UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the period ended April 30, 1996
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: 0-18150
DEAN WITTER REALTY INCOME PARTNERSHIP II, L.P.
(Exact name of registrant as specified in governing instrument)
Delaware 13-3244091
(State of organization) (IRS Employer Identification No.)
2 World Trade Center, New York, NY 10048
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code: (212) 392-1054
Former name, former address and former fiscal year, if changed since last
report: not applicable
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X
No
<PAGE>
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DEAN WITTER REALTY INCOME PARTNERSHIP II, L.P.
CONSOLIDATED BALANCE SHEETS
April 30, October 31,
1996 1995
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 6,462,490 $ 7,424,199
Real estate:
Land 14,634,935 15,821,935
Buildings and improvements 121,649,661 130,152,151
136,284,596 145,974,086
Accumulated depreciation 48,346,273 45,806,137
87,938,323 100,167,949
Real estate held for sale - 10,769,096
Deferred leasing commissions, net 2,145,777 2,009,275
Investment in joint venture 2,710,558 2,730,575
Other assets 2,600,421 2,932,580
$101,857,569 $126,033,674
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued
liabilities $ 634,844 $ 714,941
Security deposits 188,254 256,758
Minority interests in joint ventures 8,390,596 8,341,537
9,213,694 9,313,236
Partners' capital (deficiency):
General partners (4,871,786) (3,537,743)
Limited partners ($1,000 per Unit,
177,023 Units issued) 97,515,661 120,258,181
Total partners' capital 92,643,875 116,720,438
$101,857,569 $126,033,674
See accompanying notes to consolidated financial statements.
/TABLE
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<TABLE>
<CAPTION>
DEAN WITTER REALTY INCOME PARTNERSHIP II, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three and six months ended April 30, 1996 and 1995
Three months ended Six months ended
April 30, April 30
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Revenues:
Rental $3,713,713 $4,444,111 $8,041,631 $8,972,323
Equity in earnings of joint venture 72,769 74,336 144,186 152,139
Interest and other 487,766 168,717 796,175 669,995
4,274,248 4,687,164 8,981,992 9,794,457
Expenses:
Property operating 1,550,920 1,680,383 3,027,924 3,300,431
Depreciation 1,221,116 1,501,487 2,540,136 3,001,745
Amortization 137,336 144,857 262,045 288,819
General and administrative 195,116 208,119 383,370 356,758
Loss on impairment of real estate - - 11,870,000 -
3,104,488 3,534,846 18,083,475 6,947,753
Income (loss) before minority interest 1,169,760 1,152,318 (9,101,483) 2,846,704
Minority interest 146,683 116,273 305,105 285,217
Net income (loss) $1,023,077 $1,036,045 $(9,406,588) $2,561,487
Net income (loss) allocated to:
Limited partners $ 920,769 $ 932,441 $(8,465,929) $2,305,338
General partners 102,308 103,604 (940,659) 256,149
$1,023,077 $1,036,045 $(9,406,588) $2,561,487
Net income (loss) per Unit of limited
partnership interest $5.20 $5.27 $(47.82) $13.02
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DEAN WITTER REALTY INCOME PARTNERSHIP II, L.P.
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
Six months ended April 30, 1996
Limited General
Partners Partners Total
<S> <C> <C> <C>
Partners' capital (deficiency)
at November 1, 1995 $120,258,181 $(3,537,743) $116,720,438
Net loss (8,465,929) (940,659) (9,406,588)
Cash distributions (14,276,591) (393,384) (14,669,975)
Partners' capital (deficiency)
at April 30, 1996 $ 97,515,661 $(4,871,786) $ 92,643,875
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DEAN WITTER REALTY INCOME PARTNERSHIP II, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended April 30, 1996 and 1995
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (9,406,588) $ 2,561,487
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation 2,540,136 3,001,745
Amortization 262,045 288,819
Loss on impairment of real estate 11,870,000 -
Minority interests in joint ventures' operations 305,105 285,217
Equity in earnings of Taxter joint venture (144,186) (152,139)
(Decrease) increase in operating assets:
Deferred expenses (398,547) (1,001,060)
Other assets 332,159 51,995
Decrease in operating liabilities:
Accounts payable and accrued liabilities (80,097) (230,691)
Security deposits (68,504) ( 9,005)
Net cash provided by operating activities 5,211,523 4,796,368
Cash flows from investing activities:
Additions to real estate (2,180,510) (549,276)
Distributions from Taxter joint venture 191,298 219,707
Investment in Taxter joint venture (27,095) (31,059)
Proceeds from disposition of real estate
held for sale 10,769,096 -
Net cash provided by (used in) investing activities 8,752,789 (360,628)
Cash flows from financing activities:
Cash distributions to partners (14,669,975) (3,933,844)
Additional investment by minority interest 107,480 240,608
Minority interests in joint ventures' distributions (363,526) (546,160)
Repayment of deferred distributions - (1,856,278)
Net cash used in financing activities (14,926,021) (6,095,674)
Decrease in cash and cash equivalents (961,709) (1,659,934)
Cash and cash equivalents at beginning of period 7,424,199 9,812,279
Cash and cash equivalents at end of period $ 6,462,490 $ 8,152,345
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
DEAN WITTER REALTY INCOME PARTNERSHIP II, L.P.
