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 July 31, 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 1 of 15<PAGE>
<TABLE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DEAN WITTER REALTY INCOME PARTNERSHIP II, L.P.
CONSOLIDATED BALANCE SHEETS
<CAPTION>
July 31, October 31,
1996 1995
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 4,666,259 $ 7,424,199
Real estate:
Land 14,634,935 15,821,935
Buildings and improvements 123,874,046 130,152,151
138,508,981 145,974,086
Accumulated depreciation 49,568,987 45,806,137
88,939,994 100,167,949
Real estate held for sale - 10,769,096
Deferred leasing commissions, net 2,294,198 2,009,275
Investment in joint venture 2,708,568 2,730,575
Other assets 2,522,777 2,932,580
$101,131,796 $126,033,674
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued
liabilities $ 787,199 $ 714,941
Security deposits 186,279 256,758
Minority interests in joint ventures 8,264,487 8,341,537
9,237,965 9,313,236
Partners' capital (deficiency):
General partners (4,946,794) (3,537,743)
Limited partners ($1,000 per Unit,
177,023 Units issued) 96,840,625 120,258,181
Total partners' capital 91,893,831 116,720,438
$101,131,796 $126,033,674
See accompanying notes to consolidated financial statements.
/TABLE
<PAGE>
<TABLE>
DEAN WITTER REALTY INCOME PARTNERSHIP II, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three and nine months ended July 31, 1996 and 1995
<CAPTION>
Three months ended Nine months ended
July 31, July 31,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Revenues:
Rental $4,005,360 $4,181,492 $12,046,991 $13,153,815
Equity in earnings of joint venture 54,771 72,439 198,957 224,578
Interest and other 76,865 118,485 873,040 788,480
4,136,996 4,372,416 13,118,988 14,166,873
Expenses:
Property operating 1,525,754 1,741,752 4,553,678 5,042,183
Depreciation 1,222,714 1,529,362 3,762,850 4,531,107
Amortization 145,757 163,011 407,802 451,830
General and administrative 225,976 180,315 609,346 537,073
Loss on impairment of real estate - - 11,870,000 -
3,120,201 3,614,440 21,203,676 10,562,193
Income (loss) before minority interest 1,016,795 757,976 (8,084,688) 3,604,680
Minority interest 144,169 124,717 449,274 409,934
Net income (loss) $ 872,626 $ 633,259 $(8,533,962) $ 3,194,746
Net income (loss) allocated to:
Limited Partners $ 785,363 $ 569,933 $(7,680,566) $ 2,875,271
General Partners 87,263 63,326 (853,396) 319,475
$ 872,626 $ 633,259 $(8,533,962) $ 3,194,746
Net income (loss) per Unit of limited
partnership interest $4.44 $3.22 $(43.39) $16.24
See accompanying notes to consolidated financial statements.
/TABLE
<PAGE>
<TABLE>
DEAN WITTER REALTY INCOME PARTNERSHIP II, L.P.
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
Nine months ended July 31, 1996
<CAPTION>
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 (7,680,566) (853,396) (8,533,962)
Cash distributions (15,736,990) (555,655) (16,292,645)
Partners' capital (deficiency)
at July 31, 1996 $ 96,840,625 $(4,946,794) $ 91,893,831
See accompanying notes to consolidated financial statements.
/TABLE
<PAGE>
<TABLE>
DEAN WITTER REALTY INCOME PARTNERSHIP II, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended July 31, 1996 and 1995
<CAPTION>
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (8,533,962) $ 3,194,746
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation 3,762,850 4,531,107
Amortization 407,802 451,830
Loss on impairment of real estate 11,870,000 -
Minority interests in joint ventures' operations 449,274 409,934
Equity in earnings of Taxter joint venture (198,957) (224,578)
Decrease (increase) in operating assets:
Deferred expenses (692,725) (1,133,450)
Other assets 409,803 681,525
Increase (decrease) in operating liabilities:
Accounts payable and accrued liabilities 72,258 (38,631)
Security deposits (70,479) 3,002
Net cash provided by operating activities 7,475,864 7,875,485
Cash flows from investing activities:
Additions to real estate (4,404,895) (828,396)
Distributions from Taxter joint venture 278,583 392,919
Investment in Taxter joint venture (57,619) (88,492)
Proceeds from disposition of real estate
held for sale 10,769,096 -
Net cash provided by (used in) investing activities 6,585,165 (523,969)
Cash flows from financing activities:
Cash distributions to partners (16,292,645) (5,900,767)
Additional investment by minority interest 130,576 302,982
Minority interests in joint ventures' distributions (656,900) (741,196)
Repayment of deferred distributions - (2,784,417)
Net cash used in financing activities (16,818,969) (9,123,398)
Decrease in cash and cash equivalents (2,757,940) (1,771,882)
Cash and cash equivalents at beginning of period 7,424,199 9,812,279
Cash and cash equivalents at end of period $ 4,666,259 $ 8,040,397
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,
DEAN WITTER REALTY INCOME PARTNERSHIP II, L.P.
