UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 20222023

 

OR

 

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

 

For the transition period from            to

 

Commission file number 0-17686

 

DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

(Exact name of registrant as specified in its charter)

 

Wisconsin 39-1606834
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

 

1900 W 75th Street, Suite 100, Prairie Village, KS 66208

(Address of principal executive offices, including zip code)

 

(816) 421-7444

(Registrant’s telephone number, including area code)

 

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
None N/A N/A

 

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 been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☒ Smaller Reporting Company ☒ Emerging growth company ☐

 

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. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

 

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐

The aggregate market value of the voting securities held by non-affiliates of the Registrant: The aggregate market value of limited partnership interests held by non-affiliates is not determinable since there is no public trading market for the limited partnership interests.

As of November 10, 2023 the registrant had 46,280.3 units issued and outstanding.

 

 

 

 

TABLE OF CONTENTS

 

DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

FORM 10-Q

FOR THE PERIODS ENDED SEPTEMBER 30, 20222023

 

 Page
PART I. Financial Information 
  
Item 1. Financial Statements (unaudited)3
  
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations14
  
Item 3. Quantitative and Qualitative Disclosure About Market Risk17
Item 4. Controls and Procedures17
PART II. Other Information
Item 1. Legal Proceedings18
  
Item 4. Controls and Procedures1A. Risk Factors18
  
PART II. Other Information
Item 1. Legal Proceedings19
Item 1A. Risk Factors19
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds1918
  
Item 3. Defaults Upon Senior Securities1918
  
Item 4. Mine Safety Disclosures1918
  
Item 5. Other Information1918
  
Item 6. Exhibits1918
  
Signatures2019

 

2
 

 

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

 

DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

 

CONDENSED BALANCE SHEETS

 

September 30, 20222023 and December 31, 20212022

 

ASSETS

 

 Setpember 30, December 31,  September 30, December 31, 
 2022 2021  2023 2022 
 (unaudited)    (unaudited) 
ASSETS                
INVESTMENT PROPERTIES: (Note 3)                
                
Land $1,944,934  $1,944,934  $-  $1,944,934 
Buildings  2,843,881   2,843,881   -   2,843,881 
Accumulated depreciation  (2,843,881)  (2,843,881)  -   (2,843,881)
                
Net investment properties  1,944,934   1,944,934   -   1,944,934 
                
Property held for sale  250,859   583,013 
Properties held for sale  1,341,540   250,859 
                
OTHER ASSETS:                
                
Cash and cash equivalents  281,361   965,838   5,322,425   171,236 
Investments held in Indemnification Trust (Note 7)  480,139   480,024   487,947   480,139 
Security deposits escrow  59,449   59,425   45,980   59,464 
Rents and other receivables  40,860   366,473   42,045   342,359 
Prepaid state income tax  24,021   28,376 
Deferred closing costs  9,875   16,067   63,080   12,413 
Prepaid insurance  1,034   5,685   237   2,515 
Deferred charges, net  268,981   314,825   174,608   258,394 
Total other assets  1,141,699   2,791,350   6,160,343   1,354,896 
                
Total assets $3,337,492  $4,736,284  $7,501,883  $3,550,689 

 

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, 20222023 and December 31, 20212022

 

LIABILITIES AND PARTNERS’ CAPITAL

 

 September 30, December 31,  September 30, December 31, 
 2022 2021  2023 2022 
 (unaudited)    (unaudited) 
LIABILITIES AND PARTNERS’ CAPITAL                
LIABILITIES:                
Accounts payable and accrued expenses $60,968  $27,207  $38,851  $36,619 
Accrued state income taxes  174,672   - 
Due to General Partner (Note 5)  848   4,533   19,601   2,090 
Security deposits  52,320   59,340   30,500   52,320 
Unearned rental income  103,440   73,891   83,915   53,114 
Total liabilities  217,576   164,971   347,539   144,143 
                
CONTINGENCIES AND COMMITMENTS (Notes 6 and 7)  -       -   - 
                
PARTNERS’ CAPITAL: (Notes 1 and 4)                
General Partner -                
Cumulative net income (retained earnings)  415,865   399,805   476,985   420,502 
Cumulative cash distributions  (173,494)  (166,024)  (201,033)  (175,584)
Total general partners’ capital  242,371   233,781   275,952   244,918 
Limited Partners (46,280.3 interests outstanding at September 30, 2022 and December 31, 2021)        
Limited Partners (46,280.3 interests outstanding at September 30, 2023 and December 31, 2022)        
                
Capital contributions  46,280,300   46,280,300   46,280,300   46,280,300 
Offering costs  (6,921,832)  (6,921,832)  (6,921,832)  (6,921,832)
Cumulative net income (retained earnings)  47,536,574   45,946,561   53,587,422   47,995,656 
Cumulative cash distributions  (83,177,268)  (80,127,268)  (85,227,269)  (83,352,268)
Total limited partners’ capital  3,717,774   5,177,761   7,718,621   4,001,856 
Former General Partner -                
Cumulative net income (retained earnings)  707,513   707,513   707,513   707,513 
Cumulative cash distributions  (1,547,742)  (1,547,742)  (1,547,742)  (1,547,742)
Total former general partners’ capital  (840,229)  (840,229)  (840,229)  (840,229)
                
Total partners’ capital  3,119,916   4,571,313  $7,154,344  $3,406,545 
                
Total liabilities and partners’ capital $3,337,492  $4,736,284  $7,501,883  $3,550,689 

 

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, 20222023 and 20212022

 

