------------------------------------------------- One of the two Elkridge buildings was sold in May 1996, and the other was sold in December 1996. The Susana Corporate Center was sold in October 1996. Each of these investments was sold for a price which approximated the Partnership's carrying value, as previously adjusted for valuation allowances. On January 30, 1997, the Partnership made a capital distribution of $4,943,720 ($123.85 per limited partnership unit) from the proceeds of these sales. In October 1996, the Partnership reached an agreement in principle with the borrowers on the Oakland and Case Communications mortgage loans which matured in 1994 and 1995 respectively, whereby the maturity dates will be extended to December 1997. In addition, effective January 1, 1997, the fixed interest and ground rental payments will be reduced, but the Partnership's rate of participation in revenue from the underlying properties will be increased. The agreement will also allow the Partnership to cause a sale of the respective properties. The mortgage loans on Case Communications are impaired, as were the mortgage loans on Elkridge and Susana Corporate Center. Accordingly, a valuation allowance has been established to adjust the carrying value of each loan to its estimated fair market value less anticipated costs of sale. The activity in the valuation allowance during 1996 and 1997, together with the related recorded and carrying values of the impaired mortgage loans at the beginning and end of the respective periods, are as follows: Recorded Valuation Carrying Value Allowance Value ------------ ------------- ------------ Balance at January 1, 1996 $15,619,235 $(3,898,000) $11,721,235 =========== ============ ============ Decrease in estimated fair market value of collateral (310,000) Sale of Collateral 155,915 ------------ Balance at June 30, 1996 $14,889,944 $(4,052,085) $10,837,859 =========== ============ ============ Increase in estimated fair market value of collateral, net 327,291 Sale of collateral 2,924,794 ------------ Balance at January 1, 1997 $ 9,907,088 $ (800,000) $ 9,107,088 =========== ============ ============ Balance at June 30, 1997 $ 9,907,088 $ (800,000) $ 9,107,088 =========== ============ ============ The average recorded value of the impaired mortgage loans did not differ materially from the balances at the end of the quarterly periods. NOTE 3 - SUBSEQUENT EVENTS - -------------------------- Distributions of cash from operations relating to the quarter ended June 30, 1997 were made on July 24, 1997 in the aggregate amount of $540,694 ($13.41 per limited partnership unit). Management's Discussion and Analysis of Financial Condition and Results of - -------------------------------------------------------------------------- Operations - ---------- Liquidity and Capital Resources The Partnership completed its offering of units of limited partnership interest in November, 1984. A total of 39,917 units were sold. The Partnership received proceeds of $36,296,995, net of selling commissions and other offering costs, which have been used for investment in real estate and the payment of related acquisition costs, or retained as working capital reserves. The Partnership made six real estate investments; three investments have been sold, one in 1993 and two in 1996. Capital of $9,338,981 ($233.96 per limited partnership unit) has been returned to the limited partners as a result of sales and similar transactions. At June 30, 1997, the Partnership had $5,522,347 in cash, cash equivalents and short-term investments, of which $540,694 was used for cash distributions to partners on July 24, 1997; the remainder is primarily being retained as working capital reserves. The Partnership also has a commitment to fund the balance of its share of the renovation of the Willows Shopping Center, which approximates $948,000. The source of future liquidity and cash distributions to partners is expected to be cash generated by the Partnership's real estate investments, and proceeds from the sale of such investments. The adjusted capital contribution was reduced from $889.89 to $766.04 per limited partnership unit during the first quarter of 1997, with a distribution of sales proceeds. Distributions of cash from operations for the first and second quarters of 1997 and 1996 were made at the annualized rate of 7% on the weighted average adjusted capital contribution. The carrying value of real estate investments in the financial statements, other than impaired mortgage loans (Case Communications), is at depreciated cost or, if the investment's carrying value is determined not to be recoverable through expected undiscounted future cash flows, the carrying value is reduced to estimated fair market value. The fair market value of such investments is further reduced by the estimated cost of sale for properties held for sale. Carrying value may be greater or less than current