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
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended June 30, 2002
-------------------------------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from ----------------------- to ----------
(Amended by Exch Act Rel No. 312905. eff 4/26/93.)
Commission File Number: 0-8952
--------------------------------------------------------
SB PARTNERS
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 13-6294787
- ------------------------------- --------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1251 Avenue of the Americas, N.Y., N.Y 10020
- --------------------------------------- --------------------
(Address of principal executive offices) (Zip Code)
(212) 408-5000
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(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 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. [X] Yes [ ] No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. [ ] Yes [ ] No
Not Applicable
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Not Applicable
SB PARTNERS
INDEX
Part I Financial Information (Unaudited)
Consolidated Balance Sheets as of
June 30, 2002 and December 31, 2001................................1
Consolidated Statements of Operations
for the three and six months ended June 30, 2002 and 2001..........2
Consolidated Statements of Changes in Partners' Capital
for the six months ended June 30, 2002.............................3
Consolidated Statements of Cash Flows
for the six months ended June 30, 2002 and 2001....................4
Notes to Consolidated Financial Statements.........................5 - 8
Management's Discussion and Analysis of
Financial Condition and Results of Operations.................9 - 13
Quantitative and Qualitative Disclosures About
Market Risk.......................................................14
Part II Other Information.....................................................14
1
SB PARTNERS
(A New York Limited Partnership)
------------------------------
CONSOLIDATED BALANCE SHEETS
June 30, 2002 (Unaudited) and December 31, 2001
-----------------------------------------------
June 30, December 31,
2002 2001
----------- -----------
Assets:
Investments -
Real estate, at cost
Land $ 5,780,842 $ 5,310,842
Buildings, furnishings and improvements 55,218,391 50,775,943
Less - accumulated depreciation (6,365,311) (5,641,349)
------------ -----------
54,633,922 50,445,436
Real estate asset held for sale 0 13,723,236
Investment in joint venture 3,380,747 0
----------- -----------
58,014,669 64,168,672
Other assets -
Cash and cash equivalents 1,904,251 634,029
Cash held by lenders in escrow 1,015,644 593,085
Other 633,703 621,893
Other assets in discontinued operations 0 987,229
----------- -----------
Total assets $61,568,267 $67,004,908
=========== ===========
Liabilities:
Mortgage notes payable $30,436,286 $31,376,636
Accounts payable and accrued expenses 722,160 595,173
Tenant security deposits 304,533 171,165
Liabilities of discontinued operations
including a mortgage note payable of
$0 and $19,769,615 at June 30, 2002
and December 31, 2001, respectively 0 20,093,063
----------- -----------
Total liabilities 31,462,979 52,236,037
----------- -----------
Partners' Capital:
Units of partnership interest without par value;
Limited partners - 7,753 units 30,119,841 14,785,402
General partner - 1 unit (14,553) (16,531)
----------- -----------
Total partners' capital 30,105,288 14,768,871
----------- -----------
Total liabilities and partners' capital $61,568,267 $67,004,908
=========== ===========
See notes to consolidated financial statements.
2
SB PARTNERS
(A New York Limited Partnership)
------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
---------------------------------------------------
For The Three Months For The Six Months
Ended June 30, Ended June 30,
------------------------ --------------------------
2002 2001 2002 2001
----------- ----------- ----------- ----------
Revenues:
Rental income $ 1,869,973 $1,850,361 $ 3,702,515 $3,697,732
Other rental income 110,173 107,446 223,807 202,671
Interest on short-term investments 18,108 6,115 23,567 12,807
----------- ---------- ----------- ----------
Total revenues 1,998,254 1,963,922 3,949,889 3,913,210
----------- ---------- ----------- ----------
Expenses:
Real estate operating expenses 888,099 882,739 1,752,866 1,625,209
Interest on mortgage notes payable 552,152 550,672 1,096,737 1,094,588
Depreciation and amortization 383,452 364,953 761,868 727,453
Real estate taxes 207,096 224,151 419,443 449,202
Management fees 168,727 138,072 307,711 277,939
Other 8,071 1,064 14,531 35,457
----------- ---------- ----------- ----------
Total expenses 2,207,597 2,161,651 4,353,156 4,209,848
----------- ---------- ----------- ----------
Loss from property operations - continuing (209,343) (197,729) (403,267) (296,638)
Equity in net loss of joint venture (13,378) 0 (13,378) 0
----------- ---------- ----------- ----------
Loss from continuing operations (222,721) (197,729) (416,645) (296,638)
Income (loss) from discontinued operations (1,208,082) 4,400 (952,468) 14,796
Net gain on sale of investment in real estate
property, including $379,725 net gain
on sale of water rights 17,101,155 0 17,480,880 0
----------- ---------- ----------- ----------
Net income (loss) 15,670,352 (193,329) 16,111,767 (281,842)
Income (loss) allocated to general partner 2,021 (25) 2,078 (36)
----------- ---------- ----------- ----------
Income (loss) allocated to limited partners $15,668,331 $ (193,304) $16,109,689 $ (281,806)
=========== ========== =========== ==========
Net Income (Loss)
Per Unit of Limited Partnership Interest
Continuing operations $ (28.73) $ (25.50) $ (53.74) $ (38.26)
=========== ========== =========== ==========
Discontinued operations $ (155.81) $ .56 $ (122.84) $ 1.91
=========== ========== =========== ==========
Net gain on sale $ 2,205.60 $ 0 $ 2,254.58 $ 0
=========== ========== =========== ==========
Weighted Average Number of Units of Limited
Partnership Interest Outstanding 7,753 7,753 7,753 7,753
=========== ========== =========== ==========
See notes to consolidated financial statements.