 September 30, September 30, September 30, September 30,  2023 2022 2023 2022 
 Three months ended Nine months ended  Three months ended Nine months ended 
 September 30, September 30, September 30, September 30,  September 30, September 30, September 30, September 30, 
 2022 2021 2022 2021  2023 2022 2023 2022 
 (unaudited) (unaudited) (unaudited) (unaudited)  (unaudited) (unaudited) (unaudited) (unaudited) 
OPERATING REVENUES:                                
Rental income (Note 3) $351,179  $415,633  $999,354  $1,122,570  $309,010  $351,179  $907,706  $999,354 
TOTAL OPERATING REVENUES $351,179  $415,633  $999,354  $1,122,570  $309,010  $351,179  $907,706  $999,354 
EXPENSES:                                
Partnership management fees (Note 5) $68,079  $68,079  $204,237  $206,901  $68,079  $68,079  $204,237  $204,237 
Insurance  1,550   1,520   4,651   4,561   712   1,550   2,179   4,651 
General and administrative  41,300   12,353   103,206   54,897   6,331   7,700   27,723   33,778 
State income tax expense  143,172   33,600   197,268   69,428 
Advisory Board fees and expenses  1,750   1,750   5,250   5,250   1,750   1,750   5,250   5,250 
Professional services  39,495   26,441   191,389   148,862   30,506   39,495   123,239   191,389 
Depreciation  0   5,449   0   28,198   -   -   -   - 
Amortization  10,588   12,465   32,666   37,395   53,781   10,588   83,785   32,666 
TOTAL OPERATING EXPENSES $162,762  $128,057  $541,399  $486,064  $304,331  $162,762  $643,681  $541,399 
OTHER INCOME                                
Other income  20   0   44,495   294   -   20   -   44,495 
Other interest income  98   239   416   -   1,011   98   9,010   416 
Gain on sale of property  -   -   1,103,208   -   4,338,508   -   5,375,213   1,103,208 
TOTAL OTHER INCOME  118   239   1,148,119   294   4,339,519   118   5,384,223   1,148,119 
                                
NET INCOME $188,535  $287,815  $1,606,074  $636,800  $4,344,198  $188,535  $5,648,248  $1,606,074 
NET INCOME ALLOCATED- GENERAL PARTNER  1,885   2,878   16,060   6,368   43,442   1,885   56,482   16,060 
NET INCOME ALLOCATED- LIMITED PARTNERS  186,650   284,937   1,590,014   630,432   4,300,756   186,650   5,591,767   1,590,014 
PER LIMITED PARTNERSHIP INTEREST,                                
Based on 46,280.3 interests outstanding: (Basic and diluted)                                
NET INCOME PER LIMITED PARTNERSHIP INTEREST $4.03  $6.16  $34.36  $13.62  $92.93  $4.03  $120.82  $34.36 

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, 20222023 and 20212022

 

 September 30, September 30,  (unaudited) (unaudited) 
 Nine Months Ended  Nine Months Ended 
 September 30, September 30,  September 30, September 30, 
 2022 2021  2023 2022 
 (unaudited) (unaudited)  (unaudited) (unaudited) 
CASH FLOWS FROM OPERATING ACTIVITIES:                
Net income $1,606,074  $636,800  $5,648,248  $1,606,074 
Adjustments to reconcile net income to net cash from operating activities:                
Depreciation and amortization  32,666   65,593   83,786   32,666 
Changes in operating assets and liabilities                
Gain on sale of property  (1,103,208)  - 
Gain on sale of Properties  (5,375,213)  (1,103,208)
Decrease in rents and other receivables  325,613   532,604   300,314   325,613 
Increase in long-term rent receivable  -   971 
Increase in security deposit escrow  (24)  (24)
Decrease (Increase) in deferred closing costs  6,192   (36,064)
Decrease (increase) in security deposit escrow  13,484   (24)
Decrease in prepaid insurance  4,651   4,561   2,278   4,651 
Decrease in accounts payable and accrued expenses  33,760   82,484 
(Increase) decrease in deferred closing costs  (50,667)  6,192 
Decrease in prepaid state income taxes  4,355   - 
Increase in accounts payable and accrued expenses  176,903   33,760 
Increase in unearned rental income  29,549   100,005   30,801   29,549 
Payment of leasing commission  -   (222,633)
Security deposit refund  (7,020)  -   (21,820)  (7,020)
(Decrease) Increase in due to General Partner  (3,685)  433 
Decrease in due to General Partner  (2,090)  (3,685)
Net cash from operating activities  924,568   1,164,730   810,379   924,568 
                
CASH FLOWS USED IN INVESTING ACTIVITIES:        
Proceeds from sale of Property, net  1,448,540   - 
CASH FLOWS PROVIDED BY INVESTING ACTIVITIES:        
Proceeds from sale of Properties, net  6,229,467   1,448,540 
Interest applied to Indemnification Trust account  (115)  (219)  (7,808)  (115)
Net cash used in investing activities  1,448,425   (219)
Net cash provided by investing activities  6,221,659   1,448,425 
                
CASH FLOWS USED IN FINANCING ACTIVITIES:                
Cash distributions to Limited Partners  (3,050,000)  (1,000,000)  (1,875,001)  (3,050,000)
Cash distributions to General Partner  (7,470)  (2,547)  (5,848)  (7,470)
Net cash used in financing activities  (3,057,470)  (1,002,547)  (1,880,849)  (3,057,470)
                
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS  (684,477)  161,964 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS  5,151,189   (684,477)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD  965,838   72,244   171,236   965,838 
CASH AND CASH EQUIVALENTS AT END OF PERIOD $281,361  $234,208  $5,322,425  $281,361 
        
Supplemental disclosure of cash flow information     
Noncash investing activities     
General Partner Distributions declared, not yet paid $19,601  $848 
Limited Partner Distributions declared, not yet paid $5,000,000  $- 

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 PARTNERS’ CAPITAL (Unaudited)

 

For the Three and Nine Month Periods Ended September 30, 20222023 and 20212022

 

  

Cumulative Net

Income

  Cumulative Cash Distributions  Total  

Capital

Contributions, Net of

Offering Costs

  

Cumulative Net

Income

  

Cumulative Cash

Distribution

  Reallocation  Total  

Total

Partners’ Capital

 
  General Partner  Limited Partners    
  

Cumulative Net

Income

  Cumulative Cash Distributions  Total  

Capital

Contributions, Net of

Offering Costs

  

