QUARTERLY REPORT FOR THE PERIOD ENDED JUNE 30, 1996
FELLOW PARTNERS:
During the last year or two, a number of limited partners have inquired about
the timing of the liquidation of the portfolio's properties. Although three
holdings have already been sold, the Fund still owns the eight properties
shown in the table on page 2.
Until now, we have been unable to adopt a broad-based liquidation plan
because real estate market conditions were such that it would have meant
selling at what we and LaSalle Advisors, the Fund's investment advisor, viewed
as "fire sale" prices.
However, during our most recent annual review of the strategic plan for
the Fund, we concluded that the alignment between (1) the fundamental
operating environment and (2) capital flows into real estate is the best it
has been for a number of years. And, for reasons we will discuss later, it
appears market conditions will continue to improve. As a result, we believe
the time is right to begin liquidating the Fund's remaining properties. If the
generally favorable environment continues, and barring any significant change
in local market conditions, our plan calls for the last property to be sold by
the end of 1998. While this is our target date, a variety of factors could
cause the timeframe to accelerate or be delayed.
As has been true in the past, the timing of individual sales within the
expected liquidation period will be governed by our assessment of the benefits
to our partners of holding versus selling immediately and by the availability
of interested buyers. Some properties appear to be candidates for near-term
liquidation, while others may take a little longer based on property type and
the local market.
Perhaps some historical perspective will be helpful at this point. In
May 1985, the final partners were admitted to the Fund and the first property,
Dupont Plaza in Irvine, California, was acquired. Exactly two years later, the
Fund made its eleventh, and final, acquisition, Newport Center in Deerfield
Beach, Florida. We intended to hold the properties for no more than seven to
10 years. However, subsequent changes in tax legislation made income-producing
real estate unattractive to many previously active lenders and purchasers,
such as commercial banks and insurance companies.
Chart 1 - Total Debt and Equity Flows to Real Estate
As the bar graph above indicates, capital flowing into real estate
peaked and then began a freefall in 1988, exacerbating the problem caused by
overbuilding in many markets. Then, the recession in 1990-1991 as well as
corporate downsizings added to the growing imbalance between supply and
demand. The combination of weak demand and negative capital flows had a
devastating effect on values in most market sectors and in most geographic
areas. Rather than begin liquidating your portfolio at the bottom of the
market cycle, we decided to wait until conditions improved. While market
conditions did not permit broad scale portfolio liquidation, we were able to
take advantage of specific opportunities to sell three holdings - DuPont in
1990, Corporate Square in 1994, and Spring Creek in April of this year. Most
of the proceeds from these dispositions have been distributed to the Fund's
limited partners.
Turning back to the more recent environment, we began to see some
improvement in numerous local markets and sectors about two years ago. New
construction was rather stagnant, occupancy and rental rates appeared to be
stabilizing or improving, and returns on real estate investments started to
improve. Property values also showed signs of recovery in a number of areas.
In addition, money began to flow back into real estate investments in 1993,
particularly into Real Estate Investment Trusts (REITS) which, in turn, became
active buyers. This strong capital infusion has contributed to a more
favorable environment.
NCREIF Total Return
1993 1994 1995 95Q2-96Q1
_____ _____ _____ __________
All Properties 0.6% 6.9% 8.9% 9.5%
Source: NCREIF-Classic Index, LaSalle Advisors Investment Research.
Results of Operations
Rental income was up modestly for the three and nine months ended June 30,
1996, relative to last year even though Spring Creek made no contribution to
revenues for the last two months of the 1996 periods. As you may remember,
Spring Creek was sold on April 30 and the net proceeds were paid to you in
May. Slightly higher rents and an improved average leased status at The
Business Park and increased rental rates at Newport Center and Royal Biltmore
more than offset the decline in occupancy and rental income at Montgomery as
well as the absence of any revenue this year from Spring Creek. As was true
for the first six months of this year, the combination of lower revenues and
higher expenses at Montgomery was a major reason for the drop in net income
from continuing operations.