Notes to Consolidated Financial Statements
1. The Partnership
Dean Witter Realty Income Partnership II, L.P. (the "Partnership") is a
limited partnership organized under the laws of the State of Delaware in
1984. The Partnership's fiscal year ends on October 31.
The financial statements include the accounts of the Partnership and the
Century Square and Framingham Corporate Center joint ventures on a
consolidated basis. The equity method of accounting has been applied to
the Partnership's 15% interest in the Taxter Corporate Park property
because of its continuing ability to exert significant influence over
Taxter.
The Partnership's records are maintained on the accrual basis of
accounting for financial reporting and tax purposes.
Net income (loss) per Unit of limited partnership interest amounts are
calculated by dividing net income (loss) allocated to Limited Partners,
in accordance with the Partnership Agreement, by the weighted average
number of Units outstanding.
In the opinion of management, the accompanying financial statements,
which have not been audited, include all adjustments necessary to present
fairly the results for the interim period. Except for the losses on
impairment of real estate, such adjustments consist only of normal
recurring accruals.
These financial statements should be read in conjunction with the annual
financial statements and notes thereto included in the Partnership's
annual report on Form 10-K filed with the Securities and Exchange
Commission for the year ended October 31, 1995. Operating results of
interim periods may not be indicative of the operating results for the
entire year.
2. Real Estate
In the fourth quarter of fiscal 1995, the Partnership entered into an
agreement with New Plan Realty Trust, an unaffiliated party, to sell the
Wallkill Plaza shopping center, for a negotiated sale price of
approximately $12.2 million. The sale took place on December 11, 1995.
All of the net proceeds from the sale, approximately $10.7 million
($60.65 per Unit), were distributed to the Limited Partners in March
1996.
In accordance with its policies, the Partnership evaluated the
recoverability of its investments in real estate and concluded that,
based on revised expectations as to the holding period of the properties,
the Partnership will be unable to recover its investment in certain
properties. Accordingly, in the first quarter of fiscal 1996, the
Partnership wrote down to fair value (based on an independent appraisal)
its Framingham Corporate Center, Glenhardie Corporate Center I and II and
Pavilions at East Lake properties and recorded losses on impairment of
$2,323,000, $3,550,000 and $5,997,000, respectively.
3. Related Party Transactions
An affiliate of the Managing General Partner provides property management
services for four properties. The Partnership incurred management fees
of approximately $126,000 and $144,000 for the six months ended April 30,
1996 and 1995, respectively. The amounts are included in property
operating expenses.
Another affiliate of the Managing General Partner performs administrative
functions, processes investor transactions and prepares tax information
for the Partnership. For the six months ended April 30, 1996 and 1995,
the Partnership incurred approximately $248,000 and $261,000,
respectively, for these services. These are included in general and
administrative expenses.
As of April 30, 1996 the affiliates were owed a total of approximately
$163,000 for these services.
4. Litigation
Various public partnerships sponsored by Realty (including the
Partnership and, in certain cases, its Managing General Partner) are
defendants in five class action lawsuits pending in state and federal
courts. The complaints allege a variety of claims, including breach of
fiduciary duty, fraud, misrepresentation and related claims, and seek
compensatory and other damages and equitable relief. The defendants have
not yet responded to the complaints and intend to vigorously defend the
actions. It is impossible to predict the effect, if any, the outcome of
these actions might have on the Partnership's financial statements.