Cumulative Net

Income

  

Cumulative Cash

Distribution

  Reallocation  Total  

Total

Partners’ Capital

 
BALANCE AT DECEMBER 31, 2021 $399,805  $(166,024) $233,781  $39,358,468  $45,946,561  $(80,127,268) $(840,229) $4,337,532  $4,571,313 
Net Income  1,568   -   1,568   -   155,249   -   -   155,249   156,817 
Cash Distributions ($25.93 per limited partnership interest)  -   (949)  (949)  -   -   (1,200,000)  -   (1,200,000)  (1,200,949)
BALANCE AT MARCH 31, 2022 $401,373  $(166,973) $234,400  $39,358,468  $46,101,810  $(81,327,268) $(840,229) $3,292,781  $3,527,181 
Net Income  12,607   -   12,607   -   1,248,114   -   -   1,248,114   1,260,721 
Cash Distributions ($4.32 per limited partnership interest)  -   (5,673)  (5,673)  -   -   (200,000)  -   (200,000)  (205,673)
BALANCE AT JUNE 30, 2022 $413,980  $(172,646) $241,334  $39,358,468  $47,349,924  $(81,527,268) $(840,229) $4,340,895  $4,582,229 
Net Income  1,885   -   1,885   -   186,650   -   -   186,650   188,535 
Cash Distributions ($35.65 per limited partnership interest)  -   (848)  (848)  -   -   (1,650,000)  -   (1,650,000)  (1,650,848)
BALANCE AT SEPTEMBER 30, 2022 $415,865  $(173,494) $242,371  $39,358,468  $47,536,574  $(83,177,268) $(840,229) $2,877,545  $3,119,916 
                                     
BALANCE AT DECEMBER 31, 2020 $384,051  $(158,944) $225,107  $39,358,468  $44,386,908  $(78,927,268) $(840,229) $3,977,878  $4,202,986 
Net Income  1,328   -   1,328   -   131,474   -   -   131,474   132,802 
Cash Distributions ($12.96 per limited partnership interest)  -   (531)  (531)  -   -   (600,000)  -   (600,000)  (600,531)
BALANCE AT MARCH 31, 2021 $385,379  $(159,475) $225,904  $39,358,468  $44,518,382  $(79,527,268) $(840,229) $3,509,352  $3,735,257 
Net Income  2,162   -   2,162   -   214,021   -   -   214,021   216,183 
Cash Distributions ($4.32 per limited partnership interest)  -   (865)  (865)  -   -   (200,000)  -   (200,000)  (200,865)
BALANCE AT JUNE 30, 2021 $387,541  $(160,340) $227,201  $39,358,468  $44,732,403  $(79,727,268) $(840,229) $3,523,373  $3,750,575 
BEGINNING BALANCE $387,541  $(160,340) $227,201  $39,358,468  $44,732,403  $(79,727,268) $(840,229) $3,523,373  $3,750,575 
Net Income  2,878   -   2,878   -   284,937   -   -   284,937   287,815 
Cash Distributions ($4.32 per limited partnership interest)  -   (1,151)  (1,151)  -   -   (200,000)  -   (200,000)  (201,151)
BALANCE AT SEPTEMBER 30, 2021 $390,419  $(161,491) $228,928  $39,358,468  $45,017,340  $(79,927,268) $(840,229) $3,608,310  $3,837,239 
ENDING BALANCE $390,419  $(161,491) $228,928  $39,358,468  $45,017,340  $(79,927,268) $(840,229) $3,608,310  $3,837,239 

  Cumulative
Net
Income		  Cumulative
Cash
Distributions		  Total  Capital
Contributions,
Net of
Offering
Costs		  Cumulative
Net Income		  Cumulative
Cash
Distribution		  Reallocation  Total  Total
Partners’
Capital		 
  General Partner  Limited Partners    
  Cumulative
Net
Income		  Cumulative
Cash
Distributions		  Total  Capital
Contributions,
Net of
Offering
Costs		  Cumulative
Net Income		  Cumulative
Cash
Distribution		  Reallocation  Total  Total
Partners’
Capital		 
BALANCE AT DECEMBER 31, 2022 $420,502  $(175,584) $244,918  $39,358,468  $47,995,656  $(83,352,268) $(840,229) $3,161,627  $3,406,545 
Net Income  11,404   -   11,404   -   1,128,857   -   -   1,128,857   1,140,261 
Distributions declared  -   (5,111)  (5,111)  -   -   (475,001)  -   (475,001)  (480,112)
BALANCE AT MARCH 31, 2023 $431,906  $(180,695) $251,211  $39,358,468  $49,124,513  $(83,827,269) $(840,229) $3,815,483  $4,066,694 
Net Income  1,637   -   1,637   -   162,153   -   -   162,153   163,790 
Distributions declared  -   (737)  (737)  -   -   (1,250,000)  -   (1,250,000)  (1,250,737)
BALANCE AT JUNE 30, 2023 $433,543  $(181,432) $252,111  $39,358,468  $49,286,666  $(85,077,269) $(840,229) $2,727,636  $2,979,747 
Net Income  43,442   -   43,442   -   4,300,756   -   -   4,300,756   4,344,198 
Distributions declared  -   (19,601)  (19,601)  -   -   (150,000)  -   (150,000)  (169,601)
BALANCE AT SEPTEMBER 30, 2023 $476,985  $(201,033) $275,952  $39,358,468  $53,587,422  $(85,227,269) $(840,229) $6,878,392  $7,154,344 
BALANCE AT DECEMBER 31, 2021 $399,805  $(166,024) $233,781  $39,358,468  $45,946,561  $(80,127,268) $(840,229) $4,337,532  $4,571,313 
Net Income  1,568   -   1,568   -   155,249   -   -   155,249   156,817 
Distributions declared  -   (949)  (949)  -   -   (1,200,000)  -   (1,200,000)  (1,200,949)
BALANCE AT MARCH 31, 2022 $401,373  $(166,973) $234,400  $39,358,468  $46,101,810  $(81,327,268) $(840,229) $3,292,781  $3,527,181 
Net Income  12,607   -   12,607   -   1,248,114   -   -   1,248,114   1,260,721 
Distributions declared  -   (5,673)  (5,673)  -   -   (200,000)  -   (200,000)  (205,673)
BALANCE AT JUNE 30, 2022 $413,980  $(172,646) $241,334  $39,358,468  $47,349,924  $(81,527,268) $(840,229) $4,340,895  $4,582,229 
Beginning balance $413,980  $(172,646) $241,334  $39,358,468  $47,349,924  $(81,527,268) $(840,229) $4,340,895  $4,582,229 
Net Income  1,885   -   1,885   -   186,650   -   -   186,650   188,535 
Net Income  1,885   -   1,885   -   186,650   -   -   186,650   188,535 
Distributions declared  -   (848)  (848)  -   -   (1,650,000)  -   (1,650,000)  (1,650,848)
BALANCE AT SEPTEMBER 30, 2022 $415,865  $(173,494) $242,371  $39,358,468  $47,536,574  $(83,177,268) $(840,229) $2,877,545  $3,119,916 
Ending balance $415,865  $(173,494) $242,371  $39,358,468  $47,536,574  $(83,177,268) $(840,229) $2,877,545  $3,119,916 