<TABLE>
Real Estate Investments (Dollars in thousands)
__________________________________________________________________________________________________
Leased Status Average Leased Status Contribution to Net Income
____________ _________________________ __________________________
Gross
Property Leasable June 30, Nine Months Ended June 30, Nine Months Ended June 30,
Name Area (Sq. Ft.) 1996 1995 1996 1995 1996
____________ __________ _______ ________ ________ ________ ________
<S> <C> <C> <C> <C> <C> <C>
Airport
Perimeter 120,986 73% 74% 72% $ 7 $ 18
Montgomery 116,348 66 77 72 155 (69)
Springdale 144,000 100 100 100 270 244
The Business
Park 157,153 97 87 96 68 169
Newport
Center 62,411 89 95 93 131 125
_________ _________ _________ _________ _________ _________
600,898 86 86 87 631 487
Held for Sale
Royal Biltmore 71,443 100 98 99 170 225
Van Buren 173,878 88 89 92 47 (55)
_________ _________ _________ _________ _________ _________
846,219 88 88 89 848 657
Properties Sold - - - - 116 407
_________ _________ _________ _________ _________ _________
Fund Expenses
Less Interest
Income - - - - (293) (334)
_________ _________ _________ _________ _________ _________
Total 846,219 88% 88% 89% $671 $730
</TABLE>
Properties held for sale or sold had an effect on overall net income
comparisons for the periods under review. In the case of Van Buren, the sale
price is expected to be lower than the historical carrying value, so a
downward adjustment was made in the quarter just ended. The decline in that
property's value was the main reason for the unfavorable comparison in overall
net income relative to the third quarter of 1995 (see the statements of
operations on page 6). For the nine months, the reduction in the Van Buren
valuation was offset by the second quarter upward adjustment for Spring Creek,
whose estimated sales price was higher than the Fund's carrying value. In
addition, the current period benefited from a decrease in depreciation because
the properties held for sale are no longer being depreciated.
Now that liquidations will play an increasing role in the Fund's
operating results, we think it is worth mentioning the effect of some
accounting requirements involved when a property is put in the "held for sale"
category. First, if the estimated sale price is less than the historical
carrying value, the latter must be adjusted downward for the difference. Then,
further adjustments may be made if, during the marketing process, the
property's value is less than estimated when it was placed for sale. If the
sale price is more than the historical carrying value, no adjustment to
increase the carrying value is made. Since depreciation has the effect of
reducing book value, a property that is being held for sale is no longer
depreciated because its adjusted carrying value would drop below its estimated
sales price. Van Buren is a good example of how adjustments can affect
results. The negative impact on net income of the $237,000 reduction in value
was partially offset by a $118,000 decline in depreciation at this property in
the quarter ended June 30, 1996.
The Business Park and Royal Biltmore continued to be bright spots in the
portfolio. As we mentioned in our last report, leases on a significant amount
of space at The Business Park expire over the remainder of the year. Activity
in the Northeast/I85 corridor in Atlanta remains strong, so we believe results
at this property will continue to be positive. Royal Biltmore is 100% leased
and will also, in our opinion, make a favorable contribution to operating
results until it is sold.
We have been discussing the leasing challenges at Montgomery and Airport
Perimeter for some time and are happy to be able report on progress at each.
In the case of Montgomery, LaSalle has adopted a "full-floor occupancy
strategy" designed to improve the building's image, occupancy, and ultimately
its value. During the past quarter, LaSalle allowed a small tenant to vacate
early in order to be able to offer the fifth floor to a single tenant. We
cannot be sure this new strategy will work, but we are encouraged by the
increasing interest in the property as well as by the lack of new construction
in the market.
At Airport Perimeter, the leased status has started to improve despite
the pall cast by the potential expansion of the Atlanta airport which would
result in condemnation of this property. As of the end of July, the property
was 80% leased at rents comparable to similar properties that are not within
the airport expansion area.
Primarily because of the $18.00 per-unit distribution paid in the first
quarter of this year - $9.00 from operations and $9.00 from previously
retained sales proceeds - the Fund's cash position declined.
Cash Distributions
A $4.75 per-unit distribution from third quarter operations will be paid to
you on August 15. The fourth quarter rate will be determined based on
operating conditions, dispositions, and the cash needs of the Fund.
