UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
EXCHANGE ACT OF 1934
For
the quarterly period ended
OR
EXCHANGE ACT OF 1934
For the transition period from to
Commission
file number
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| incorporation or organization) | Identification No.) |
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Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
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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 such shorter period that the registrant was required to file such reports), and (2) has
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Indicate
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| Smaller
Reporting Company | ||
| Emerging
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
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☐
As of November 11, 2024 the registrant had units issued and outstanding.
TABLE OF CONTENTS
DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2024
| 2 |
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
CONDENSED BALANCE SHEETS
September 30, 2024 and December 31, 2023
| September 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| (unaudited) | ||||||||
| PROPERTIES HELD FOR SALE: (Note 3) | ||||||||
| Properties held for sale | $ | $ | ||||||
| OTHER ASSETS: | ||||||||
| Cash and cash equivalents | ||||||||
| Investments held in Indemnification Trust (Note 7) | ||||||||
| Security deposits escrow | ||||||||
| Rents and other receivables | ||||||||
| Prepaid state income tax | ||||||||
| Deferred closing costs | ||||||||
| Prepaid insurance | ||||||||
| Deferred charges, net | ||||||||
| Total other assets | ||||||||
| Total assets | $ | $ | ||||||
The accompanying notes to the financial statements are an integral part of these statements.
| 3 |
DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
CONDENSED BALANCE SHEETS
September 30, 2024 and December 31, 2023
LIABILITIES AND PARTNERS’ CAPITAL
| September 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| (unaudited) | ||||||||
| LIABILITIES: | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Due to General Partner (Note 5) | ||||||||
| Accrued state income tax (Note 8) | ||||||||
| Distributions payable (Note 8) | ||||||||
| Security deposits | ||||||||
| Total liabilities | ||||||||
| CONTINGENCIES AND COMMITMENTS (Notes 6 and 7) | ||||||||
| PARTNERS’ CAPITAL: (Notes 1 and 4) | ||||||||
| General Partner (1993-Present) | ||||||||
| Cumulative net income (retained earnings) | ||||||||
| Cumulative cash distributions | ( | ) | ( | ) | ||||
| Total general partners’ capital | ||||||||
| Limited Partners ( | ||||||||
| Capital contributions | ||||||||
| Offering costs | ( | ) | ( | ) | ||||
| Cumulative net income (retained earnings) | ||||||||
| Cumulative cash distributions | ( | ) | ( | ) | ||||
| Total Limited Partners’ capital | ||||||||
| Former General Partner (1987-1993) | ||||||||
| Cumulative net income (retained earnings) | ||||||||
| Cumulative cash distributions | ( | ) | ( | ) | ||||
| Total former general partners’ capital | ( | ) | ( | ) | ||||
| Total partners’ capital | ||||||||
| Total liabilities and partners’ capital | $ | $ | ||||||
The accompanying notes to the financial statements are an integral part of these statements.
| 4 |
DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
CONDENSED STATEMENTS OF INCOME
For the Three and Nine Month Periods Ended September 30, 2024 and 2023
| Three months ended | Nine months ended | |||||||||||||||
| September 30, | September 30, | September 30, | September 30, | |||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||
| OPERATING REVENUES: | ||||||||||||||||
| Rental income (Note 3) | $ | $ | | $ | $ | | ||||||||||
| TOTAL OPERATING REVENUES | ||||||||||||||||
| EXPENSES: | ||||||||||||||||
| Partnership management fees (Note 5) | ||||||||||||||||
| Insurance | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Advisory Board fees and expenses | ||||||||||||||||
| Professional services | ||||||||||||||||
| Depreciation | ||||||||||||||||
| Amortization | ||||||||||||||||
| TOTAL OPERATING EXPENSES | $ | $ | ||||||||||||||
| OTHER INCOME | ||||||||||||||||
| Other interest income | ||||||||||||||||
| Gain on sale of property | ||||||||||||||||
| TOTAL OTHER INCOME | ||||||||||||||||
| NET INCOME | $ | $ | $ | $ | ||||||||||||
| NET INCOME ALLOCATED - GENERAL PARTNER | $ | $ | $ | $ | ||||||||||||
| NET INCOME ALLOCATED - LIMITED PARTNERS | $ | $ | $ | $ | ||||||||||||
| Based on | ||||||||||||||||
| NET INCOME PER LIMITED PARTNERSHIP INTEREST | $ | $ | $ | $ | ||||||||||||
The accompanying notes to the financial statements are an integral part of these statements.