appraised value. At June 30, 1997, the appraised value of each of the Partnership's investments exceeded its related carrying value by an aggregate of approximately $2,400,000. The current appraised value of real estate investments has been estimated by the general partner and is generally based on a correlation of traditional appraisal approaches performed by the Partnership's advisor and independent appraisers. Because of the subjectivity inherent in the valuation process, the estimated current appraised value may differ significantly from that which could be realized if the real estate were actually offered for sale in the marketplace. Results of Operations Operating Factors One of the two Elkridge buildings was sold in May 1996; the other was sold in December 1996. The Susana Corporate Center was sold in October 1996. At June 30, 1997, the Willows Shopping Center was 94% leased, compared to 90% at June 30, 1996. The ground lessee/borrower has substantially completed the full rehabilitation of the Center. The Partnership's share of the remaining cost is approximately $948,000 at June 30, 1997 which largely relates to the renovation of space occupied by a significant anchor tenant which began operating in October 1996. The Partnership and its affiliate are currently negotiating a purchase and sale agreement for the property. Although, there can be no assurances, a fourth quarter 1997 closing is anticipated. Occupancy at Oakland was 100% at June 30, 1997, an increase from 91% at June 30, 1996. During the second quarter of 1997, a month-to-month tenant occupied 12% of the building, while the space is being marketed to potential long-term tenants. The Case Communications property continues to be fully occupied by a government agency, whose lease expired in November 1996. The tenant has indicated its intention to renew, although a new lease agreement has not yet been executed. In the meantime, the tenant has been renting the space on a month-to-month basis. The Partnership's mortgage loans on Oakland and Case Communications reached maturity in 1994 and 1995, respectively. In October 1996, the Partnership reached an agreement in principle with the borrowers, whereby the maturity dates will be extended to December 1997. In addition, effective January 1, 1997, the fixed interest and ground rental payments will be reduced, but the Partnership's rate of participation in revenue from the underlying properties will be increased. The agreement will also allow the Partnership to cause a sale of the properties. Investment Results Exclusive of the operating results from Susana Corporate Center in 1996 of $236,931 and Elkridge in 1996 of $61,500 and the provision for impaired mortgage loans, total real estate activity was $1,757,703 and $1,272,642 for the six months ended June 30, 1997 and 1996, respectively. This increase of $485,061, is primarily due to improved operating results at the Willows Shopping Center of approximately $442,000 caused by increased occupancy and lower operating expenses. Revenue from Oakland and Case Communications also increased due to higher percentage rent payments. Interest on cash equivalents and short-term investments was relatively unchanged between the first six months of 1996 and 1997. The increase in operating cash flow of approximately $166,000 between the first six months of 1996 and 1997 is due to the above mentioned changes in operating results, partially offset by changes in net working capital. Portfolio Expenses The Partnership management fee is 9% of distributable cash flow from operations after any increase or decrease in working capital reserves as determined by the general partner. General and administrative expenses primarily consist of real estate appraisal, printing, legal, accounting and investor servicing fees. Management fees decreased between the first six months of 1996 and 1997 due to a reduction in distributable cash flow. General and administrative expenses for the first six months of 1997 decreased approximately 12% compared to the first six months of 1996 primarily due to lower professional fees. NEW ENGLAND PENSION PROPERTIES II; A REAL ESTATE LIMITED PARTNERSHIP FORM 10-Q FOR QUARTER ENDED JUNE 30, 1997 PART II OTHER INFORMATION ------------------- Item 6. Exhibits and Reports on Form 8-K a. Exhibits: None. b. Reports on Form 8-K: No Current Reports on Form 8-K were filed during the quarter ended June 30, 1997. 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. NEW ENGLAND LIFE PENSION PROPERTIES II; A REAL ESTATE LIMITED PARTNERSHIP (Registrant) August 14, 1997 /s/ James J. Finnegan ------------------------------- James J. Finnegan Managing Director and General Counsel of General Partner, Copley Properties Company II, Inc. August 14, 1997 /s/ Karin J. Lagerlund -------------------------------- Karin J. Lagerlund Principal Financial and Accounting Officer of General Partner, Copley Properties Company II, Inc.