3
SB PARTNERS
(A New York Limited Partnership)
------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
For the six months ended June 30, 2002 (Unaudited)
-------------------------------------------------------
Limited Partners:
Units of
Partnership
Interest Cumulative Accumulated
----------- Cash Earnings
Number Amount Distributions (Losses) Total
------ ------------ ------------- ----------- -----------
Balance, January 1, 2002 7,753 $119,968,973 $(100,170,361) $(5,013,210) $14,785,402
Cash distributions 0 0 (775,250) 0 (775,250)
Net income for the period 0 0 0 16,109,689 16,109,689
----- ------------ ------------- ----------- -----------
Balance, June 30, 2002 7,753 $119,968,973 $(100,945,611) $11,096,479 $30,119,841
===== ============ ============= =========== ===========
General Partner:
Units of
Partnership
Interest Cumulative Accumulated
----------- Cash Earnings
Number Amount Distributions (Losses) Total
------ -------- ------------- ----------- --------
Balance, January 1, 2002 1 $ 10,000 $(24,874) $(1,657) $(16,531)
Cash distributions 0 0 (100) 0 (100)
Net income for the period 0 0 0 2,078 2,078
---- ------- -------- ------- --------
Balance, June 30, 2002 1 $10,000 $(24,974) $ 421 $(14,553)
==== ======= ======== ======= ========
See notes to consolidated financial statements.
4
SB PARTNERS
(A New York Limited Partnership)
------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
-------------------------------------------------
For the Six Months Ended
June 30,
--------------------------
2002 2001
----------- ---------
Cash Flows From Operating Activities:
Net income (loss) $16,111,767 $(281,842)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
(Income) loss from discontinued operations 952,468 (14,796)
Gain on sale of investment in real estate property (17,480,880) 0
Equity in net loss of joint venture 13,378 0
Depreciation and amortization 761,868 727,453
Net increase in operating assets (472,275) (327,335)
Net increase (decrease) in operating liabilities 260,355 (17,099)
----------- ---------
Net cash provided by continuing operations 146,681 86,381
Net cash provided by (used in) discontinued
operations (288,687) 641,381
----------- ---------
Net cash provided by (used in) operating activities (142,006) 727,762
----------- ---------
Cash Flows From Investing Activities:
Acquisition of real estate property (4,713,385) 0
Investment in joint venture (3,394,125) 0
Capital additions to real estate owned (199,063) (252,233)
------------ ---------
Net cash used in investing activities - continuing (8,306,573) (252,233)
Capital additions to real estate asset held for sale (185,859) (182,932)
Proceeds from sale of investment in
real estate property including water rights 31,389,975 0
------------ ---------
Net cash provided by (used in) investing activities 22,897,543 (435,165)
------------ ---------
Cash Flows From Financing Activities:
Borrowings under revolving credit facility 3,750,000 700,000
Repayments of borrowings under revolving
credit facility (4,500,000) 0
Principal payments on mortgage notes payable (190,350) (177,573)
Distributions paid to partners (775,350) (775,350)
Increase in deferred financing costs 0 (43,958)
------------ ---------
Net cash used in financing activities - continuing (1,715,700) (296,881)
Principal payments on mortgage note payable - discontinued (178,225) (198,990)
Retirement of mortgage note payable - discontinued (19,591,390) 0
------------ ---------
Net cash used in financing activities (21,485,315) (495,871)
------------ ---------
Net increase (decrease) in cash and cash equivalents 1,270,222 (203,274)
Cash and cash equivalents at beginning of period 634,029 474,689
------------ ---------
Cash and cash equivalents at end of period $ 1,904,251 271,415
============ =========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 2,899,164 $1,849,495
============ ==========
See notes to consolidated financial statements.
5
SB PARTNERS
Notes to Consolidated Financial Statements
(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
SB Partners, a New York limited partnership, and its subsidiaries
(collectively, the "Partnership"), have been engaged since April 1971 in
acquiring, operating, and holding for investment a varying portfolio of real
properties. SB Partners Real Estate Corporation (the "General Partner") serves
as the general partner of the Partnership.
The consolidated financial statements as of and for the three and six
month periods ended June 30, 2002 and 2001 included herein are unaudited;
however, the information reflects all adjustments (consisting solely of normal
recurring adjustments) that are, in the opinion of management, necessary to a
fair presentation of the financial position, results of operations and cash
flows for the interim periods. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations, although management
believes that the disclosures are adequate to make the information presented not
misleading. It is suggested that these consolidated financial statements be read
in conjunction with the consolidated financial statements and the notes thereto
included in the Registrant's latest annual report on Form 10-K.