| 5 |
DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
CONDENSED STATEMENTS OF CASH FLOWS
For the Nine Month Periods Ended September 30, 2024 and 2023
| Nine Months Ended | ||||||||
| September 30, 2024 | September 30, 2023 | |||||||
| (unaudited) | (unaudited) | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net income | $ | $ | | |||||
| Adjustments to reconcile net income to net cash from operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Changes in operating assets and liabilities | ||||||||
| Gain on sale of property | ( | ) | ||||||
| Decrease in rents and other receivables | ||||||||
| (Increase) decrease in security deposit escrow | ( | ) | ||||||
| Decrease in prepaid insurance | ||||||||
| Decrease in prepaid state income taxes | ||||||||
| (Decrease) increase in accounts payable and accrued expenses | ( | ) | ||||||
| Security deposit refund | ( | ) | ||||||
| Decrease (Increase) in deferred closing costs | ( | ) | ( | ) | ||||
| Increase in unearned rental income | ||||||||
| (Decrease) Increase in due to General Partner | ( | ) | ( | ) | ||||
| Net cash from (used in) operating activities | ( | ) | ||||||
| CASH FLOWS PROVIDED FROM INVESTING ACTIVITIES: | ||||||||
| Proceeds from sale of Property, net | ||||||||
| Interest applied to Indemnification Trust account | ( | ) | ( | ) | ||||
| Indemnification Trust account withdrawal | ||||||||
| Net cash provided from investing activities | ||||||||
| CASH FLOWS USED IN FINANCING ACTIVITIES: | ||||||||
| Cash distributions to Limited Partners | ( | ) | ( | ) | ||||
| Cash distributions to General Partner | ( | ) | ( | ) | ||||
| Net cash used in financing activities | ( | ) | ( | ) | ||||
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | ( | ) | ||||||
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | ||||||||
| CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | $ | ||||||
| Supplemental disclosure of cash flow information | ||||||||
| Noncash investing activities | ||||||||
| Distributions declared, not yet paid | $ | $ | ||||||
The accompanying notes to the financial statements are an integral part of these statements.
| 6 |
DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
CONDENSED STATEMENTS OF PARTNER’S CAPITAL (Unaudited)
For the Three and Nine Month Periods Ended September 30, 2024 and 2023
| General Partner | Limited Partners | |||||||||||||||||||||||||||||||||||
| Capital | ||||||||||||||||||||||||||||||||||||
| Cumulative | Cumulative | Contributions, | Cumulative | Cumulative | Total | |||||||||||||||||||||||||||||||
| Net | Cash | Net of | Net | Cash | Partners’ | |||||||||||||||||||||||||||||||
| Income | Distributions | Total | Offering Costs | Income | Distribution | Reallocation | Total | Capital | ||||||||||||||||||||||||||||
| BALANCE AT DECEMBER 31, 2023 | $ | $ | ( | ) | $ | $ | | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||||
| Net Income (Loss) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Distributions declared | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| BALANCE AT MARCH 31, 2024 | $ | $ | ( | ) | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||||
| Net Income | ||||||||||||||||||||||||||||||||||||
| Distributions declared | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| BALANCE AT JUNE 30, 2024 | $ | $ | ( | ) | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||||
| Net Income | ||||||||||||||||||||||||||||||||||||
| Distributions declared | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| BALANCE AT SEPTEMBER 30, 2024 | $ | $ | ( | ) | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||||
| BALANCE AT DECEMBER 31, 2022 | $ | $ | ( | ) | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||||
| Net Income | ||||||||||||||||||||||||||||||||||||
| Distributions declared | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| BALANCE AT MARCH 31, 2023 | $ | $ | ( | ) | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||||
| Net Income | ||||||||||||||||||||||||||||||||||||
| Distributions declared | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| BALANCE AT JUNE 30, 2023 | $ | $ | ( | ) | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||||
| Net Income | ||||||||||||||||||||||||||||||||||||
| Distributions declared | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| BALANCE AT SEPTEMBER 30, 2023 | $ | $ | ( | ) | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||||
The accompanying notes to the financial statements are an integral part of these statements.
| 7 |
DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
The condensed statements included herein have been prepared by the registrant, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission, and reflect all adjustments which are, in the opinion of management, necessary to a fair statement of the results of operations for the interim period, on a basis consistent with the annual audited statements. The adjustments made to these condensed statements consist only of normal recurring adjustments. Certain information, accounting policies, and footnote disclosures normally included in financial statements prepared in accordance with United States Generally Accepted Accounting Principles (US GAAP) have been condensed or omitted pursuant to such rules and regulations, although the registrant believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these condensed financial statements be read in conjunction with the financial statements and the summary of significant accounting policies and notes thereto included in the registrant’s latest annual report on Form 10-K.
