QUARTERLY REPORT
FOR THE PERIOD ENDED
SEPTEMBER 30, 1995
FELLOW PARTNERS:
Revenues and expenses were flat for the first nine months of 1995 relative to
1994, and the year-to-date net income comparison was also flat. As we
forewarned in the June report to you, the sale of Sullyfield on June 29
affected operating results relative to last year. This property had the
greatest effect on revenues in the quarter-a decrease of $89,000 in rental
income as a result of the sale-and on expenses for the nine-month period-an
increase of $158,000 driven by valuation adjustments prior to the sale.
Excluding Sullyfield, net income from continuing property operations
increased by approximately $30,000 and $173,000, respectively, over the
prior-year three and nine months. The primary reasons were: significantly
lower bad debt expense, principally at Atlantic, your industrial park in the
metropolitan Atlanta area, and at Bonnie Lane, another industrial holding
which is in Elk Grove, Illinois; and more interest income as a result of
higher average cash balances.
Rental revenues from continuing properties declined relative to both the
third quarter and first nine months of 1994. Lower average leased status
compared with the same periods last year, primarily at Oakbrook, Fairchild,
and Bonnie Lane, was largely responsible for the decrease.
On a positive note, Glenn Avenue, Regal Row, and Atlantic experienced
higher rental income and improved operating performance. All three had an
increase in average leased status relative to last year, and Glenn Avenue also
had a new tenant who was paying higher rental rates than under the previous
lease.
For the periods under review, lower bad debt expense at continuing
properties more than offset the effect of the increase in management fees as a
result of the higher level of cash available for distribution. Depreciation,
which is a non-cash charge, was also higher for the quarter and nine months.
We still face high vacancies at a number of properties but are
encouraged by recent interest at several, including Oakbrook Corners which is
only 61% leased at the present time.
The major reason the Fund's cash position increased less for the nine
months ended September 30, 1995, than in the prior-year period was the higher
overall distribution payments. Even though operations provided a $436,000
increase in cash in 1995, distributions were $3,301,000 more than last year,
which included the Sullyfield proceeds.
Disposition Update
As we advised you in August, we had decided that the time was right to begin
marketing Regal Row, your industrial property in Dallas, Texas. On November 2,
we received a signed letter of intent from an investor interested in
purchasing the property. The buyer is currently conducting its due diligence
work and, if it decides to proceed with the purchase, the sale could occur as
early as mid-December.
Distribution Update
Your quarterly distribution from operations for the third quarter was $8.75,
bringing the amount declared so far in 1995 to $26.25 plus $31.17 from the
Sullyfield sales proceeds. These amounts will be reported to you on the K-1 we
send in February. Your K-1 will also include a passive loss from Sullyfield of
approximately $25 per unit which you may use to offset passive income. The K-1
Guide will have details on filing requirements.
Sincerely,
James S. Riepe
Chairman
November 10, 1995
INVESTMENT ADVISOR'S REPORT
Having reviewed the state of the industrial and retail real estate sectors the
last two quarters, we wanted to share with you our view of the office market
this quarter. The office sector was the one most severely impacted by the
excesses of the '80s and early '90s. Construction during this period exceeded
demand, and vacancy rates peaked at approximately 20% in 1991. The weakened
market conditions were exacerbated by the recession when many office tenants
either limited their previously planned expansions or reduced their space
requirements. As a result, building owners aggressively sought tenants by
offering financial incentives. Effective rental rates tumbled, and tenants
were able to upgrade to Class A buildings and still reduce their occupancy
costs. The sole redeeming factor during the early '90s was that speculative
construction came to a halt.
With multi-tenant vacancy rates currently around 15%, the office market
remains oversupplied. There are, however, several bright spots. First,
construction starts are at one percent of the peak levels achieved in the
'80s, and permit data indicate they will remain far below historical averages
for the next several years. Second, net absorption in 1994 was at the highest
level in five years, and employment growth in 1994 bodes well for further
gains in absorption this year and next. Third, most markets are beginning to
recover, although Southern California still lags the rest of the country.
Despite an overall upturn, there is sufficient instability in the
operating environment to keep many institutional owners from pursuing the
purchase of office buildings. Many current buyers are entrepreneurs like
Carter-Crowley in Dallas and Miller-Anschutz in Denver, who are seeking
short-term gains and high returns. However, as the markets become more stable
and occupancy levels rise, institutional buyers should return to the market,
driving up values.
Our goal is to have the Fund's office properties positioned for sale
when this occurs.
The six office properties in the Fund-Oakbrook Corners, Tierrasanta,
Baseline, Business Plaza, Fairchild, and AMCC-are all in suburban markets,
which are recovering, as a general rule, more quickly than central business
districts. This group represented 45% of the total square footage in the
portfolio and 57% of revenues for the quarter ended September 30, 1995.
Fairchild Corporate Center and Business Plaza have just office and storage
space available. The others also contain areas for distribution, light
manufacturing, research and development, and/or warehousing. However, these
properties are heavily influenced by developments in the office market and are
therefore classified as "Office/Service" in our listing of real estate
holdings in each annual report.