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:ORGANIZATION:

 

DiVall Insured Income Properties 2 LP (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 $300, representing aggregate capital contributions of $200 by the former general partners and $100 by the initial limited partner. A subsequent offering of limited partnership interests closed on February 22, 1990, with 46,280.3 limited partnership interests having been sold in that offering, resulting in total proceeds to the Partnership, net of underwriting compensation and other offering costs, of $39,358,468.

 

The Partnership is currently engaged in the business of owning and operating its investment portfolio of commercial real estate properties (each a “Property”, and collectively, the “Properties”). The Properties are leased on a triple net basis primarily to, and operated by, franchisors or franchisees of national, regional, and local retail chains under primarily long-term leases. The lessees are operators of fast food, family style, and casual/theme restaurants. As of September 30, 2022,2023, the Partnership owned 85 Properties, which are located in a total of threetwo states.

 

The Limited Partnership Agreement, as amended from time to time (collectively, the “Partnership Agreement”), stipulates 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 limited partner 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 by a majority of the limited partners. During the second and third quarters of the nine odd numbered years from 2001 through 2017, consent solicitations were circulated to the Partnership’s limited partners which, if approved by the limited partners, would have authorized the General Partner to initiate the potential sale of all of the Properties and the dissolution of the Partnership (each a “Consent”). Limited partners owning a majority of the outstanding limited partnership interests did not vote in favor of any of the Consents. Therefore, the Partnership continues to operate as a going concern.

 

During the 2020 consent solicitation process, the Limited Partners approved two separate amendments to the Partnership Agreement. The amendments served to: (i) extend the term of the Partnership by three (3) years to November 30, 2023, and (ii) permit the General Partner to effect distributions at times that it deems appropriate, but no less often than semi-annually.semi-annually.

 

2. RECENTLY ISSUED ACCOUNTING PRINCIPLES:PRINCIPLES:

 

Management has reviewed recently issued, but not yet effective, accounting pronouncements and does not expect the implementation of the pronouncements to have a significant effect on the Partnership’s financial statements.

 

8
 

 

DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

 

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

 

3. INVESTMENT PROPERTIES AND 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, 2022,2023, the Partnership owned eightfive Properties, all of which contained fully constructed fast-food/casual dining restaurant facilities. The followingProperties are operated by tenants at the aforementioned Properties: seven separateas Wendy’s restaurants, and an Applebee’s restaurant.franchise restaurants. The Properties are located in a total of three states.

On April 23, 2020, the Partnership executed three Amendedtwo states, Georgia and Restated Restaurant Absolutely Net Leases to the Original Leases dated January 30, 1989, by and between the Partnership and Wendgusta LLC (“Tenant”, as successor in interest to Wensouth Corporation) with the intent that these Leases will amend, restate and replace the Original Leases. Effective January 1, 2021, for the restaurant property located at 1901 Whiskey Road, Aiken, South Carolina, per the terms of the Amendment, the Tenant will pay $210,632 annually in rent, in addition to 7% of sales over an annual breakpoint of $2,632,900 over the term of the lease extension (January 1, 2021 to December 31, 2040).

Effective January 1, 2021, for the restaurant property located at 1004 Richland Ave, Aiken, South Carolina, per the terms of the Amendment, the Tenant will pay $167,500 annually in rent, in addition to 7% of sales over an annual breakpoint of $2,093,750 over the term of the lease extension (January 1, 2021 to December 31, 2040). Effective January 1, 2021, for the restaurant property located at 3013 Peach Orchard Road, Augusta, Georgia per the terms of the Amendment, the Tenant will pay $188,000 annually in rent, in addition to 7% of sales over an annual breakpoint of $2,350,000 over the term of the lease extension (January 1, 2021 to December 31, 2040).

On April 28, 2020, the Partnership executed a Third Amendment to Lease with RMH Franchise Corporation in response to changed circumstances arising from the COVID-19 pandemic. The term of the amendment was April 1, 2020 through June 30, 2020 and during that time suspended the amount and timing of the payment of the monthly base rent, as defined in the Lease. The revised monthly base rent for the months of April and May 2020 was equal to six percent of the monthly gross sales. The revised monthly base rent for the month of June 2020 was a fixed amount of $5,750. Full monthly base rent resumed July 1, 2020.