1. ORGANIZATION:
DiVall
Insured Income Properties 2 Limited Partnership (the “Partnership”) was formed on November 20, 1987, pursuant to the Uniform
Limited Partnership Act of the State of Wisconsin. The initial capital, contributed during 1987, consisted of $
The
Partnership is continuing its orderly liquidation process per the terms of Partnership Agreement as the Partnership’s term expired
November 30, 2023. The Partnership had been in the business of owning and operating its investment portfolio of commercial real estate
properties (the “Properties”) since the late 1980’s. The Partnership has sold six Properties in the last two years.
The three remaining Properties currently owned by the Partnership are leased on a triple net basis to, and operated by, franchisees of
the International Wendy’s Company under leases with terms through December 31, 2040. As of September 30, 2024, the Partnership
owned
The Partnership Agreement (as defined below) provides that the Partnership is scheduled to be dissolved on November 30, 2023, or earlier upon the prior occurrence of any of the following events: (a) the disposition of all its Properties; (b) the written determination by the General Partner, that the Partnership’s assets may constitute “plan assets” for purposes of ERISA; (c) the agreement of limited partners owning a majority of the outstanding Interests to dissolve the Partnership; or (d) the dissolution, bankruptcy, death, withdrawal, or incapacity of the last remaining General Partner, unless an additional General Partner is elected previously by a majority of the limited partners.
Pursuant to a consent solicitation that concluded on October 15, 2020, the Partnership solicited and obtained the affirmative consent of limited partners holding more than a majority of the Partnership’s outstanding Interests to authorize the General Partner, to sell the Properties prior to November 30, 2023 if the General Partner determined such sale to be in the best interest of the Partnership and, upon the sale of all Properties, to commence an orderly liquidation, wind-up and dissolution of the Partnership. In connection with such consent, the limited partners approved a resolution granting the General Partner the authority to sell all or substantially all of the Partnership’s assets prior to November 30, 2023 and subsequently liquidate and dissolve the Partnership, without further approval from the limited partners. On August 25, 2023, the General Partner adopted resolutions determining that it is in the best interest of the Partnership to sell all or substantially all of the Partnership’s assets, and providing that the General Partner will, upon the sale of such assets, liquidate and dissolve the Partnership in accordance with applicable law and the terms of the Partnership Agreement. During the fiscal year ended December 31, 2023 the General Partner caused the Partnership to dispose of five of its now former Properties, and thereafter and through the quarter ended September 30, 2024 continued to pursue the orderly disposition of the Partnership’s remaining Properties.
2. RECENTLY ADOPTED ACCOUNTING PRINCIPLES:
None that would have a significant impact on the Partnership.
| 8 |
DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
3. PROPERTIES HELD FOR SALE:
The total cost of the Properties includes the original purchase price plus acquisition fees and other capitalized costs paid to an affiliate of the former general partners of the Partnership.
As
of September 30, 2024, the Partnership owned
Properties Held for Sale
The Martintown Rd. Property in North Augusta, SC was listed for sale on December 22, 2021 and the listing contract expired in 2023. The Property was sold without agency directly to the tenant on March 31, 2023.
The remaining three Wendy’s Properties were listed for sale on July 12, 2023.
The components of the properties held for sale in the condensed balance sheets as of September 30, 2024 and December 31, 2023 are outlined below:
| September 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Balance Sheet: | ||||||||
| Land | $ | $ | ||||||
| Building | ||||||||
| Accumulated Depreciation | ( | ) | ( | ) | ||||
| Properties held for sale | $ | $ | ||||||
| 9 |
DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
4. PARTNERSHIP AGREEMENT:
The Limited Partnership Agreement, as amended from time to time (collectively, the “Partnership Agreement”) was amended, effective as of October 20, 2020, to extend the term of the Partnership to November 30, 2023, or until dissolution prior thereto pursuant to the consent of the majority of the outstanding limited partnership interests.