5. Subsequent Event
On May 29, 1996, the Partnership paid a cash distribution of $8.25 per
Unit to the Limited Partners. The cash distribution aggregated
$1,622,670 with $1,460,399 distributed to the Limited Partners and
$162,271 distributed to the General Partners.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources
The Partnership raised $177,023,000 in a public offering which was
terminated in 1985. The Partnership has no plans to raise additional
capital.
The Partnership purchased six properties (one sold in May 1993, and one
sold in December 1995) and made three investments in partnerships on an
all-cash basis. The Partnership's acquisition program has been
completed. No additional investments are planned.
The economy continues to expand which, in turn, results in absorption of
vacant space. Population and employment growth are improving the
economies in the Southeastern region and steady growth in business
service firms has benefitted several of the Midwestern and West coast
cities (except Los Angeles). Southern California and areas of the
Northeast are still negatively affected by corporate downsizings and
consolidations. For many office properties, vacancy rates are slowly
declining, values are stabilizing and rents are beginning to increase.
In the retail real estate sector, disappointing retail sales during 1995
resulted in stagnant rents and increasing vacancy levels at many retail
properties. These events translate into declining demand for retail
space.
The Partnership's liquidity depends on the cash flow from operations of
its properties, expenditures for tenant improvements and leasing
commissions in connection with the leasing of space. During the six
months ended April 30, 1996, all of the Partnership's properties
generated positive cash flow from operations, and it is anticipated that
they will continue to do so. The Partnership's liquidity is also
affected by the sale of Partnership's properties. The Partnership
received $10.7 million in the first fiscal quarter of 1996 from the sale
of the Wallkill Plaza shopping center (see Note 2 to the consolidated
financial statements). In accordance with the provisions of the
Partnership Agreement, the net sales proceeds (approximately $60.65 per
Unit) were distributed to the Limited Partners in March 1996,
representing a return of invested capital. Because the Partnership has
fewer income producing investments, the Partnership's cash from
operations available for distribution will decline during 1996 and
thereafter.
The Managing General Partner currently expects, barring a change in
circumstances, to offer for sale certain of the Partnership's office
properties in 1996 with the objective of completing sales of all the
Partnership's properties by 1998. Given the generally weakened retail
property fundamentals, reduced investor interest for retail properties
and the major renovation program ongoing at Pavilions at East Lake, the
Partnership's remaining retail property, the Managing General Partner
currently plans to postpone marketing this property for sale until 1997.
The closing of the sale of the Wallkill Plaza shopping center occurred
on December 11, 1995. See Note 2 to the consolidated financial
statements. During the three-and six-month periods ended April 30, 1996,
the Partnership's aggregate cash flow from operations was reduced by
approximately $851,000 and $487,000, respectively, as a result of the
sale of the shopping center.
During the second quarter of 1996, the Partnership's cash flow from
operations and distributions received from its joint venture investment
exceeded distributions to partners (exclusive of the distribution of the
sales proceeds from the Wallkill Plaza shopping center), capital
expenditures and minority interest share of distributions from the
Century Square property. The Partnership's cash flow from operations,
and distributions received from its joint venture investment are expected
to exceed distributions to partners (other than distributions of net
proceeds from future property sales), capital expenditures and minority
interest share of distributions for the remainder of the fiscal year.
During the six months ended April 30, 1996, the Partnership incurred
approximately $2,579,000 of building improvements and leasing commissions
(net of capital contributions by minority interest), including
approximately $322,000 at the Century Square building, approximately
$1,221,000 at United Services Life Building, approximately $612,000 at
the Pavilions at East Lake and approximately $305,000 at Framingham
Corporate Center.
In the fourth quarter of 1995, Fuji Photo USA, Inc., which occupies
approximately 24% of the space at the Taxter property, exercised its
option to extend its leases through March 2001, at an effective rent
which is approximately ninety percent of current rental rates in the
Westchester market. This renewal was accomplished without incurring any
capital expenditures or significant leasing commissions. Because market
rates have declined since Fuji signed its original lease, rental revenue
and cash flow from Fuji during the renewal term will be significantly
lower than what the Partnership currently receives. In addition, Fuji
will not pay any rent in the six month period beginning April 1, 1996.
As a result of this renewal, the Partnership expects that cash
distributions from the Taxter joint venture will be reduced by
approximately $136,000 during the remainder of 1996.
The Partnership has demolished the old A&P store at Pavilions at East
Lake (approximately 39,000 square feet) and is building a new Kroger
supermarket (approximately 63,000 square feet) at an estimated cost of
approximately $3.7 million, which will be funded from Partnership cash
reserves. Approximately $400,000 was paid through April 30, 1996.