The results of operation for the three and six month periods ended June
30, 2002 and 2001 are not necessarily indicative of the results to be expected
for a full year.
The significant accounting and financial reporting policies of the
Partnership are as follows:
(a) The accompanying consolidated financial statements include the
accounts of SB Partners and its wholly owned subsidiaries.
All significant intercompany accounts and transactions have been
eliminated. The consolidated financial statements are prepared
using the accrual basis of accounting in accordance with
accounting principles generally accepted in the United States of
America. Revenues are recognized as earned and expenses are
recognized as incurred. The preparation of financial statements
in conformity with such principles requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
(b) In connection with the mortgage financing on certain of its
properties, the Partnership placed the assets and liabilities of
those properties into single asset limited partnerships, limited
liability companies or land trusts which hold title to the
properties. The Partnership has effective control over such
entities and holds 100% of the beneficial interest. Accordingly,
the financial statements of these subsidiaries are consolidated
with those of the Partnership.
(c) Depreciation of buildings, furnishings and improvements is
computed using the straight-line method of depreciation, based
upon the estimated useful lives of the related properties, as
follows:
Buildings and improvements 5 to 40 years
Furnishings 5 to 7 years
Expenditures for maintenance and repairs are expensed as incurred.
Expenditures for improvements, renewals and betterments, which
increase the useful life of the real estate, are capitalized.
Upon retirement or sale of property, the related cost and
accumulated depreciation are removed from the accounts.
Amortization of deferred financing and refinancing costs is
computed by amortizing the cost on a straight-line basis over the
terms of the related mortgage notes.
(d) Real estate properties are regularly evaluated on a property by
property basis to determine if it is appropriate to write down
carrying values to recognize an impairment of value. Impairment
is determined by calculating the sum of the estimated undiscounted
future cash flows including the projected undiscounted future net
proceeds from the sale of the property. In the event such sum is
less than the net carrying value of the property, the property is
written down to estimated fair value. Based on the Partnership's
long-term hold strategy for its investments in real estate, the
carrying value of its properties at June 30, 2002 is estimated to
be fully realizable.
6
(e) Real estate held for sale is carried at the lower of cost or fair
value less selling costs. Upon determination that a property is
held for sale, all depreciation of such property is ceased, and the
results of operations and cash flows are classified as discontinued
operations.
(f) For financial reporting purposes, the Partnership considers all
highly liquid, short-term investments with maturities of three
months or less when purchased to be cash equivalents.
(g) The Partnership accounts for its investment in joint venture under
the equity method of accounting as the Partnership owns a
non-controlling interest in the joint venture.
(h) Tenant leases at the residential properties generally have terms of
one year or less. Tenant leases at the industrial flex property
have terms that exceed one year. Rental income is recognized when
earned pursuant to the terms of the leases with tenants.
(i) Gains on sales of investments in real estate are recognized in
accordance with generally accepted accounting principles applicable
to sales of real estate, which require minimum levels of initial
and continuing investment by the purchaser, and certain other tests
be met, prior to the full recognition of profit at the time of the
sale. When the tests are not met, gains on sales are recognized on
either the installment or cost recovery methods.
(j) Each partner is individually responsible for reporting its share of
the Partnership's taxable income or loss. Accordingly, no provision
has been made in the accompanying consolidated financial statements
for Federal, state or local income taxes.
(k) Net income (loss) per unit of partnership interest has been
computed based on the weighted average number of units of
partnership interest outstanding during each year. There were no
potentially dilutive securities outstanding during the periods
presented.
(l) The Partnership is engaged in only one industry segment, real
estate investment, and therefore information regarding industry
segments is not applicable and is not included in these
consolidated financial statements.
(m) On January 1, 2002, the Partnership adopted Statement of Financial
Accounting Standards ("SFAS") No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". This statement
requires the operations related to properties that have been sold
or properties that are intended to be sold be presented as
discontinued operations in the statements of operations for all
periods presented and properties intended to be sold are to be
designated as "held for sale" on the balance sheet.
(n) In April, 2002, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 145, "Rescission of SFAS No. 4, 22 and 64,
Amendment of SFAS No. 13 and Technical Corrections". SFAS No. 145,
among other things, rescinds SFAS No. 4 "Reporting Gains and Losses
from Extinguishment of Debt", and accordingly, the reporting of
gains or losses from the early extinguishment of debt as
extraordinary items will only be required if they meet the specific
criteria for extraordinary items included in Accounting Principles
Board Opinion No. 30, "Reporting the Results of Operations".
Although the rescission of SFAS No. 4 is mandatory as of January 1,
2003, management has elected to adopt SFAS 145, immediately. (See
Note 3.)