Under
the terms of the Partnership Agreement, net profits or losses from operations are allocated
The
provisions regarding distribution of Net Proceeds, as defined, provide that Net Proceeds are to be distributed as follows: (a) to the
limited partners, an amount equal to
During
the 2020 consent solicitation process, the Limited Partners approved two separate amendments to the Partnership Agreement.
| 10 |
DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
5. TRANSACTIONS WITH GENERAL PARTNER AND ITS AFFILIATES:
Pursuant
to the terms of the Permanent Manager Agreement (“PMA”) executed in 1993 and renewed for an additional two-year term as of
January 1, 2023, the General Partner receives a base fee (the “Base Fee”) for managing the Partnership equal to four percent
of gross receipts, subject initially to a minimum annual Base Fee. The PMA also provides that the Partnership is responsible for reimbursement
of the General Partner for office rent and related office overhead (“Expenses”) up to an initial annual maximum of $
For
purposes of computing the
Amounts paid and/or accrued to the General Partner and its affiliates for the three-month periods ended September 30, 2024 and 2023 are as follows:
| Incurred for the | Incurred for the | Incurred for the | Incurred for the | |||||||||||||
| Three Months Ended | Three Months Ended | Nine Months Ended | Nine Months Ended | |||||||||||||
| September 30, 2024 | September 30, 2023 | September 30, 2024 | September 30, 2023 | |||||||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||
| General Partner | ||||||||||||||||
| Management fees | $ | $ | $ | $ | ||||||||||||
| Overhead allowance | ||||||||||||||||
| Leasing commissions | ||||||||||||||||
| Reimbursement for out-of-pocket expenses | ||||||||||||||||
| Cash distribution | ||||||||||||||||
| Amounts paid and/or accrued to the General Partner | $ | $ | $ | $ | ||||||||||||
At
September 30, 2024 and December 31, 2023, $
| 11 |
DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
As of September 30, 2024, Jesse Small, an Advisory Board Member, beneficially owned greater than ten percent of the Partnership’s outstanding limited partnership interests. Amounts paid to Mr. Small for his services as a member of the Advisory Board for the three and nine month periods ended September 30, 2024 and 2023 are as follows:
| Three Month Period ended September 30, 2024 | Three Month Period ended September 30, 2023 | Nine Month Period ended September 30, 2024 | Nine Month Period ended September 30, 2023 | |||||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
| Advisory Board Fees paid | $ | $ | $ | $ | ||||||||||||
At
September 30, 2024 and December 31, 2023 there were
6. CONTINGENT LIABILITIES:
According
to the Partnership Agreement, TPG, as General Partner of the Partnership, may receive a disposition fee not to exceed
7. PMA INDEMNIFICATION TRUST:
The
PMA provides that TPG will be indemnified from any claims or expenses arising out of, or relating to, TPG serving in the capacity of
general partner or as substitute general partner, so long as such claims do not arise from fraudulent or criminal misconduct by TPG.
The PMA provides that the Partnership fund this indemnification obligation by establishing a reserve of up to $
| 12 |
DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
8. LIMITED PARTNER STATE INCOME TAXES
For the 2023 tax year, state income taxes were paid on behalf of the Limited Partners to the states of South Carolina, Georgia and Ohio.
In
the state of South Carolina, composite tax was filed and paid on behalf of the Limited Partners in the amount of $
In
the states of Ohio and Georgia, PTE payments were made during the first quarter of 2024 and are reflected on the balance sheet as of
December 31, 2023 as distributions payable totaling $
9. FAIR VALUE DISCLOSURES:
The Partnership has determined the fair value based on hierarchy that gives the highest priority to quoted prices in active markets for identical assets and liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). Inputs are broadly defined as assumptions market participants would use in pricing an asset or liability. The three levels of the fair value hierarchy under the accounting principle are described below:
| Level 1. | Quoted prices in active markets for identical assets or liabilities. | |
| Level 2. | Quoted prices for similar investments in active markets, quoted prices for identical or similar investments in markets that are not active, and inputs other than quoted prices that are observable for the investment. | |
| Level 3. | Unobservable inputs for which there is little, if any, market activity for the investment. The inputs into the determination of fair value are based upon the best information in the circumstances and may require significant management judgment or estimation and the use of discounted cash flow models to value the investment. |
The fair value hierarchy is based on the lowest level of input that is significant to the fair value measurements. The Partnership’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the investment. The assets held in the indemnification trust account are invested in one year treasury bills which are measured using level 1 fair value inputs.