On July 21, 2020, the Partnership executed two Amended and Restated Restaurant Absolutely Net Leases to the Original Leases dated January 30, 1989, by and between the Partnership and WendCharles I, LLC (“Tenant”, as successor in interest to Wensouth Corporation) with the intent that these Leases will amend, restate and replace the Original Leases. Effective January 1, 2021, for the restaurant property located at 361 Highway 17 Bypass, Mt. Pleasant, South Carolina, per the terms of the Amendment, the Tenant will pay $146,520 annually in rent, in addition to 7% of sales over an annual breakpoint of $1,831,500 over the term of the lease extension (January 1, 2021 to December 31, 2040). Effective January 1, 2021, for the restaurant property located at 343 Folly Road, Charleston, South Carolina, per the terms of the Amendment, the Tenant will pay $136,000 annually in rent, in addition to 7% of sales over an annual breakpoint of $1,700,000 over the term of the lease extension (January 1, 2021 to December 31, 2040).Carolina.

 

Sale of Walton Way Property

 

On April 22, 2022, the Partnership sold the property located at 1730 Walton Way, Augusta, GA for $1,600,000. The gain on the sale is approximately $1,600,0001,103,000.

Sale of Martintown Road Property

On March 31, 2023, the Martintown Road Property was sold for $1,350,000. The Partnership received proceeds from the sale of approximately $1.28 million and the gain on the sale was about $1 million.

Sale of Mt. Pleasant, SC Property

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 $3.2 million. The Property listing went active on July 12, 2023.

On July 20, 2023, the Partnership accepted an offer to sell the Property at asking price. The buyer negotiated a 1-day inspection period and on August 31, 2023 the Partnership sold the Property for $3,212,124. The gain on the sale was approximately $1,103,0002.7M.

Sale of Applebee’s Property

On April 11, 2023, the Partnership signed a listing agreement to offer its Applebee’s Property for a sale price of $2.3 million. As of June 27, 2023, the tenant waived its right of first offer contained in the lease.

On July 13, 2023, the Partnership accepted an offer to sell the Property for $2,125,000. The buyer negotiated a 25-day inspection period and closing should take place about 30 days after that date.

On September 7, 2023 the Partnership sold the Property for $2,125,000. The gain on the sale was approximately $1.6 million.

Wendy’s – Peach Orchard Road, Augusta, GA Property

On October 30, 2022, the tenant Wendgusta, LLC closed on an asset purchase agreement with JAI Augusta, LLC to sell substantially all the assets of the tenant and pursuant thereto, the lease was also assigned to JAI Augusta under the same terms and conditions of the lease amendment effected January 1, 2021.

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 $4.1 million. The Property listing went active on July 12, 2023.

On August 7, 2023 the Partnership accepted an offer to sell the Property for $3,822,000. The sale closed on November 1, 2023 and the gain was approximately $3.4 million.

9

DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

Wendy’s – Whiskey Road, 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 $4.0 million. The Property listing went active on July 12, 2023.

On October 6, 2023 the Partnership accepted an offer to sell the Property for $3.8 million. The sale closed on November 6, 2023 and the gain was approximately $3.2 million.

Wendy’s – Folly Road, Charleston, SC

On December 19, 2022, the tenant Wendcharles I, LLC closed on an asset purchase agreement with JAI Augusta, LLC to sell substantially all the assets of the tenant and pursuant thereto, the lease was also assigned to JAI Augusta under the same terms and conditions of the lease amendment effected January 1, 2021.

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. The Property listing went active on July 12, 2023.

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 $3.4 million. The Property listing went active on July 12, 2023.

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 $3.9 million. The Property listing went active on July 12, 2023.

 

Property Held for Sale

 

The Walton Way property in Augusta, GA, was listed for sale on July 5, 2021 and was sold on April 22, 2022. The Martintown Rd property in North Augusta, SC was listed for sale on December 22, 2021.2021 and was sold on March 31, 2023. The Applebee’s Property was listed for sale on April 11, 2023 and sold on September 7, 2023. The Mt. Pleasant, SC Wendy’s was listed for sale on July 12, 2023 and sold on August 31, 2023. The remaining five Wendy’s properties were listed for sale on July 12, 2023.

 

The components of propertythe five properties held for sale in the condensed balance sheets as of September 30, 20222023 and December 31, 20212022 are outlined below:

SCHEDULE OF PROPERTY HELD FOR SALE 

 September 30,
2022		 December 31,
2021		  September 30,
2023		 December 31,
2022		 
          
Balance Sheet:                
Land $250,859  $583,013  $1,341,540  $250,859 
Building  396,659   805,956   1,840,864   409,297 
Accumulated Depreciation  (396,659)  (805,956)  (1,840,864)  (409,297)
Properties held for sale $250,859  $583,013  $1,341,540  $250,859 

910
 

 

DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

 

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

 

4. PARTNERSHIP AGREEMENT:AGREEMENT:

 

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 limited partners owning a majority of the outstanding limited partnership interests.

 

Under the terms of the Partnership Agreement, as amended, net profits or losses from operations are allocated 99%99% to the limited partners and 1%1% to the current General Partner. The November 9, 2009 amendment also provided for distributions from Net Cash Receipts, as defined, to be made 99%99% to limited partners and 1%1% to The Provo Group, Inc. (“TPG”, or the “General Partner”), the current General Partner, provided that quarterly distributions are cumulative and are not to be made to the current General Partner unless and until each limited partner has received a distribution from Net Cash Receipts in an amount equal to 10%10% per annum, cumulative simple return on his, her or its Adjusted Original Capital, as defined, from the Return Calculation Date, as defined, except to the extent needed by the General Partner to pay its federal and state income taxes on the income allocated to it attributable to such year.

 

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 100% of their Adjusted Original Capital; (b) then, to the limited partners, an amount necessary to provide each limited partner a liquidation preference equal to a 13.5%13.5% per annum, cumulative simple return on Adjusted Original Capital from the Return Calculation Date including in the calculation of such return on all prior distributions of Net Cash Receipts and any prior distributions of Net Proceeds under this clause, except to the extent needed by the General Partner to pay its federal and state income tax on the income allocated to it attributable to such year; and (c) then, to limited partners, 99%99%, and to the General Partner, 1%1%, of remaining Net Proceeds available for distribution.