Disposition Update
We have a signed letter of intent with a potential buyer for Van Buren. If we
are able to negotiate a mutually satisfactory contract and if the buyer's due
diligence is successfully completed, the sale could take place by the end of
September. Any distribution of proceeds would then be distributed to you in
November along with your fourth quarter distribution from operations.
Now that we are in the portfolio liquidation phase, some properties may
be managed differently than if we were planning to hold them for a longer
period. For instance, if a property would require a significant infusion of
capital in order to stabilize its occupancy around the 90% to 95% level,
LaSalle might make concessions on the sale price and give the new owners the
flexibility to make their own changes. We measure our capital expenditures
against the potential for an immediate return on our investment. Obviously,
the more we put into a property, the more we expect to get out of it.
One practice which does not change, however, is our close watch on
day-to-day expenses. LaSalle will continue to re-bid service contracts, appeal
real estate tax increases or seek reassessments, and take whatever other steps
it can to pare the costs of operating the properties in order to make them
more attractive to potential buyers.
Another change we have noted in the overall commercial real estate
market is that buyers appear to have shortened their investment horizon.
Rather than the seven to 10-year holding period we envisioned when building
the Fund's portfolio, buyers are now looking at a five-year timeframe. As a
result, in negotiating new and renewal leases, LaSalle will try to manage
lease terms and expirations to achieve the five-year average cash flows and
cap rates currently demanded by the market.
Outlook
A number of factors point to continued improvement for real estate in the near
future. Within the market itself, speculative construction remains sparse in
most areas, and foreclosure rates are falling. In addition, low unemployment,
subdued inflation, favorable interest rates, and increasing returns from real
estate relative to stocks and bonds contribute to a more optimistic outlook.
The return of large institutional investors, especially the REITs, means
there is more capital available for real estate investment and, therefore, a
market more accommodating to property sales. Of equal importance, the rate of
return (or "cap" rate) required by potential buyers tends to decline as
investment dollars flow into real estate. The relationship between cap rates
and real estate values is like that between interest rates and bond prices -
lower rates mean rising values.
Future reports will update you on our progress toward liquidating the
portfolio. The purpose of this discussion is to inform you of the improving
conditions we see in the real estate market and to outline our liquidation
strategy. We are optimistic that our plan is reasonable and will continue
working hard to bring it to fruition. Our focus in selling your holdings is
the same as that we employed in acquiring and managing each property - to
serve the interests of our partners.
Sincerely,
James S. Riepe
Chairman
August 9, 1996
CONDENSED BALANCE SHEETS
Unaudited
(In thousands)
June 30, September 30,
1996 1995
___________ ____________
Assets
Real Estate Property Investments
Land . . . . . . . . . . . . . . . . . . . . . $ 7,398 $ 11,014
Buildings and Improvements . . . . . . . . . . 42,981 54,237
________ ________
50,379 65,251
Less: Accumulated Depreciation and
Amortization. . . . . . . . . . . . . . . . (19,680) (24,092)
________ ________
30,699 41,159
Held for Sale. . . . . . . . . . . . . . . . . 8,970 1,226
________ ________
39,669 42,385
Cash and Cash Equivalents. . . . . . . . . . . . 2,036 2,832
Accounts Receivable (less allowances of
$71 and $85). . . . . . . . . . . . . . . . 264 292
Other Assets . . . . . . . . . . . . . . . . . . 399 624
________ ________
$ 42,368 $ 46,133
________ ________
________ ________
Liabilities and Partners' Capital
Security Deposits and Prepaid Rents. . . . . . . $ 314 $ 364
Accrued Real Estate Taxes. . . . . . . . . . . . 196 202
Accounts Payable and Other Accrued Expenses. . . 233 281
________ ________
Total Liabilities. . . . . . . . . . . . . . . . 743 847
Partners' Capital. . . . . . . . . . . . . . . . 41,625 45,286
________ ________
$ 42,368 $ 46,133
________ ________
________ ________
See the accompanying notes to condensed consolidated financial statements.