Notes to Consolidated Financial Statements
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 $183,000 and $217,000 for the nine months ended July 31,
1996 and 1995, respectively. These 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 nine months ended July 31, 1996 and 1995,
the Partnership incurred approximately $369,000 and $391,000,
respectively, for these services. These amounts are included in general
and administrative expenses.
As of July 31, 1996 the affiliates were owed a total of approximately
$162,000 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 a number of 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 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
Based on an assessment of the projected cash flow from operations of the
Partnership's properties and anticipated future cash needs, the
Partnership determined that it can distribute a portion of its cash
reserves. Accordingly, the Partnership increased the cash distribution
to $10.34 per Unit to the Limited Partners, beginning with the third
quarter distribution which was paid August 29, 1996. The total
distribution aggregated $2,033,740 with $1,830,366 distributed to the
Limited Partners and $203,374 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.
In most regions of the country, the growth in demand for office space
exceeds the growth in supply. Office construction remains primarily on
a build-to-suit basis as current rental rates do not justify speculative
development. Some office markets are faring better than others.
Increasing demand for office space by smaller to medium sized firms is
improving the suburban Northeast office market. Office properties
located in the West are benefiting from expansion by the entertainment,
high-technology and telecommunications industries. In the retail sector,
a changing tenant base caused by the domination of certain power center
tenants coupled with bankruptcies and major restructurings of other
tenants is resulting in higher vacancies and stagnant rents at many
retail properties.
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 nine
months ended July 31, 1996, all of the Partnership's properties generated
positive cash flow from operations, and the Partnership expects 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 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 nine-month periods ended July 31,
1996, the Partnership's aggregate cash flow from operations decreased by
approximately $167,000 and $997,000, respectively, as a result of the
sale of the shopping center.
During the nine months ended July 31, 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. During the remainder of
1996, the Partnership expects that cash flow from operations and
distributions received from its joint venture investment (net of minority
interest share) will exceed distributions to partners (other than
distributions of net proceeds from future property sales); the
Partnership expects to fund a portion of capital expenditures from cash
reserves.
During the nine months ended July 31, 1996, the Partnership incurred
approximately $4,967,000 of building improvements and leasing commissions
(net of capital contributions by minority interest), including
approximately $392,000, primarily for building improvements at the
Century Square property, and tenant related capital expenditures of
approximately $710,000 at Framingham Corporate Center, approximately
$1,287,000 at United Services Life Building, and approximately $2,560,000
at Pavilions at East Lake.
The Partnership has demolished the former A&P store at Pavilions at East
Lake (approximately 39,000 square feet) and has built a new Kroger
supermarket (approximately 63,000 square feet) at an estimated cost of
approximately $3.7 million, funded from Partnership cash reserves.
Approximately $2,300,000 was incurred through July 31, 1996. The
remaining work on the interior of the store will be completed in the
fourth quarter of fiscal 1996, at which time Kroger's lease will
commence.
As of July 31, 1996, the Partnership has commitments to fund capital
expenditures of approximately $375,000 and $900,000 at Framingham
Corporate Center and United Services Life Building, primarily for tenant
related capital expenditures, and $1,400,000 at Pavilions at East Lake
primarily related to the Kroger supermarket, as described above. 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.
Based on an assessment of the projected cash flow from operations of the
Partnership's properties and anticipated future cash needs, the
Partnership determined that it can distribute a portion of its cash
reserves. Accordingly, the Partnership increased the cash distribution
to $10.34 per Unit to the Limited Partners, beginning with the third
quarter distribution which was paid August 29, 1996. The total
distribution aggregated $2,033,740 with $1,830,366 distributed to the
Limited Partners and $203,374 distributed to the General Partners.