  

10

DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

5. TRANSACTIONS WITH GENERAL PARTNER AND ITS AFFILIATES: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, 2021, 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 $13,250. Both the Base Fee and Expenses reimbursement are subject to annual Consumer Price Index based adjustments. Effective March 1, 2021, Management has elected to roll back the last five years of CPI increases to their 2016 level and suspend any future CPI adjustments for the base fee. Therefore, the minimum annual Base Fee decreased by 5.54% from the prior year to $272,316. The maximum annual Expenses reimbursement remained the same at $23,256 and any potential future CPI adjustments have been suspended.

 

For purposes of computing the four percent overall fee paid to the General Partner, gross receipts include amounts recovered in connection with the misappropriation of assets by the former general partners and their affiliates. The fee received by the General Partner from the Partnership on any amounts recovered reduce the four percent minimum fee by that same amount.

 

Amounts paid and/or accrued to the General Partner and its affiliates for the three- and nine-month periods ended September 30, 20222023 and 20212022 are as follows:

SCHEDULE OF AMOUNTS PAID AND/OR ACCRUED TO GENERAL PARTNER AND ITS AFFLIATESAFFILIATES

  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, 2022  September 30, 2021  September 30, 2022  September 30, 2021 
  (unaudited)  (unaudited)  (unaudited)  (unaudited) 
General Partner                
Management fees $68,079  $68,079  $204,237  $206,901 
Overhead allowance  5,814   5,814   17,442   17,442 
Leasing commissions  -   -   -   222,633 
Reimbursement for out-of-pocket expenses  -   -   2,500   2,500 
Cash distribution  848   1,151   7,470   2,547 
Amounts paid and/or accrued to the General Partner $74,741  $75,044  $231,649  $452,023 

  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,

2023

  

September 30,

2022

  

September 30,

2023

  

September 30,

2022

 
  (unaudited)  (unaudited)  (unaudited)  (unaudited) 
General Partner                
Management fees $68,079  $68,079  $204,237  $204,237 
Overhead allowance  5,814   5,814   17,442   17,442 
Sales commissions  93,636   -   124,649   - 
Reimbursement for out-of-pocket expenses  -   -   2,500   2,500 
Cash distribution  19,601   848   25,449   7,470 
Amounts paid and/or accrued to the General Partner $187,130  $74,741  $374,277  $231,649 

 

At September 30, 20222023 and December 31, 2021,2022, $84819,601 and $4,5332,090, respectively, was payable to the General Partner.

 

11
 

 

DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

 

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

 

As of September 30, 2022,2023, 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, 20222023 and 20212022 are as follows:

SCHEDULE OF ADVISORY BOARD FEES PAID TO JESSE SMALL 

  Three Month
Period ended
September 30, 2022		  Three Month
Period ended
September 30, 2021		  Nine Month
Period ended
September 30, 2022		  Nine Month
Period ended
September 30, 2021		 
  (Unaudited)  (Unaudited)  (Unaudited)  (Unaudited) 
Advisory Board Fees paid $875  $875  $2,625  $2,625 
  Three Month
Period ended
September 30,
2023		  Three Month
Period ended
September 30,
2022		  Nine Month
Period ended
September 30,
2023		  Nine Month
Period ended
September 30,
2022		 
  (Unaudited)  (Unaudited)  (Unaudited)  (Unaudited) 
Advisory Board Fees paid $875  $875  $2,625  $2,625 

 

At September 30, 20222023 and December 31, 20212022 there were no outstanding Advisory Board fees accrued and payable to Jesse Small.

 

6. CONTINGENT LIABILITIES:LIABILITIES:

 

According to the Partnership Agreement, TPG, as General Partner may receive a disposition fee not to exceed three percent of the contract price on the sale of the properties of the Partnership and two affiliated publicly registered limited partnerships, DiVall Insured Income Fund Limited Partnership (“DiVall 1”), which was dissolved December of 1998, and DiVall Income Properties 3 Limited Partnership, which was dissolved in December 2003 (“DiVall 3”), and together with the Partnership and DiVall 1 (the “three original partnerships”). In addition, fifty percent of all such disposition fees earned by TPG were to be escrowed until the aggregate amount of recovery of the funds misappropriated from the three original partnerships by the former general partners was greater than $4,500,000. Upon reaching such recovery level, full disposition fees would thereafter be payable, and fifty percent of the previously escrowed amounts would be paid to TPG. At such time as the recovery exceeded $6,000,000 in the aggregate, the remaining escrowed disposition fees were to be paid to TPG. If such levels of recovery were not achieved, TPG would contribute the amounts escrowed toward the recovery until the three original partnerships were made whole. In lieu of a disposition fee escrow, fifty percent of all such disposition fees previously discussed were paid directly to a restoration account and then distributed among the three original partnerships; whereby the three original partnerships recorded the recoveries as income. After the recovery level of $4,500,000 was exceeded, fifty percent of the total disposition fee amount paid to the three original partnerships recovery through the restoration account (in lieu of the disposition fee escrow) was refunded to TPG during March 1996. The remaining fifty percent amount allocated to the Partnership through the restoration account, and which was previously reflected as Partnership recovery income, may be owed to TPG if the $6,000,000 recovery level is met. As of September 30, 2022,2023, the Partnership may owe TPG $16,296 if the $6,000,000 recovery level is achieved. TPG does not expect any future refund, as it is uncertain that such a $6,000,000 recovery level will be achieved.

 

7. PMA INDEMNIFICATION TRUST: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 will fund this indemnification obligation by establishing a reserve of up to $250,000 of Partnership assets which would not be subject to the claims of the Partnership’s creditors. An Indemnification Trust (the “Trust”) serving such purposes has been established at United Missouri Bank, N.A. The corpus of the Trust has been fully funded with Partnership assets. Funds are invested in U.S. Treasury securities at fair value at level 1 (see Note 8). In addition, $230,139237,947 of earnings has been credited to the Trust as of September 30, 2022.2023. The rights of TPG to the Trust shall be terminated upon the earliest to occur of the following events: (i) the written release by TPG of any and all interest in the Trust; (ii) the expiration of the longest statute of limitations relating to a potential claim which might be brought against TPG and which is subject to indemnification; or (iii) a determination by a court of competent jurisdiction that TPG shall have no liability to any person with respect to a claim which is subject to indemnification under the PMA. At such time as the indemnity provisions expire or the full indemnity is paid, any funds remaining in the Trust will revert back to the general funds of the Partnership.