In July, 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities", which is also
effective January 1, 2003. SFAS No. 146 replaces current
accounting literature and requires the recognition of costs
associated with exit or disposal activities when they are incurred
rather than at the date of a commitment to an exit or disposal
plan. The Partnership does not anticipate the adoption of this
statement will have a material effect on the Partnership's
consolidated financial statememts.
(o) Certain prior year amounts have been reclassified to make them
comparable to the current year presentation.
7
(2) INVESTMENTS IN REAL ESTATE AND REAL ESTATE HELD FOR SALE
As of June 30, 2002, the Partnership owned apartment projects in St.
Louis, Missouri; Greenville, South Carolina; and Holiday and Orlando,
Florida; as well as an industrial flex property in Maple Grove,
Minnesota and 13.9 acres of land in Holiday, Florida. The following is
the cost basis and accumulated depreciation of the real estate
investments owned by the Partnership and the net carrying value of the
real estate asset held for sale at June 30, 2002 and December 31, 2001:
Real Estate at Cost
No.of Year of ---------------------------
Type Prop. Acquisition Description 6/30/02 12/31/01
- ---- ----- ----------- ------------- ----------- -----------
Residential properties 4 1991-99 1,042 Apts. $56,241,461 $56,042,398
Industrial flex property 1 2002 60,345 sf 4,713,385 0
Undeveloped land 1 1978 13.9 Acres 44,387 44,387
----------- -----------
Total cost 60,999,233 56,086,785
Less: accumulated depreciation (6,365,311) (5,641,349)
----------- -----------
Net book value $54,633,922 $50,445,436
=========== ===========
Real Estate Held for Sale
No.of Year of ---------------------------
Type Prop. Acquisition Description 6/30/02 12/31/01
- ---- ----- ----------- ------------- ----------- -----------
Residential property 1 1983 704 Apts. $ 0 $13,723,236
=========== ===========
In August 2001, the Partnership began actively marketing Meadowwood Apartments
in Reno, Nevada for sale. As such, the Partnership reflected this investment
as a "real estate asset held for sale" on the accompanying consolidated balance
sheets, and, since the change in holding strategy, the investment in the
property was no longer depreciated. The carrying amount of real estate assets
held for sale is the lower of depreciated cost or fair market value less selling
costs and is included above at depreciated cost. In accordance with
SFAS No. 144, the results of operations and cash flows from the property are
reflected as discontinued operations in the accompanying consolidated financial
statements. Prior year amounts have been reclassified to conform to the current
year presentation (see also Footnote 6).
(3) REAL ESTATE TRANSACTIONS
On April 30, 2002, the Partnership purchased a 75% interest in a
partnership, which owns Waterview Apartments in Westchester,
Pennsylvania. The Partnership paid approximately $3,270,000 in cash for
this non-controlling interest. The purchase price reflects an agreed
upon value of $18,500,000 for the apartment property, net of a first
mortgage loan of approximately $14,230,000 and certain related assets
and liabilities. Waterview Apartments comprises 203 apartment units and
6,000 square feet of commercial space.
On May 9, 2002, the Partnership sold Meadowwood Apartments in Reno,
Nevada for $31,350,000 in an all cash transaction. The proceeds from
the sale were used, in part, to retire the mortgage note of
approximately $19,600,000 that had been secured by the property. In
accordance with SFAS No. 145, "Recission of SFAS No. 4, 44 and 64,
Amendment of SFAS No. 13, and Technical Corrections", the Partnership
has included the yield maintenance payment on the mortgage note,
approximately $1,000,000, in loss from discontinued operations in the
consolidated statements of operations for the three and six months
ended June 30, 2002. The sale of Meadowwood Apartments resulted in a
net gain for financial reporting purposes of approximately $17,100,000.
On June 12, 2002, the Partnership purchased Eagle Lake Business Center
IV in Maple Grove, Minnesota for approximately $4,700,000 in an all
cash transaction. The property contains approximately 60,000 square
feet of industrial flex space.
8
(4) MORTGAGE NOTES PAYABLE
Mortgage notes payable consist of the following:
Net Carrying Amount
Annual June 30, December 31,
Interest Maturity Installment Amount Due ---------- ------------
Property Rate Date Payments(a) at Maturity 2002 2001
- --------------------------------------------------------------------------------------------------------------------
Halton Place(b) 3.820% 2/03 Interest Only $ 1,000,000 $ 250,000 $ 1,000,000
Holiday Park 6.895% 2/08 $ 300,169 3,277,785 3,607,923 3,633,115
Cypress Key 6.605% 1/09 1,322,707 14,772,418 16,530,274 16,643,524
Le Coeur du Monde 7.805% 10/09 890,447 9,075,763 10,048,089 10,099,997
----------- ------------
$30,436,286 $31,376,636
=========== ============
Discontinued operations:
Meadowwood 7.550% 1/04 $1,914,996 18,979,461 $ 0 $ 19,769,615
=========== ============
(a) Annual installment payments include principal and interest.