As of April 30, 1996, the Partnership has commitments to fund capital
expenditures of approximately $700,000 and $900,000 at Framingham
Corporate Center and United Services Life Building, respectively. These
expenditures will be funded from cash from operations and cash reserves.
Except as discussed above and in the consolidated financial statements,
the Managing General Partner is not aware of any trends or events,
commitments or uncertainties that will have a material impact on
liquidity.
On May 29, 1996, the Partnership paid the second quarter cash
distribution of $8.25 per Unit to the Limited Partners. The total
distribution aggregated $1,622,670 with $1,460,399 distributed to the
Limited Partners and $162,271 to the General Partners.
Operations
Fluctuations in the Partnership's operating results for the three- and
six-month periods ended April 30, 1996 compared to 1995 are primarily
attributable to the following:
Rental revenue decreased primarily due to the sale of Wallkill Plaza in
December 1995. In addition, rental revenue declined during the second
quarter of fiscal 1996 because A&P, a major anchor at Pavilions at East
Lake, which vacated in 1994, was not required to pay rent after December
1995.
The increase in interest and other income represents primarily interest
earned on the proceeds from the sale of the Wallkill Plaza shopping
center before such proceeds were distributed to investors in March 1996.
Interest and other income also increased for the three-month period ended
April 30, 1996 due to lease termination fees of approximately $283,000
from Blue Cross and ASB Meditest, two tenants at Framingham Corporate
Center.
The decreases in property operating expenses are primarily attributable
to the sale of Wallkill Plaza.
Depreciation decreased because of the sale of Wallkill Plaza and as a
result of lower depreciation charges at Framingham Corporate Center,
Glenhardie Corporate Center I and II and Pavilions at East Lake due to
the writedown of these properties in January 1996.
In the first quarter of fiscal 1996, the Partnership recorded losses on
impairment of the Framingham Corporate Center, Glenhardie Corporate
Center I and II and Pavilions at East Lake properties totalling
$11,870,000. See Note 2 to the consolidated financial statements.
A summary of the markets in which the Partnership's properties are
located and the leasing status of each property is as follows:
The Boston suburban office market, the location of the Framingham
Corporate Center continues to have a limited amount of space available.
The current market vacancy rate is approximately 11% due to the relative
absence of office construction. At April 30, 1996, the property was 100%
leased. No significant leases expire during the remainder of fiscal 1996.
The vacancy level in the office market in Westchester County, New York,
the location of Taxter Corporate Park, has recently improved slightly to
19%. It is unlikely that the vacant space will be absorbed in the market
for several years. At April 30, 1996, occupancy at the property was 97%.
No significant leases expire in fiscal 1996. Leases aggregating
approximately 12% of the space expire in fiscal 1997.
Glenhardie Corporate Center I and II are located in Valley Forge,
Pennsylvania, an improving market with increasing demand and a vacancy
rate of approximately 12%. Steady demand and slowdown in corporate
downsizing contributed to the improvement in this market. During the six
months ended April 30, 1996, occupancy at the property increased to 100%.
No significant leases expire in fiscal 1996.
The Century Square office building remained 100% leased through April 30,
1996. The Pasadena, California market is not expected to improve during
1996. Vacancy levels remained at 15% and improvements are not expected
until the downtown Los Angeles market improves. The property's largest
tenant, Countrywide Credit, occupies 84% of the property's rentable
space. No leases are due to expire in fiscal 1996.
The market in Bellevue, Washington, the location of the United Services
Life Building, currently has a 5% vacancy rate, as the availability of
large blocks of contiguous space is limited. During the six months ended
April 30, 1996, occupancy at the building increased slightly to 99%.
Asymetrix Corporation and an affiliate occupy approximately 37% of the
property's space under three leases. During the second quarter,
Asymetrix renewed one of the leases which was to expire in 1996 (for 16%
of the property) through 1999; the other leases expire in 1998.