The Partnership assesses the levels of the investments at each measurement date, and transfers between levels are recognized on the actual date of the event or change in circumstances that caused the transfer in accordance with the Partnership’s accounting policy regarding the recognition of transfers between levels of the fair value hierarchy. For the three-month period ended September 30, 2024 and the year ended December 31, 2023, there were no such transfers.
10. SUBSEQUENT EVENTS:
Wendy’s – Sam Rittenberg, Charleston, SC
On
June 6, 2023, the Partnership executed a listing agreement with Matthews Real Estate Investment Services, Inc. for the sale of the Property
with an asking price of $
Wendy’s – Richland Ave, Aiken, SC
On
June 6, 2023, the Partnership executed a listing agreement with Matthews Real Estate Investment Services, Inc. for the sale of the Property
with an asking price of $
Wendy’s – Folly Road, Charleston, SC
On
June 6, 2023, the Partnership executed a listing agreement with Matthews Real Estate Investment Services, Inc. for the sale of the Property
with an asking price of $
As
a result of these property sales as of October 15, 2024 the Partnership no longer holds any Properties. On October 25, 2024 the Partnership
effected a distribution of an aggregate of $
We have reviewed all material events through the date of this report in accordance with ASC 855-10.
| 13 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
CAUTIONARY STATEMENT
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements are not historical facts but are the intent, belief or current expectations of management of the Partnership based on its knowledge and understanding of the business and industry. Words such as “may,” “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “would,” “could,” “should” and variations of these words and similar expressions are intended to identify forward-looking statements. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we can give no assurance that these expectations will prove to have been correct. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements.
Examples of forward-looking statements include, but are not limited to, statements we make regarding:
| ● | our expectations regarding our financial condition, results of operations in future periods, and matters related to the timing to wind-up the Partnership’s operations; |
| ● | our expectations regarding the timing and efforts to satisfy existing or potential Partnership obligations as we wind-up the Partnership; |
| ● | our expectations regarding economic and business conditions and how conditions could impact the wind-up of the Partnership; |
| ● | our decisions and policies with respect to the potential disposition of our remaining assets as we wind-up the Partnership; |
| ● | costs and expenses to complete the wind-up and dissolution of the Partnership; |
| ● | our ability to collect on any remaining obligations owed to the Partnership; |
| ● | any contingent liabilities related to our former Properties or other Partnership matters; and |
| ● | other risks and uncertainties described from time to time in our filings with the Securities and Exchange Commission (the “SEC”). |
| 14 |
Critical Accounting Policies and Estimates
Management’s discussion and analysis of financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with US GAAP. The preparation of these financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On a regular basis, we evaluate these estimates, including investment impairment. These estimates are based on management’s historical industry experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates, and the difference could be material.
See Note 1 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2023 for a discussion of our significant accounting policies.
Investment Properties
Pursuant to a consent solicitation that concluded on October 15, 2020, the Partnership solicited and obtained the affirmative consent of limited partners holding more than a majority of the Partnership’s outstanding Interests to authorize the General Partner, to sell the Properties prior to November 30, 2023 if the General Partner determined such sale to be in the best interest of the Partnership and, upon the sale of all Properties, to commence an orderly liquidation, wind-up and dissolution of the Partnership. In connection with such consent, the limited partners approved a resolution granting the General Partner the authority to sell all or substantially all of the Partnership’s assets prior to November 30, 2023, and subsequently liquidate and dissolve the Partnership, without further approval from the limited partners.
On August 25, 2023, the General Partner adopted resolutions (a) determining that it is in the best interest of the Partnership to sell all or substantially all of the Partnership’s assets, and (b) providing that the General Partner will, upon the sale of such assets, liquidate and dissolve the Partnership in accordance with applicable law and the terms of the Partnership Agreement. In addition, the stated term of the Partnership ended on November 30, 2023, and, prior to that date the Partnership did not seek or obtain the consent of the limited partners to amend the Partnership Agreement to extend the Partnership’s term. As a result of the authority and authorization provided to the General Partner, and because the Partnership’s intended term lapsed on November 30, 2023, during the fiscal year ended December 31, 2023 the General Partner caused the Partnership to dispose of five of its now former Properties and expects to continue to pursue and effect the orderly disposition of the Partnership’s remaining Properties.