(b) On March 1, 2001, the Partnership entered into a revolving credit
facility agreement with a bank in the amount of $7,500,000, which is
secured by Halton Place Apartments. The credit facility is for a term of
two years. Borrowings bear interest at LIBOR plus 1.95%. The agreement
requires the Partnership to maintain a ratio of NOI, as defined, to
Actual Debt Service, as defined, of 1.2 to 1. As of June 30, 2002, the
Partnership is in compliance with the covenant. In connection with this
credit facility, the Partnership is subject to market risk relating to
potential future changes in interest rates.
(5) GAIN ON SALE OF WATER RIGHTS
In February 2002, the Partnership sold the water rights at Meadowwood
Apartments for $389,725. As there was no identifiable cost basis for
the rights, the receipt, net of costs incurred in the transaction, has
been taken into income and is included as a component of gain on sale
of investment in real estate property on the accompanying consolidated
statements of operations.
(6) DISTRIBUTIONS
In March 2002, the Partnership paid a cash distribution of $100 per
unit of partnership interest outstanding as of December 31, 2001, which
totaled $775,350 based on 7,753.5 units outstanding.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
AS OF AND FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
-------------------------------------------------------------------
General
- -------
The consolidated financial statements as of and for the three and six
months ended June 30, 2002 reflect the continuing operations of four residential
garden apartment properties, a joint venture interest purchased April 30, 2002
and an industrial flex property purchased June 12, 2002. The consolidated
financial statements as of and for the three and six months ended June 30, 2001
reflect the continuing operations of four residential garden apartment
properties. The operations and sale of Meadowwood Apartments in Reno, Nevada
have been segregated and reflected as discontinued operations for the three and
six months ended June 30, 2002 and 2001.
Total revenues from continuing operations for the three months ended June
30, 2002 increased $34,000 to approximately $1,998,000 from approximately
$1,964,000 for the three months ended June 30, 2001. Net income after gain on
sale of investment in real estate property for the three months ended June 30,
2002 increased $15,863,000 to net income of approximately $15,670,000 from a net
loss of approximately $193,000 for the three months ended June 30, 2001.
Total revenues from continuing operations for the six months ended June
30, 2002 increased $37,000 to $3,950,000 from $3,913,000 for the six months
ended June 30, 2001. Net income after gain on sale of investment in real estate
for the six months ended June 30, 2002 increased $16,394,000 to net income of
$16,112,000 from a net loss of $282,000 for the six months ended June 30, 2001.
The increase in total revenues from continuing operations was due, in
part, to the purchase of Eagle Lake Business Center IV in June 2002, which added
approximately $37,000 to total revenues. Revenues at Le Coeur du Monde
Apartments for the three and six months ended June 30, 2002 were approximately
7% and 11% higher, respectively, than in the comparable periods in the prior
year. Revenues at Holiday Park Apartments were up 4% and 6% over the three and
six month periods of the prior year, respectively. These increases in revenue
were partially offset by decreased revenues at Halton Place Apartments, which is
located in an area that is still suffering from the economic downturn, and
Cypress Key Apartments, which is facing increased competition from new
development in the Orlando area.
The changes in net income are the result of the changes from 2001 to 2002
in the composition of the portfolio. On April 30, 2002, the Registrant purchased
a 75% interest in a partnership which owns Waterview Apartments, a 203-unit
apartment complex in Westchester, Pennsylvania. On May 9, 2002, the Registrant
sold Meadowwood Apartments, a 704-unit apartment community in Reno, Nevada, for
$31,350,000 in an all cash transaction, and retired the mortgage note payable
that had been secured by the property. In addition, on June 12, 2002, the
Registrant purchased Eagle Lake Business Center IV, a 60,345 square foot
industrial flex property in Maple Grove, Minnesota, for $4,700,000, in an all
cash transaction.
As of December 31, 2001, Meadowwood Apartments was under a contract of
sale, and, as such, was classified as a "real estate asset held for sale" on the
consolidated balance sheets. In accordance with accounting principles generally
accepted in the United States of America, depreciation expense is no longer
recorded once a property is so classified, and the results of operations and
cash flows of the property are classified as discontinued operations for all
periods presented.
For additional analysis, please refer to the discussions of the individual
properties below.
This report on Form 10-Q includes statements that constitute "forward
looking statements" within the meaning of Section 27(A) of the Securities Act of
1933 and Section 21(E) of the Securities Exchange Act of 1934 and that are
intended to come within the safe harbor protection provided by those sections.
By their nature, all forward looking statements involve risks and uncertainties
as further described in the Registrant's latest annual report on Form 10-K.
Actual results may differ materially from those contemplated by the forward
looking statements.