 

12
 

 

DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP

 

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

 

8. FAIR VALUE DISCLOSURES: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 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 nine-month period ended September 30, 20222023 and for the year ended December 31, 2021,2022, there were no such transfers.

 

9. SUBSEQUENT EVENTS:EVENTS:

Wendy’s – Peach Orchard, Augusta, GA

On November 1, 2023, the Partnership closed on the sale of the Property. The proceeds from the sale were $3.7 million and the gain on the sale is expected to approximate $3.4 million.

Wendy’s – Whiskey Road, Aiken, SC

On October 6, 2023 the Partnership accepted an offer to sell the Property for $3.8 million.

On November 6, 2023, the Partnership closed on the sale of the Property. The proceeds from the sale were $3.7 million and the gain on the sale is expected to approximate $3.2 million.

 

We have reviewed all material events through the issuance 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 DiVall Insured Income Properties 2 Limited Partnership (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 financial condition or results of operations in future periods;
   
 ●our future sources of, and needs for, liquidity and capital resources;
   
 ●our expectations regarding economic and business conditions;
   
 ●our business strategies;
   
 ●our decisions and policies with respect to the potential retention or disposition of one or more Properties;
   
 ●our ability to find a suitable purchaser for any marketed Properties;
   
 ●our ability to agree on an acceptable purchase price or contract terms;
   
 ●our ability to collect rents on our leases;
   
 ●our ability to maintain relationships with our tenants, and when necessary identify new tenants;
   
 ●future capital expenditures; 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.

 

The Partnership believes that its most critical accounting policies deal with:

 

Depreciation methods and lives- Depreciation of the Properties is provided on a straight-line basis over the estimated useful life of the buildings and improvements. While the Partnership believes these are the appropriate lives and methods, use of different lives and methods could result in different impacts on net income. Additionally, the value of real estate is typically based on market conditions and property performance, so depreciated book value of real estate may not reflect the market value of real estate assets.

 

Revenue recognition- Rental revenue from investment properties is recognized on a straight-line basis over the life of the respective lease when collectability is assured. Percentage rents are accrued only when the tenant has reached the sales breakpoint stipulated in the lease.

 

Impairment- The Partnership periodically reviews its long-lived assets, primarily real estate, for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The Partnership’s review involves comparing current and future operating performance of the assets, the most significant of which is undiscounted operating cash flows, to the carrying value of the assets. Based on this analysis, if deemed necessary, a provision for possible loss is recognized.

 

Investment Properties

 

As of September 30, 2022,2023, the Partnership owned eightfive Properties, sevenall of which contained fully constructed fast-food/casual dining restaurant facilities. The followingProperties are operated by tenants at the aforementioned Properties: seven separateas Wendy’s restaurants, and an Applebee’s restaurant.franchise restaurants. The Properties are located in a totaltwo states, Georgia and South Carolina. The five properties are included in properties held for sale as of three states.September, 30, 2023.

 

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, 2022.2023.

 

Net Income

Net income for the three-month periods ended September 30, 2023 and 2022 was $4,344,198 and $188,535, respectively. Net income per limited partnership interest for the three-month periods ended September 30, 2023 and 2022 was $92.93 and $4.03, respectively.

Net income for the nine-month periods ended September 30, 2023 and 2022 was $5,648,248 and $1,606,074, respectively. Net income per limited partnership interest for the nine-month periods ended September 30, 2023 and 2022 was $120.82 and $34.36, respectively.

See paragraphs below for further information as to the primary factors that contributed to the variances in operating income and expense items from the 2022 periods to the 2023 periods.

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Results of Operations

 

Three-month period ended September 30, 20222023 as compared to the three-month period ended September 30, 2021:2022:

 

Net income from continuing operations for the three-monththree month periods ended September 30, 2023 and 2022 was $4,344,198 and 2021 was $188,535, and $287,815, respectively. Net income per limited partnership interest for the three-monththree month periods ended September 30, 2023 and 2022 was $92.93 and 2021 was $4.03, respectively.

See paragraphs below for further information as to the primary factors that contributed to the variances in operating income and $6.16, respectively.expense items from the 2022 periods to the 2023 periods.

Operating Rental Income: Rental income for the three-month periods ended September 30, 2023 and 2022 was $309,010 and 2021 was $351,179, and $415,633, respectively. The rental income was comprised primarily of monthly lease obligations and includes recognition of annual percentage rents earned year-to-date. The decrease is primarily the result of lower monthly base rents and accrued percentage rents as a result of twomultiple property sales within the last 12 months.

 

General and Administrative Expense: General and administrative expenses for the three-month periods ended September 30, 2023 and 2022 were $149,503 and 2021 were $41,300, and $12,353, respectively. General and administrative expenses were comprised of management expense, state/city registration and annual report filing fees, XBRL outsourced fees, office supplies, printing costs, outside storage expenses, copy/fax costs, postage and shipping expenses, long-distance telephone expenses, website fees, bank fees and state income tax expenses. The increase is primarily the result of higher state income tax paid in 2022accruals for 2021 income2023 related to the sale of the Brakes 4 Less propertyProperty sales in late 2021.March, August and September.

 

Professional services: Professional services expenses for the three-month periods ended September 30, 2023 and 2022 were $30,506 and 2021 were $39,495, and $26,441, respectively. Professional services expenses were primarily comprised of investor relations data processing, investor mailings processing, website design, legal, auditing and tax preparation fees, and SEC report conversion and processing fees. The increasedecrease is primarily related to an increasethe decrease in investor relations hourly billing fees related to thecosts as a result of our new process of emailing 2021 K-1’s to the investors.transfer agent contract effective in January 2023.