Pavilions at East Lake is located in an area of suburban Atlanta which
experienced significant retail development in the 1980's. Large
retailers of consumer electronics, appliances and toys continue to
increase retail market share at the expense of department stores and
smaller local tenants. Currently, the vacancy rate in this market is
20%. Occupancy at the Pavilions property remained stable during the six
months ended April 30, 1996 at 81%. A&P, which occupied 27% of the
leased space, had vacated its space in 1994 but continued to pay rent
through December 1995. Demolition of the A&P store has been completed
and construction of the new Kroger store is underway with completion
scheduled for the fourth quarter of 1996. Kroger has signed a new lease
which will commence at the completion of construction. The initial lease
term is twenty years with an option to renew for an additional twenty
years. Rental revenue from the Kroger store will be higher than the
previous rental revenues. The Partnership believes that the new Kroger
store, when complete, will have a positive impact on leasing activity and
rents at the property will increase its value. Michaels, whose lease on
approximately 10.8% of the property expires in June 1996, vacated early
but continues to pay rent. A new shopping center recently opened which
directly competes with the property, but the Partnership does not expect
that it will have a significant impact.
Inflation
Inflation has been consistently low during the period presented in
the financial statements, and, as a result, has not had a significant
effect on the operations of the Partnership or its properties.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The following developments have occurred since the filing of the
Partnership's most recent quarterly report on Form 10-Q with respect to
the purported class actions filed against the Partnership.
On March 13, 1996, a class action lawsuit (the "Young Action") naming
Dean Witter Realty Income Partnership III, L.P., other unidentified
limited partnerships, Dean Witter, Discover & Co., Dean Witter Reynolds
Inc., and others as defendants was filed in the Circuit Court for
Baltimore City in Baltimore, Maryland. The defendants have removed the
case to the United States District Court for the District of Maryland.
The complaint alleges fraud, negligent misrepresentation, breach of
fiduciary duty, unjust enrichment and related claims and seeks an
accounting of records, compensatory and punitive damages in unspecified
amounts and other equitable relief. The defendants have not yet
responded to the complaint and intend to vigorously defend the action.
Pursuant to an order of the U.S. District Court for the Southern District
of California entered May 24, 1996, the Grigsby Action was transferred
to the U.S. District Court for the Southern District of New York.
Item 6. Exhibits & Reports on Form 8-K
(a) Exhibits -
An exhibit index has been filed as part of this Report
on page E1
(b) Reports on Form 8-K - Report dated April 15, 1996 of the
valuation per Unit of Limited Partnership Interest at
October 31, 1995.
<PAGE>
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.
DEAN WITTER REALTY INCOME
PARTNERSHIP II, L.P.
By: Dean Witter Realty Income
Properties II Inc.
Managing General Partner
Date: June 14, 1996 By: /s/E. Davisson Hardman, Jr.
E. Davisson Hardman, Jr.
President
Date: June 14, 1996 By: /s/Lawrence Volpe
Lawrence Volpe
Controller
(Principal Financial and
Accounting Officer)
<PAGE>
<TABLE>
<CAPTION>
Exhibit Index
Dean Witter Realty Income Partnership II, L.P.
Quarter Ended April 30, 1996
Exhibit Sequentially
No. Description Numbered Page
<C> <S>
27 Financial Data Schedule
E1
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Registrant is a limited partnership which invests in real estate and real
estate joint ventures. In accordance with industry practice, its balance
sheet is unclassified. For full information, refer to the accompanying
unaudited financial statements.
</LEGEND>
<CIK> 0000752744
<NAME> DEAN WITTER REALTY INCOME PARTNERSHIP II, L.P.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-END> APR-30-1996
<CASH> 6,462,490
<SECURITIES> 0
<RECEIVABLES> 2,371,070
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 101,857,569<F1>
<CURRENT-LIABILITIES> 0
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 92,643,875<F2>
<TOTAL-LIABILITY-AND-EQUITY> 101,857,569<F3>
<SALES> 0
<TOTAL-REVENUES> 8,981,992<F4>
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 18,388,580
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (9,406,588)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,406,588)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,406,588)<F5>
<EPS-PRIMARY> (47.82)<F6>
<EPS-DILUTED> 0
<FN>
<F1>In addition to cash and receivables, total assets include net investments
in real estate of $87,938,323, investment in joint venture of $2,710,558,
net deferred leasing commissions of $2,145,777 and other assets of $229,351.
<F2>Other Stockholders' Equity represents partners' capital.
<F3>Liabilities include accounts payable and accrued liabilities of
$634,844, minority interest in joint venture of $8,390,596, and other
liabilities of $188,254.
<F4>Total revenue includes rent of $8,041,631, equity in earnings of joint
venture of $144,186, and interest and other revenues of $796,175.
<F5>Net loss includes loss on impairment of real estate of $11,870,000.
<F6>Represents net loss per Unit of limited partnership interest.
</FN>
</TABLE>