10
Liquidity and Capital Resources
- -------------------------------
As of June 30, 2002, the Registrant had cash and cash equivalents of
approximately $1,904,000 in addition to approximately $1,016,000 of deposits
held in escrow by certain lenders for the payment of insurance, real estate
taxes and certain capital and maintenance costs. These balances are
approximately $1,693,000 more than the cash, cash equivalents and deposits held
in escrow on December 31, 2001. The higher cash balance is due primarily to the
sale of Meadowwood Apartments which provided approximately $10,600,000 of cash
flow after retiring the mortgage note of approximately $19,600,000 that had been
secured by the property, and paying the costs of the sale and yield maintenance
on the mortgage note. The sale of the water rights at Meadowwood Apartments in
February 2002 provided approximately $380,000 of cash. Uses of cash during the
period included distributions amounting to approximately $775,000 that were paid
to Unitholders of record as of December 31, 2001. In addition, approximately
$4,700,000 was invested in an industrial flex property, and approximately
$3,400,000 was invested in a joint venture. Capital additions to existing real
estate properties totaled approximately $200,000 during the period, and
principal reductions of approximately $940,000 were made on mortgage notes
payable. Operations, net of an increase of approximately $423,000 of deposits
held in escrow by lenders, used approximately $142,000 of cash, primarily in
connection with discontinued operations.
Total outstanding debt at June 30, 2002 consisted of approximately
$30,186,000 of long-term non-recourse first mortgage notes, and $250,000 under a
revolving credit facility, all secured by real estate owned by the Registrant
(see Note 4 to the Consolidated Financial Statements). Scheduled maturities
through regularly scheduled monthly payments will be approximately $164,000 for
the remainder of 2002. The terms of certain mortgage notes require monthly
escrow of estimated annual real estate tax, insurance, and reserves for repairs,
maintenance and improvements to the secured property, in addition to the payment
of principal and interest. The Registrant has no other debt except normal trade
accounts payable and accrued interest on mortgage notes payable.
Meadowwood Apartments in Reno, Nevada, had been classified as a real
estate asset held for sale on the December 31, 2001 consolidated balance sheet.
The Registrant sold the property for $31,350,000 on May 9, 2002. (Please refer
to Form 8-K filed in connection with the sale.) After retirement of the mortgage
note secured by the property and the payment of other costs associated with the
sale, including the yield maintenance payment required under the terms of the
mortgage note, the Registrant realized approximately $10,600 000 of cash
proceeds. The proceeds have been invested in an industrial flex space property
and a real estate joint venture. (Please refer to Footnote 3 to the Consolidated
Financial Statements.)
In March 2002, the Registrant made a distribution of $100 per unit to
Unitholders of record as of December 31, 2001. This is the fourth consecutive
annual distribution since the repositioning of the portfolio in the late 1990's.
However, there is no requirement to make such distributions, nor can there be
any assurance that future operations will generate cash available for
distributions.
Inflation and changing prices during the current period did not
significantly affect the markets in which the Registrant conducts its business,
or the Registrant's business overall.
The Registrant's properties are expected to generate sufficient cash flow
to cover operating, financing, capital improvement costs, and other working
capital requirements of the Registrant for the foreseeable future.
11
Meadowwood Apartments (Reno, Nevada)
- ---------------------
On May 9, 2002, the Registrant sold Meadowwood Apartments in Reno, Nevada,
for $31,350,000 in an all cash transaction. Proceeds from the sale were used, in
part, to retire the mortgage note of approximately $19,600,000 that had been
secured by the property. The sale of Meadowwood Apartments resulted in a net
gain for financial reporting purposes of approximately $17,100,000. (Please
refer to Form 8-K filed May 24, 2002, in connection with this transaction.) The
gain for tax purposes will be computed using the tax basis of the assets sold,
and will differ from the gain reported on the consolidated financial statements.
Total revenues for the three months ended June 30, 2002 decreased $733,000
to $510,000 from $1,243,000 for the three months ended June 30, 2001. Loss
before gain on sale, and after depreciation and mortgage interest expense for
the three months ended June 30, 2002, increased $1,266,000 to a loss of
$1,192,000 from income of $74,000 for the three months ended June 30, 2001.
Total revenues for the six months ended June 30, 2002 decreased $683,000
to $1,784,000 from $2,467,000 for the six months ended June 30, 2001. Income
before gain on sale and after depreciation and mortgage interest expense for the
six months ended June 30, 2002 decreased $1,016,000 to a loss of $864,000 from
income of $152,000 for the six months ended June 30, 2001.
Due to the sale of the property by the Registrant, the reporting period
for Meadowwood Apartments ended on May 9, 2002. The changes in revenues and
income are due substantially to the shortened reporting period. Furthermore, as
Meadowwood Apartments was classified as a real estate asset held for sale as of
August, 2001, no depreciation was charged to expense in the current periods,
which decreased depreciation expense $241,000 and $482,000, respectively, from
the three and six month periods of the prior year. Due to the retirement before
the maturity date of the mortgage note that had been secured by the property,
interest expense increased $916,000 primarily due to the yield maintenance
payment of approximately $1,056,000 related to the retirement of the mortgage
note, and amortization expense increased $62,000 as the balance of the costs
incurred in connection with the mortgage note were written off.