CONDENSED STATEMENTS OF OPERATIONS
Unaudited
(In thousands except per-unit amounts)
Three Months Ended Nine Months Ended
June 30, June 30,
1996 1995 1996 1995
________ ________ ________ ________
Revenues
Rental Income. . . . . . . . . . $ 1,495 $ 1,485 $ 4,517 $ 4,460
Interest Income. . . . . . . . . 29 46 74 82
________ ________ ________ ________
1,524 1,531 4,591 4,542
________ ________ ________ ________
Expenses
Property Operating Expenses. . . 465 396 1,322 1,192
Real Estate Taxes. . . . . . . . 162 140 489 442
Depreciation and Amortization. . 487 725 1,707 1,946
Decline (Recovery) of
Property Values. . . . . . . . 237 (28) (66) (84)
Partnership Management Expenses. 148 130 409 375
________ ________ ________ ________
1,499 1,363 3,861 3,871
________ ________ ________ ________
Net Income . . . . . . . . . . . $ 25 $ 168 $ 730 $ 671
________ ________ ________ ________
________ ________ ________ ________
Activity per Limited Partnership Unit
Net Income . . . . . . . . . . . $ 0.25 $ 1.67 $ 7.25 $ 6.66
________ ________ ________ ________
________ ________ ________ ________
Cash Distributions Declared
from Operations. . . . . . . . $ 4.75 $ 4.00 $ 14.25 $ 12.00
from Sale Proceeds . . . . . . - - 17.79 -
________ ________ ________ ________
Total Distributions Declared . . $ 4.75 $ 4.00 $ 32.04 $ 12.00
________ ________ ________ ________
________ ________ ________ ________
Units Outstanding. . . . . . . . 90,622 90,622 90,622 90,622
________ ________ ________ ________
________ ________ ________ ________
See the accompanying notes to condensed financial statements.
CONDENSED STATEMENT OF PARTNERS' CAPITAL
Unaudited
(In thousands)
General Limited
Partner Partners Total
________ ________ ________
Balance, September 30, 1995. . . $ (3,747) $ 49,033 $ 45,286
Net Income . . . . . . . . . . . 73 657 730
Cash Distributions . . . . . . . (288) (4,103) (4,391)
_______ _______ _______
Balance, June 30, 1996 . . . . . $ (3,962) $ 45,587 $ 41,625
_______ _______ _______
_______ _______ _______
See the accompanying notes to condensed financial statements.
CONDENSED STATEMENTS OF CASH FLOWS
Unaudited
(In thousands)
Nine Months Ended
June 30,
1996 1995
_________ _________
Cash Flows from Operating Activities
Net Income . . . . . . . . . . . . . . . . . . . $ 730 $ 671
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Depreciation and Amortization. . . . . . . . . 1,707 1,946
Recovery of Property Values. . . . . . . . . . (66) (84)
Other Changes in Assets and Liabilities. . . . 0 (53)
________ ________
Net Cash Provided by Operating Activities. . . . 2,371 2,480
________ ________
Cash Flows From Investing Activities
Proceeds from Property Disposition . . . . . . . 1,679 -
Investments in Real Estate . . . . . . . . . . . (455) (689)
________ ________
Net Cash Provided by (Used in)
Investing Activities . . . . . . . . . . . . . 1,224 (689)
________ ________
Cash Flows Used in Financing Activities
Cash Distributions . . . . . . . . . . . . . . . (4,391) (1,303)
________ ________
Cash and Cash Equivalents
Net Increase (Decrease) during Period. . . . . . (796) 488
At Beginning of Year . . . . . . . . . . . . . . 2,832 2,603
________ ________
At End of Period . . . . . . . . . . . . . . . . $ 2,036 $ 3,091
________ ________
________ ________
See the accompanying notes to condensed financial statements.
NOTES TO CONDENSED FINANCIAL STATEMENTS
Unaudited
The unaudited interim condensed financial statements reflect all adjustments
which are, in the opinion of management, necessary for a fair statement of the
results for the interim periods presented. All such adjustments are of a
normal, recurring nature.
The unaudited interim financial information contained in the accompanying
condensed financial statements should be read in conjunction with the
financial statements contained in the fiscal 1995 Annual Report to Partners.