As of September 30, 2024, the Partnership owned three Properties, all of which feature tenants that are Wendy’s franchisees. The Properties are all located in the state of South Carolina and included in Properties held for sale. Subsequent to September 30, 2024 the Partnership closed on the sale of its final three Properties, and going forward the General Partner intends to continue to the orderly wind-up of the Partnership.
Property taxes, general maintenance, insurance and ground rent on the Properties are the responsibility of the tenant. However, when a tenant fails to make the required tax payments or when a Property becomes vacant, the Partnership makes the appropriate property tax payments to avoid possible foreclosure of the Property.
There were no building improvements capitalized during the three month period ending September 30, 2024.
Net Income
Net income for the three-month periods ended September 30, 2024 and 2023 was $36,886 and $4,344,198, respectively. Net income per limited partnership interest for the three-month periods ended September 30, 2024 and 2023 was $0.79 and $92.93, respectively. Net income for the nine-month periods ended September 30, 2024 and 2023 was $58,369 and $ 5,648,248, respectively. Net income per limited partnership interest for the nine-month periods ended September 30, 2024 and 2023 was $1.25 and $ 120.82, respectively.
The decrease in net income for the three and nine months ended September 30, 2024 when compared to the net income for the prior year periods is primarily the net effect of the sale of the Martintown Road Property on March 31, 2023 (with no corresponding Property sale in the 2024 periods), and lower rental income resulting from the Partnership owning fewer rental Properties (as described below). See paragraphs below for further information as to the primary factors that contributed to the variances in operating income and expense items from the 2023 periods to the 2024 periods.
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Results of Operations
Three-month period ended September 30, 2024, as compared to the three-month period ended September 30, 2023:
Operating Rental Income: Rental income for the three-month periods ended September 30, 2024 and 2023 was $117,587 and $309,010 respectively. The rental income was comprised of monthly lease obligations. The decrease in rental income for the quarter ended September 30, 2024 compared to the quarter ended September 30, 2023 is due to the loss in rents associated with the five Properties that were sold in the fourth quarter of 2023.
General and Administrative Expense: General and administrative expenses for the three-month periods ended September 30, 2024 and 2023 were $4,881 and $149,503, respectively. General and administrative expenses were comprised of management expense, state/city registration and annual report filing fees, office supplies, printing costs, outside storage expenses, copying costs, postage and shipping expenses, website fees, bank fees and state income tax expenses. The decrease for the quarter ended September 30, 2024 compared to the quarter ended September 30, 2023 is due primarily to the reduction in the management fee and overhead allowance, as well as the change in treatment for 2023 state income taxes due for the 2023 tax year, which were accrued during the 2023 tax year instead of being expensed when paid as had been the practice in prior years.
Professional Services: Professional services expenses for the three-month periods ended September 30, 2024 and 2023 were $27,520 and $30,506 respectively. Professional services expenses were primarily comprised of investor relations data processing, investor mailings processing, outsourced financial services, legal, auditing and tax preparation fees, and SEC report conversion and processing fees. The decrease for the quarter ended September 30, 2024 compared to the quarter ended September 30, 2023 is due primarily to our decreased use of outside financial advisors and other professionals during the 2024 period as we curtailed our reliance on outside service providers as part of our wind-up activities.
Nine-month period ended September 30, 2024, as compared to the nine-month period ended September 30, 2023:
Income from operations for the nine-month periods ended September 30, 2024 and 2023 were $58,369 and $5,648,248 respectively. The 2023 period included the sale of one Property during that period, whereas there were no Property sales during the nine months ended September 30, 2024.
Operating Rental Income: Rental income for the nine-month periods ended September 30, 2024 and 2023 was $352,761 and $907,706, respectively. The rental income was comprised of monthly lease obligations. The decrease from the 2023 period to the 2024 period is due to the loss in rents associated with the five Properties that were sold during calendar year 2023 after September 30, 2023.
General and Administrative Expense: General and administrative expenses for the nine-month periods ended September 30, 2024 and 2023 were $20,873 and $ 224,991, respectively. General and administrative expenses were comprised of management expense, state/city registration and annual report filing fees, office supplies, printing costs, outside storage expenses, copying costs, postage and shipping expenses, website fees, bank fees, and state income tax expenses. The decrease for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 is due primarily to the reduction in the management fee and overhead allowance, as well as the change in treatment for 2023 state income taxes due for the 2023 tax year, which were accrued during the 2023 tax year instead of being expensed when paid as had been the practice in prior years.