 

Nine-month period ended September 30, 20222023 as compared to the nine-month period ended September 30, 2021:2022:

 

Net income from continuing operations for the nine-monthnine month periods ended September 30, 2023 and 2022 was $5,648,248 and 2021 were $1,606,074, and $636,800, respectively. The increase is primarily the result of the sale of three Properties in 2023 versus the Walton Way Wendy’s propertysale of one Property in April 2022 slightly offset by a decrease in base monthly rents and accrued percentage rents as a result of two property sales within the last 12 months.2022.

See paragraphs below for further information as to the primary factors that contributed to the variances in operating income and expense items from the 20212022 periods to the 20222023 periods.

 

Operating Rental Income: Rental income for the nine-month periods ended September 30, 2023 and 2022 was $907,706 and 2021 was $999,354, and $1,122,570, respectively. The rental income was comprised primarily of monthly lease obligations and includes accruals for annual percentage rents earned year-to-date and adjustments for straight line rent.year-to-date. The decrease is primarily the result of lower monthly base rents and accrued percentage rents as a result of twothree property sales within the last 12 months.

 

General and Administrative Expense: General and administrative expenses for the nine-month periods ended September 30, 2023 and 2022 were $224,991 and 2021 were $103,206, and $54,897, 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, copy/fax costs, postage and shipping expenses, long-distance telephone expenses, website fees, bank fees, and state income tax expenses and bad debt allowance.expenses. The increase is primarily the result of higher state income tax paid in 2022accrued for 20212023 income related to the sale of the Brakes 4 Less property in late 2021.three Properties so far this year.

 

Professional services: Professional services expenses for the nine-month periods ended September 30, 2023 and 2022 were $123,239 and 2021 were $191,389, and $148,862, respectively. Professional services expenses were primarily comprised of investor relations data processing, investor mailings processing, website design, legal, auditing and tax preparation fees, and SEC report conversion and processing fees. The increasedecrease is primarily related to an increasethe decrease in investor relations hourly billing fees related to the cost of our new process of emailing 2021 K-1’s to the investors.transfer agent contract effective in January 2023.

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Cash Flow Analysis

 

Net cash flows provided by operating activities for the nine-month periods ended September 30, 2023 and 2022 were $810,379 and 2021 were $924,568, and $1,164,730, respectively. The decrease is attributed to lower net income period over period (exclusive of the property sale)sales) in addition to lower accrued percentage rents than in 2021.2022.

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Cash flows used inprovided by investing activities for the nine-month periods ended September 30, 2023 and 2022 were $6,221,659 and 2021 were $1,448,425, and $219, respectively. The 2023 amount represents the proceeds from the sales of three Properties offset partially by interest applied to the indemnification trust account. The 2022 amount represents the proceeds from the sale of the Walton Way property offset partially by interest applied to the indemnification trust account. The 2021 amount is interest applied to

For the indemnification trust account.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.

For the nine-month period ended September 30, 2022, cash flows used in financing activities was $3,057,470 and consisted of aggregate limited partner distributions of $3,050,000, and general partner distributions of $7,470.

For the nine-month period ended September 30, 2021, cash flows used in financing activities was $1,002,547 and consisted of aggregate limited partner distributions of $1,000,000, and general partner distributions of $2,547.

Liquidity and Capital Resources

The Partnership’s cash balance was $281,361$5,322,425 at September 30, 2022.2023. Cash of $175,000 is anticipated to be$5,000,000 was used to fund the 2022 third quarter aggregate distribution to limited partners on or about November 15, 2022.October 6, 2023 of $5,000,000.

 

The Partnership’s principal demands for liquidity historically have been, and are expected to continue to be, for the payment of operating expenses and distributions. Management anticipates that cash generated through the operations of the Properties and potential sales of Properties will primarily provide the sources for future Partnership liquidity and limited partner distributions of cash flows from operations. The Partnership is in competition with sellers of similar properties to locate suitable purchasers for its Properties. The two primary liquidity risks in the absence of mortgage debt with respect to the on-going operations of the Properties are the Partnership’s inability to collect rent receivables and near-term or chronic property vacancies. 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 distributions, capital expenditures, and taxable income recognition matching, which is primarily attributable to percentage rents and property sales.

 

As of September 30, 2022,2023, the current eightfive Properties were 100% leased. In addition, the Partnership collected 100% of its base rent from current operating tenants for the period ended September 30, 20222023 and the year ended December 31, 2021,2022, which we believe is a good indication of overall tenant quality and stability.

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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, 20222023 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, 20222023 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

 

None.

 

Item 6. Exhibits

 

 (a)Listing of Exhibits

 

 3.1Certificate 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.
   
 4.1Agreement 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.
   
 4.2Amendments 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.
   
 4.4Amendment 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.
   
 4.5Amendment 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.
   
 4.6Amendment 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.

 

 31.1Sarbanes-Oxley Section 302 Certification
   
 31.2Sarbanes-Oxley Section 302 Certification
   
 32.1Certification of Periodic Financial Report Pursuant to 18 U.S.C. Section 1350.
99.1Correspondence to the Limited Partners, anticipated to be mailed on or about November 15, 2022.
   
 101The 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, 20222023 and December 31, 2021,2022, (ii) Unaudited Condensed Statements of Income for the three and nine month periods ended September 30, 20222023 and 2021,2022, (iii) Unaudited Condensed Statement of Cash Flows for the nine month periods ended September 30, 20222023 and 2021,2022, (iv) Unaudited Condensed Statements of Partners’ Capital for the nine month periods ended September 30, 20222023 and 2021,2022, 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/ Lynette L. DeRose 
 Lynette L. DeRose 
 (Chief Financial Officer and 
 Duly Authorized Officer of the Partnership) 
   
Date:November 14, 202213, 2023 

 

2019