NOTE 1 - TRANSACTIONS WITH RELATED PARTIES AND OTHER
As compensation for services rendered in managing the affairs of the
Partnership, the General Partner receives 10% of cash available for
distribution from operations and a portion of the proceeds from property
dispositions. The General Partner's share of cash available for distribution
from operations totaled $144,000 and from property dispositions totaled
$67,000 for the first nine months of fiscal 1996.
In accordance with the partnership agreement, certain operating expenses
are reimbursable to the General Partner. The General Partner's reimbursement
of such expenses totaled $114,000 for communications and administrative
services performed on behalf of the Partnership during the first nine months
of fiscal 1996.
An affiliate of the General Partner earned a normal and customary fee of
$3,000 from the money market mutual funds in which the Partnership made its
interim cash investments during the first nine months of fiscal 1996.
LaSalle Advisors Limited Partnership ("LaSalle") is the Partnership's
advisor and is compensated for its advisory services directly by the General
Partner. LaSalle is reimbursed by the Partnership for certain operating
expenses pursuant to its contract with the Partnership to provide real estate
advisory, accounting and other related services to the Partnership. LaSalle's
reimbursement for such expenses during the first nine months of 1996 totaled
$113,000.
The partnership agreement includes provisions limiting the maximum
contribution the General Partner can be required to fund upon the dissolution
and termination of the Partnership if, at that time, the General Partner's
capital account has a negative balance. The maximum contribution is
approximately $913,000. If after making such a contribution, the General
Partner's capital account still has a negative balance, a reallocation of
income equal to the remaining negative balance will be made to the General
Partner from the Limited Partners.
An affiliate of LaSalle earned $150,000 in the first nine months of fiscal
1996 as property manager for several of the Partnership's properties.
NOTE 2 - PROPERTY DISPOSITION
On April 30, 1996 the Partnership sold Spring Creek for net proceeds of
$1,679,000. The net book value of the property at that date was also
$1,679,000 after accumulated depreciation expense and previously recorded
property valuation adjustments. Therefore, no gain or loss on the sale is
reflected in the accompanying financial statements. The Partnership recognized
a $303,000 recovery of property value in the second quarter of fiscal 1996 to
reflect the net realizable value of Spring Creek. Results of operations for
Spring Creek were $407,000 and $116,000 for the nine months ended June 30,
1996 and 1995, respectively.
NOTE 3 - PROPERTIES HELD FOR SALE
The Partnership began actively marketing Royal Biltmore and Van Buren late in
March 1996 and has classified these properties as held for sale in the
accompanying June 30, 1996 balance sheet. The Partnership recognized a
$237,000 decline of property value in the third quarter of fiscal 1996, to
reflect the estimated net realizable value of Van Buren. Results of operations
for these properties were $170,000 and $217,000 for the nine months ended June
30, 1996 and 1995, respectively.
NOTE 4 - SUBSEQUENT EVENT
The Partnership declared a quarterly cash distribution of $4.75 per unit to
Limited Partners of the Partnership as of the close of business on June 30,
1996. The Limited Partners will receive $430,000, and the General Partner will
receive $48,000.
Chart 1 - Total Debt and Equity Flows to Real Estate bar graph titled "Total
Debt and Equity Flows to Real Estate," which depicts the net flow of debt and
equity in public and private markets, in billions of dollars into and from
real estate from the period 1981-1994, and forecasts such flows from
1995-1999. The graph shows a range from ($40) billion to $120 billion.
Year Dollars in Billions
1981 $30
1982 $40
1983 $50
1984 $65
1985 $80
1986 $85
1987 $90
1988 $101
1989 $79
1990 $40
1991 ($10)
1992 ($25)
1993 $10
1994 $35
1995 $55 (forecast)
1996 $65 (forecast)
1997 $75 (forecast)
1998 $77 (forecast)
1999 $79 (forecast)
Note: Includes debt and equity in public and private markets.
Source: Federal Reserve Board, Commercial Mortgage Alert, Capital Markets
Report, LaSalle Advisors Investment Research.