Professional services: Professional services expenses for the nine-month periods ended September 30, 2024 and 2023 were $150,593 and $123,239, respectively. Professional services expenses were primarily comprised of investor relations data processing, investor mailings processing, outsourced financial services, legal, auditing and tax preparation fees, and SEC report conversion and processing fees. The increase for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 is due primarily to an increase in outsourced financial services fees upon reclassification from management fees in accordance with the Partnership Agreement, as amended.
Cash Flow Analysis
Net cash flows from operating activities for the nine-month periods ended September 30, 2024 and 2023 were $(593) and $810,379, respectively. The decrease is attributed primarily to lower net income (net of the gain on the sale of property during the 2023 period) during the 2024 period versus the 2023 period in addition to the state income tax payments to Ohio, South Carolina and Georgia totaling $441,588 in the first quarter attributable to 2023 income.
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Cash flows provided from investing activities for the nine-month periods ended September 30, 2024 and 2023 were $97,301 and $6,221,659, respectively. The 2024 amount represents the net of interest earned on the indemnification trust account offset by a withdrawal from the indemnification trust to support state income tax payments made on behalf of Limited Partners. The 2023 amount represents the proceeds from the sale of the Partnership’s former Martintown Road property that was sold during the 2023 period offset partially by interest earned on the indemnification trust account.
For the nine-month period ended September 30, 2024, cash flows used in financing activities was $235,555 and consisted of aggregate limited partner distributions of $234,495 and general partner distributions of $1,060.
For the nine-month period ended September 30, 2023, cash flows used in financing activities was $1,880,849 and consisted of aggregate limited partner distributions of $1,875,001, and general partner distributions of $5,848.
Liquidity and Capital Resources
The Partnership’s cash balance was $40,898 at September 30, 2024. This balance represents amounts deemed necessary to allow the Partnership to operate normally.
The Partnership’s principal demands for liquidity are expected to continue to be, for the payment of operating expenses, assumption of Limited Partner state income taxes and distributions to Limited Partners. Management anticipates that cash generated through the sales of Properties will primarily provide the sources for future Partnership liquidity and limited partner distributions. The two primary liquidity risks in the absence of mortgage debt with respect to the liquidating operations of the Properties and their eventual sale, are the Partnership’s inability to collect rent receivables and completing anticipated sales of the remaining Properties. The amount of cash to be distributed to our limited partners is determined by the General Partner and is dependent on a number of factors, including funds available for payment of operating expenses during liquidation and state income tax payments related to the sales of the remaining Properties in the portfolio.
As of September 30, 2024, the three owned Properties were 100% leased. In addition, the Partnership collected 100% of its base rent that was owing from current operating tenants for the period ended September 30, 2024 and the fiscal year ended December 31, 2023, which we believe is a good indication of overall tenant quality and stability.
There were no leases set to expire in 2024.
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Item 3. Quantitative and Qualitative Disclosure About Market Risk
As a smaller reporting company, the Partnership is not required to provide the information required by Item 305 of Regulation S-K.
Item 4. Controls and Procedures
Controls and Procedures
Controls and Procedures:
As of September 30, 2024 the Partnership’s management, including the persons performing the functions of the Partnership’s principal executive officer and principal financial officer, have concluded that the Partnership’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report were effective based on the evaluation of these controls and procedures as required by paragraph (b) of Rule 13a-15 or Rule 15d-15 under the Exchange Act.
Changes in Internal Control over Financial Reporting:
There has been no change in the Partnership’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal quarter ending September 30, 2024 that has materially affected, or is reasonably likely to materially affect, the Partnership’s internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
As of the date of this report, there are no material pending legal proceedings to which the Partnership is a party.
Item 1a. Risk Factors
Not Applicable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Effective January 1, 2025, the Partnership expects to enter into a renewal of the Permanent Manager Agreement originally dated February 8, 1993. By its terms that agreement would expire on December 31, 2024 and the renewal would be entered into for the primary purpose of allowing the General Partner to facilitate the completion of the wind-up of the Partnership.
On October 15, 2024, the Partnership closed on the sale of its final three Properties for cash consideration. In each case the buyer was a third party unrelated to the Partnership. The Property address and the gross sale price for each applicable Property is identified below.