Holiday Park Apartments (Holiday, Florida)
- -----------------------
Total revenues for the three months ended June 30, 2002 increased
$14,000 to $342,000 from $328,000 for the three months ended June 30, 2001. Net
income after depreciation and mortgage interest expense for the three months
ended June 30, 2002 increased $10,000 to $37,000 from $27,000 for the three
months ended June 30, 2001. Increased revenue is due primarily to higher rental
rates for new and renewing leases, which added $11,000 to total revenues in the
current period. Income from the water and sewer billback program added $5,000 to
revenues in the current period. The increase in net income was the result of
higher revenue, partially offset by a $4,000 increase in expenses. Payroll
expenses increased $3,000 as staff positions that were open in the comparable
period of the prior year were filled.
Total revenues for the six months ended June 30, 2002 increased $40,000
to $693,000 from $653,000 for the six months ended June 30, 2001. Net income
after depreciation and mortgage interest expense for the six months ended June
30, 2002 increased $22,000 to $85,000 from $63,000 for the six months ended June
30, 2001. Increased revenue is due primarily to a rise in rental rates
implemented at the property for new and renewing leases, which generated
approximately $22,000. In addition, utility income increased $10,000 due to the
water and sewer billback program. Other miscellaneous receipts increased
$10,000. The increase in net income was the result of higher revenue, partially
offset by an increase in expenses. Payroll expenses increased $12,000 as staff
positions that were open in the comparable period of the prior year were filled.
Real estate tax expense increased $4,000.
12
Cypress Key Apartments (Orlando, Florida)
- ----------------------
Total revenues for the three months ended June 30, 2002 decreased $27,000
to $738,000 from $765,000 for the three months ended June 30, 2001. Net loss
after depreciation and mortgage interest expense for the three months ended June
30, 2002 increased $2,000 to $93,000 from $91,000 for the three months ended
June 30, 2001. Although rental rates on new and renewing leases were raised
which added $13,000 to revenues, and average occupancy was higher which added
another $14,000, total revenues declined $32,000 as more concessions were given
to tenants. Miscellaneous income was $20,000 lower as fees were waived in an
effort to induce tenants to enter into leases. A new apartment community built
directly across from Cypress Key has been very aggressive in its leasing efforts
which necessitated these concessions on new and renewing leases. The
increase in net loss was a result of lower revenues, partially offset by a
$25,000 decrease in expenses. Utility expense was $10,000 lower and real estate
taxes were $12,000 lower in the three month period in the current year.
Total revenues for the six months ended June 30, 2002 decreased $94,000 to
$1,480,000 from $1,574,000 for the six months ended June 30, 2001. Net loss
after depreciation and mortgage interest expense for the six months ended June
30, 2002 increased $122,000 to $187,000 from $65,000 for the six months ended
June 30, 2001. Average occupancy decreased 2.3%, to 91.3% from 93.6% for the
comparable period in 2001, reducing revenues $30,000. Although rental rates on
new and renewing tenants were raised, greater concessions were offered to
prospective tenants, resulting in a net decrease in rental revenues of $29,000.
Fee income was $19,000 lower and collection losses $15,000 higher in the six
months ended June 30, 2002. The net loss was a result of lower revenues and an
increase of $27,000 in expenses. Payroll expenses for the current period were
$21,000 higher. Repairs and maintenance increased $34,000, primarily as a result
of higher turnover costs incurred as vacated apartments were prepared for new
tenants. These increases in expenses were partially offset by a decrease in real
estate taxes of $25,000.
Halton Place Apartments (Greenville, South Carolina)
- -----------------------
Total revenues for the three months ended June 30, 2002 decreased $35,000
to $389,000 from $424,000 for the three months ended June 30, 2001. Net income
after depreciation and interest expense for the three months ended June 30, 2002
decreased $37,000 to $74,000 from $111,000 for the three months ended June 30,
2001. The decrease in revenues is due primarily to lower occupancy at the
property. Average occupancy for the three months ended June 30, 2002 decreased
4.7%, to 86.8% from 91.5% for the three months ended June 30, 2001, which
reduced revenues $27,000. Greater concessions reduced revenues $12,000. The
decrease in net income was caused primarily by the reduction of revenues. While
overall expenses for the three months ended June 30, 2002 were comparable to the
three months ended June 30, 2001, real estate taxes decreased $16,000, partially
offset by additional interest expense of $8,000 as average borrowings under the
revolving credit facility rose in 2002, and higher depreciation and amortization
expense of $8,000.
Total revenues for the six months ended June 30, 2002 decreased $50,000 to
$779,000 from $829,000 for the six months ended June 30, 2001. Net income after
depreciation and interest expense for the six months ended June 30, 2002
decreased $68,000 to $159,000 from $227,000 for the six months ended June 30,
2001. The decrease in total revenues is due primarily to a decrease in occupancy
at the property. Average occupancy decreased 4.1%, to 85.5% from 89.6% for the
comparable period in 2001, which reduced rental revenue $40,000. Although rental
rates were increased marginally, greater tenant concessions resulted in a net
decrease in revenues of $10,000. The decrease in net income was a result of
lower revenues and an $18,000 increase in expenses. Interest expense for the
period increased $15,000, as the average balance outstanding under the credit
facility secured by the property was higher in the current period. In addition,
financing costs were amortized over all six months in the current period which
increased expenses $11,000. Depreciation expense was $6,000 higher as additional
assets were placed in service over the course of the year. These increases were
partially offset by a decrease in real estate taxes of $22,000.