We will continue to monitor the real estate and capital markets to
determine the strategic time to sell each of your properties, including those
in the office sector.
Property Highlights
Three properties remained 100% leased during the quarter, while the leased
status at five others was either maintained or improved. However, the loss of
a tenant at Oakbrook Corners combined with two tenant departures at other
properties due to credit problems caused the Fund's overall occupancy to drop
slightly.
The most notable improvement in leased status occurred at Fairchild
Corporate Center, where two new tenants signed leases representing 13% of the
property. These gains were partially offset by the loss of one tenant due to
financial problems and the early termination of another tenant to accommodate
a larger new tenant. As a result, overall occupancy rose seven percentage
points. The anticipated loss of two tenants within the next six months could
lower the leased rate by 14%, but we have already begun aggressively marketing
these two spaces and have a number of prospects for some of the already vacant
areas.
Regal Row's leased status also improved markedly during the quarter with
the addition of a new tenant who signed a lease for 6% of the total property.
Real Estate Investments
________________________________________________________________
Gross % Leased
Leasable _____________________
Area Prior Current
Property (Sq. Ft.) Quarter Quarter
________ ________ _______ _______
Atlantic 187,800 100% 92%
Coronado 95,700 100 100
Oakbrook Corners 123,900 70 61
Baseline 100,200 88 88
Business Plaza 66,300 87 81
AMCC 100,000 100 100
Bonnie Lane 119,600 78 78
Glenn Avenue 82,000 100 100
Regal Row 217,300 88 94
South Point 48,400 69 67
Tierrasanta 104,200 75 75
Fairchild Corporate
Center 104,800 73 80
_________ ___ ___
Fund Total 1,350,200 87% 86%
At Bonnie Lane, we finally signed the renewal lease with a tenant
representing 23% of the property. In return for a seven-year lease extension,
the Fund agreed to install sprinklers in the building.
As expected, Oakbrook Corners lost a tenant representing 17% of the
property when its lease expired in August. This loss was partially offset by
the signing of one new tenant, and we have a strong prospect for 22% of the
space. A new leasing agent has been hired for this property as well as for
Atlantic, which lost a tenant who leased 8% of its total space.
The loss of two tenants who occupied a total of 14% of the leasable area
at the Business Plaza was partially offset by the signing of new and expansion
leases for 7% of the total space.
Disposition Update
We are negotiating with one potential buyer for Regal Row, the industrial
property in Dallas, Texas, which we began marketing during the second quarter.
If we can reach a mutually satisfactory agreement, the transaction could close
either late in 1995 or at the beginning of 1996. We will keep you apprised of
our progress in future reports.
Office Highlights
The southeast markets where two of your office properties are located have
shown solid improvement in the past year. For example, Oakbrook Corner's
Northeast Atlanta submarket's occupancy has increased from 92% to 94% in the
past 12 months, while Business Plaza's suburban Ft. Lauderdale submarket
occupancy has risen from 86% to 89%. At the same time, net effective rates on
new leases have climbed 25% in the Atlanta area.
The submarket in which Baseline Business Park in Phoenix competes has
shown even more dramatic gains. Occupancy is up from 90% to 97%, and rental
rates have grown significantly in the past nine months.
The Southern California markets have also begun to improve, albeit at a
slower pace. The Irvine submarket in which Fairchild Corporate Center competes
has improved slightly since this time last year, as rental rates have risen
between 8% and 14%. In San Diego, AMCC's submarket occupancy has increased
from 85% to 91% over the past 12 months, while Tierrasanta's has improved from
80% to 86%. Moreover, rental rates have risen noticeably in the Tierrasanta
area. We have several prospects for the vacant space at this property as well
as the probable renewal of a tenant representing 11% of the total square
footage.
Outlook
Although the overall Fund occupancy has declined by one percentage point for
each of the last two quarters, we do not believe this is a trend. We have a
number of prospective tenants identified to fill several vacancies, and new
leases are, as a general rule, being signed at higher rates than we have
experienced over the past couple of years. Therefore, we continue to be
optimistic about the future cash flows and occupancy levels for Fund II.