1721 Sam Rittenberg Blvd., Charleston, SC
On June 6, 2023, the Partnership executed a listing agreement with Matthews Real Estate Investment Services, Inc. for the sale of the Property with an asking price of $3.9 million. On March 8, 2024, the Partnership lowered the asking price of the Property to $3,684,866. On July 18, 2024 the Partnership accepted an offer of $3,108,135 as amended July 22, 2024, and the sale closed on October 15, 2024.
1004 Richland Ave. West, Aiken, SC
On June 6, 2023, the Partnership executed a listing agreement with Matthews Real Estate Investment Services, Inc. for the sale of the Property with an asking price of $3.4 million. On July 18, 2024 the Partnership accepted an offer of $3,016,300, as amended July 22, 2024, and the sale closed on October 15, 2024.
343 Folly Road, Charleston, SC
On June 6, 2023, the Partnership executed a listing agreement with Matthews Real Estate Investment Services, Inc. for the sale of the Property with an asking price of $3.5 million. On March 8, 2024, the Partnership lowered the asking price of the Property to $3,341,033. On July 18, 2024 the Partnership accepted an offer of $2,939,098, as amended July 22, 2024, and the sale closed on October 15, 2024.
Item 6. Exhibits
| (a) | Listing of Exhibits |
| 3.1 | Certificate of Limited Partnership dated November 20, 1987, filed as Exhibit 3.7 to the Partnership’s Annual Report on Form 10-K filed March 22, 2013, Commission File 0-17686, and incorporated herein by reference. | |
| 4.1 | Agreement of Limited Partnership dated as of November 20, 1987, amended as of November 25, 1987, and February 20, 1988, filed as Exhibit 3A to Amendment No. 1 to the Partnership’s Registration Statement on Form S-11 as filed on February 22, 1988, and incorporated herein by reference. | |
| 4.2 | Amendments to Amended Agreement of Limited Partnership dated as of June 21, 1988, included as part of Supplement dated August 15, 1988, filed under Rule 424(b)(3), Commission File 0-17686, and incorporated herein by reference. | |
| 4.3. | Amendment to Amended Agreement of Limited Partnership dated as of February 8, 1993, filed as Exhibit 3.3 to the Partnership’s Annual Report on Form 10-K for the year ended December 31, 1992, Commission File 0-17686, and incorporated herein by reference. | |
| 4.4 | Amendment to Amended Agreement of Limited Partnership dated as of May 26, 1993, filed as Exhibit 3.4 to the Partnership’s Annual Report on Form 10-K for the year ended December 31, 1993, Commission File 0-17686, and incorporated herein by reference. | |
| 4.5 | Amendment to Amended Agreement of Limited Partnership dated as of June 30, 1994, filed as Exhibit 3.5 to the Partnership’s Annual Report on Form 10-K for the year ended December 31, 1994, Commission File 0-17686, and incorporated herein by reference. | |
| 4.6 | Amendment to Amended Agreement of Limited Partnership dated as of November 9, 2009, filed as Exhibit 4.1 to the Partnership’s Quarterly Report on Form 10-Q filed November 12, 2009, Commission File 0-17686, and incorporated herein by reference. | |
| 4.7 | Amendment to Amended Agreement of Limited Partnership dated as of October 22, 2020, filed as Exhibit 4.7 to the Partnership’s Quarterly Report on Form 10-Q filed November 13, 2020, Commission File 0-17686, and incorporated herein by reference. | |
| 31.1 | Sarbanes-Oxley Section 302 Certification | |
| 32.1 | Certification of Periodic Financial Report Pursuant to 18 U.S.C. Section 1350. | |
| 99.1 | Correspondence to the Limited Partners, distributed on or about October 25, 2024. | |
| 101 | The following materials from the Partnership’s Quarterly Report on Form 10-Q for the quarter ended, formatted in XBRL (Extensible Business Reporting Language): (i) Unaudited Condensed Balance Sheets at September 30, 2024 and December 31, 2023, (ii) Unaudited Condensed Statements of Income for the three and nine month periods ended September 30, 2024 and 2023, (iii) Unaudited Condensed Statement of Cash Flows for the nine month periods ended September 30, 2024 and 2023, (iv) Unaudited Condensed Statements of Partners’ Capital for the nine month periods ended September 30, 2024 and 2023, and (v) Notes to the Unaudited Condensed Financial Statements. |
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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.
| DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP | ||
| By: | /s/ Bruce A. Provo | |
| Bruce A. Provo | ||
(President and Chief Financial Officer, and Duly Authorized Officer of the Partnership) |
||
| Date: | November 14, 2024 | |
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