13
Le Coeur du Monde Apartments (St. Louis, Missouri)
- ----------------------------
Total revenues for the three months ended June 30, 2002 increased $32,000
to $472,000 from $440,000 for the three months ended June 30, 2001. Net loss
after depreciation and mortgage interest expense for the three months ended June
30, 2002 decreased $41,000 to $14,000 from $55,000 for the three months ended
June 30, 2001. Higher revenues were due primarily to decreased tenant
concessions at the property, which added $29,000 to total revenues.
Miscellaneous income was also $3,000 higher in the current period. The decrease
in net loss was a result of higher revenues and an $8,000 decrease in expenses.
Higher occupancy rates led to a decrease in repairs and maintenance expenditures
of $12,000 and a decrease in advertising and promotion of $8,000. Depreciation
expense increased $3,000 as additional assets were placed in service over the
course of the last year, and real estate tax expense increased $4,000 from the
prior year.
Total revenues for the six months ended June 30, 2002 increased $92,000 to
$935,000 from $843,000 for the six months ended June 30, 2001. Net loss after
depreciation and mortgage interest expense for the six months ended June 30,
2002 decreased $76,000 to $37,000 from $113,000 for the six months ended June
30, 2001. Higher revenues were due primarily to higher average occupancy in the
current period. The average occupancy rate rose 5.0%, to 95.4 % in the current
year from 90.4% for the same period in the prior year, which added $81,000 to
total revenues. Miscellaneous income was also $11,000 higher in the current
period. The decrease in net loss was a result of higher revenues partially
offset by a $16,000 decrease in expenses. Depreciation expense increased $7,000
as additional assets were placed in service over the course of the last year,
and real estate tax expense increased $8,000 from the prior year.
Eagle Lake Business center IV (Maple Grove, Minnesota)
- -----------------------------
On June 12, 2002, the Registrant purchased Eagle Lake Business Center IV,
a 60,345 square foot industrial flex property located in Maple Grove, Minnesota,
for $4,700,000 in an all cash transaction. (Refer also to Footnote 3 of the
Consolidated Financial Statements.)
Total revenues for the three and six months ended June 30, 2002 were
$37,000. Net income after depreciation expense for the three and six months
ended June 30, 2002 was $20,000. Total revenue was comprised of rental revenue
of $29,000 and escalation income of $8,000. As of June 30, 2002, the property is
100% occupied. Expenses for the three and six months ended June 30, 2002 related
primarily to real estate tax expense of $5,000, depreciation expense of $5,000,
repairs and maintenance expense of $2,000 and other miscellaneous expenses of
$4,000.
Investment in Joint Venture
- ---------------------------
On April 30, 2002, the Registrant purchased a 75% interest in a
partnership that owns Waterview Apartments in Westchester, Pennsylvania.
Waterview Apartments comprises 203 apartment units and 6,000 square feet of
commercial space. (Refer also to Footnote 3 of the Consolidated Financial
Statements.)
Equity in net loss of joint venture for the three and six months ended
June 30, 2002 was $13,378.
14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
AS OF AND FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002
----------------------------------------------------------
On March 1, 2001, the Registrant entered into a revolving credit facility
agreement with a bank under which interest incurred is determined based on
current market rates. As such, the Registrant has market risk to the extent
interest rates fluctuate during the two-year term and funds are advanced by the
bank under the agreement. The Registrant does not believe this limited exposure
to market risk will have a material adverse effect on its financial position or
on results of its operations.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
On May 24, 2002, the Registrant filed Form 8-K to
report the sale on May 9, 2002 of Meadowwood
Apartments. Pro-forma financial statements were
included in the filing.
15
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Each of the undersigned hereby certifies in his/her capacity as an officer of SB
Partners Real Estate Corporation, the general partner of SB Partners (the
"Partnership"), that the Quarterly Report of the Partnership on Form 10-Q for
the period ended June 30, 2002 fully complies with the requirements of Section
13(a) or 15(d) of the Securities and Exchange Act of 1934 and that the
information contained in such report fairly presents, in all material respects,
the financial condition of the Partnership at the end of such period and the
results of operations of the Partnership for such period.
SB PARTNERS
-----------------------------
(Registrant)
By: SB PARTNERS REAL ESTATE
CORPORATION
-----------------------------
General Partner
Dated: August 14, 2002 By:/s/ John H. Streicker
------------------------------
John H. Streicker
President
Dated: August 14, 2002 By:/s/ Elizabeth B. Longo
------------------------------
Elizabeth B. Longo
Chief Financial Officer
(Principal Financial Officer)
Dated: August 14, 2002 By:/s/ George N. Tietjen
------------------------------
George N. Tietjen III
Vice President
(Principal Accounting Officer)