Operations
Fluctuations in the Partnership's operating results for the three- and
nine-month periods ended July 31, 1996 compared to 1995 are primarily
attributable to the following:
Rental revenue decreased due to the sale of Wallkill Plaza in December
1995 and because the lease of A&P, a major anchor at Pavilions at East
Lake, expired in December 1995. These decreases were partially offset
by increased rents at the United Services Life property.
Interest and other income for the nine- month period increased primarily
because of interest earned on the proceeds from the sale of the Wallkill
Plaza shopping center until such proceeds were distributed to investors
in March 1996. Interest and other income for the three months ended July
31, 1996 decreased because of a lower average cash balance due primarily
to the funding of the Kroger renovations.
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 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 limited availability of large blocks of contiguous space in the
suburban Boston market has resulted in rising rental rates and declining
vacancy levels. The current market vacancy rate decreased to
approximately 5% due to increased subleasing activity and the relative
absence of office construction. At July 31, 1996, the property was 98%
leased. No significant leases expire until fiscal 1998.
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 July 31, 1996, occupancy at the property increased
slightly to 99%. 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
nine months ended July 31, 1996, occupancy at the property remained at
100%. No significant leases expire during the remainder of fiscal 1996.
Leases aggregating approximately 10% of the space expire in fiscal 1997.
The Century Square office building remained 100% leased through July 31,
1996. The Pasadena, California market is not expected to improve during
1996. The vacancy rate decreased slightly to approximately 14%.
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 significant leases expire until
2003.
The market in Bellevue, Washington, the location of the United Services
Life Building, currently has a 5% vacancy rate, and the availability of
large blocks of contiguous space is limited. During the nine months
ended July 31, 1996, occupancy at the building remained at 99%.
Asymetrix Corporation and an affiliate occupy approximately 37% of the
property's space under three leases. During the second quarter,
Asymetrix renewed one lease which was to expire in 1996 (for 16% of the
property) through 1999; the other leases expire in 1998. No other
significant leases expire until fiscal 1998. The Partnership has engaged
a broker to market the property for sale to take advantage of the
favorable market conditions for office properties in the Seattle area.
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 decreased during the three
months ended July 31, 1996 from 81% to 71% because the Michaels lease,
for approximately 10.8% of the property, expired in June 1996. Kroger
has signed a new lease which will commence at the completion of
construction of its space. The initial lease term is twenty years with
an option to renew for an additional twenty years. The Partnership
expects that 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 and will increase its value. 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. No
significant leases expire until 1998.
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.
The parties in the Schechtman Action, the Dosky Action and the Segal
Action intend to ask the Delaware Court of Chancery that such Actions be
consolidated in a single matter. The Grigsby Action has been stayed
indefinitely subject to being reopened for good cause. The Young Action
has been dismissed without prejudice. The defendants in the Young Action
understand that the plaintiffs in the Young Action intend to join the
Schechtman Action, the Dosky Action and the Segal Action if such Actions
are consolidated.
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) None.
<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: September 13, 1996 By: /s/E. Davisson Hardman, Jr.
E. Davisson Hardman, Jr.
President
Date: September 13, 1996 By:/s/Lawrence Volpe
Lawrence Volpe
Controller
(Principal Financial and
Accounting Officer)
<PAGE>
Dean Witter Realty Income Partnership II, L.P.
Quarter Ended July 31, 1996
Exhibit Index
Exhibit
No. Description
27 Financial Data Schedule
E1
<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>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-END> JUL-31-1996
<CASH> 4,666,259
<SECURITIES> 0
<RECEIVABLES> 2,359,622
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 101,131,796<F1>
<CURRENT-LIABILITIES> 0
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 91,893,831<F2>
<TOTAL-LIABILITY-AND-EQUITY> 101,131,796<F3>
<SALES> 0
<TOTAL-REVENUES> 13,118,988<F4>
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 21,652,950
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (8,533,962)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,533,962)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,533,962)<F5>
<EPS-PRIMARY> (43.39)<F6>
<EPS-DILUTED> 0
<FN>
<F1>In addition to cash and receivables, total assets include net investments
in real estate of $88,939,994, investment in joint venture of $2,708,568,
net deferred leasing commissions of $2,294,198 and other assets of
$163,155.
<F2>Other Stockholders' Equity represents partners' capital.
<F3>Liabilities include accounts payable and accrued liabilities of
$787,199, minority interest in joint venture of $8,264,487, and other
liabilities of $186,279.
<F4>Total revenue includes rent of $12,046,991, equity in earnings of joint
venture of $198,957, and interest and other revenues of $873,040.
<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>