LaSalle Advisors
November 10, 1995
CONDENSED CONSOLIDATED BALANCE SHEETS
Unaudited (In thousands)
September 30, December 31,
1995 1994
____________ ____________
Assets
Investments in Real Estate, at Cost
Land. . . . . . . . . . . . . . . . . . . . $ 17,530 $ 18,469
Buildings and Improvements. . . . . . . . . 53,452 57,162
________ ________
70,982 75,631
Less:
Accumulated Depreciation and
Amortization. . . . . . . . . . . . . . . (20,089) (20,038)
Valuation Allowances. . . . . . . . . . . (5,802) (7,226)
________ ________
45,091 48,367
Cash and Cash Equivalents. . . . . . . . . . . 5,030 4,819
Accounts Receivable
(less allowances of $166 and $327) . . . . . . 138 249
Other Assets . . . . . . . . . . . . . . . . . 373 335
________ ________
$ 50,632 $ 53,770
________ ________
________ ________
Liabilities and Partners' Capital
Security Deposits and Prepaid Rents. . . . . . $ 471 $ 522
Accrued Real Estate Taxes. . . . . . . . . . . 662 432
Accounts Payable and Other
Accrued Expenses . . . . . . . . . . . . . . . 255 279
________ ________
Total Liabilities. . . . . . . . . . . . . . . 1,388 1,233
Partners' Capital. . . . . . . . . . . . . . . 49,244 52,537
________ ________
$ 50,632 $ 53,770
________ ________
________ ________
CONDENSED CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
Unaudited (In thousands)
General Limited
Partner Partners Total
________ ________ ________
Balance, December 31, 1994 . . . . . . . $ (267) $ 52,804 $ 52,537
Net Income . . . . . . . . . . . . . . . 18 1,774 1,792
Cash Distributions . . . . . . . . . . . (25) (5,060) (5,085)
________ ________ ________
Balance, September 30, 1995. . . . . . . $ (274) $ 49,518 $ 49,244
________ ________ ________
________ ________ ________
The accompanying notes are an integral part of the condensed consolidated
financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited (In thousands except per-unit amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
_____ _____ _____ _____
Revenues
Rental Income. . . . . . . . . . $ 1,596 $ 1,722 $ 4,999 $ 5,089
Interest Income. . . . . . . . . 76 43 188 99
_______ _______ _______ _______
1,672 1,765 5,187 5,188
_______ _______ _______ _______
Expenses
Property Operating 294 390 750 1,004
Expenses . . . . . . . . . . .
Real Estate Taxes. . . . . . . . 226 258 681 703
Depreciation and
Amortization . . . . . . . . . . 592 565 1,775 1,714
Net Recovery of
Property Values. . . . . . . . . (168) (188) (405) (574)
Management Fee to
General Partner. . . . . . . . . 74 67 250 202
Partnership Management
Expenses . . . . . . . . . . . . 112 107 344 347
_______ _______ _______ _______
1,130 1,199 3,395 3,396
_______ _______ _______ _______
Net Income . . . . . . . . . . . $ 542 $ 566 $ 1,792 $ 1,792
_______ _______ _______ _______
_______ _______ _______ _______
Activity per Limited Partnership Unit
Net Income . . . . . . . . . . . $ 6.38 $ 6.66 $ 21.10 $ 21.10
_______ _______ _______ _______
_______ _______ _______ _______
Cash Distributions Declared
from Operations . . . . . . . $ 8.75 $ 8.00 $ 26.25 $ 24.00
from Sale Proceeds. . . . . . - - 31.17 -
_______ _______ _______ _______
Total Distributions
Declared . . . . . . . . . . . . $ 8.75 $ 8.00 $ 57.42 $ 24.00
_______ _______ _______ _______
_______ _______ _______ _______
Units Outstanding. . . . . . . . 84,099 84,099 84,099 84,099
_______ _______ _______ _______
_______ _______ _______ _______
The accompanying notes are an integral part of the condensed consolidated
financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited (In thousands)
Nine Months Ended
September 30,
1995 1994
___________ ___________
Cash Flows from Operating Activities
Net Income . . . . . . . . . . . . . . . . . . . $ 1,792 $ 1,792
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities
Depreciation and Amortization . . . . . . . . 1,775 1,714
Net Recovery of Property Values . . . . . . . (405) (574)
Decrease in Accounts Receivable,
Net of Allowances . . . . . . . . . . . . . . 23 33
Increase in Other Assets. . . . . . . . . . . (88) (180)
Change in Security Deposits and
Prepaid Rents . . . . . . . . . . . . . . . . (52) 12
Increase in Accrued
Real Estate Taxes . . . . . . . . . . . . . . 230 50
Decrease in Accounts Payable and
Other Accrued Expenses. . . . . . . . . . . . (24) (32)
________ ________
Net Cash Provided by
Operating Activities . . . . . . . . . . . . . . 3,251 2,815
________ ________
Cash Flows from Investing Activities
Proceeds from Property Disposition . . . . . . . 2,622 -
Investments in Real Estate . . . . . . . . . . . (577) (488)
________ ________
Net Cash Provided by (Used in)
Investing Activities . . . . . . . . . . . . . . 2,045 (488)
________ ________
Cash Flows from Financing Activities
Cash Distributions . . . . . . . . . . . . . . . (5,085) (1,784)
Redemption of Units. . . . . . . . . . . . . . . - (1)
________ ________
Net Cash Used in
Financing Activities . . . . . . . . . . . . . . (5,085) (1,785)
________ ________
Cash and Cash Equivalents
Net Increase during Period . . . . . . . . . . . 211 542
At Beginning of Year . . . . . . . . . . . . . . 4,819 4,212
________ ________
At End of Period . . . . . . . . . . . . . . . . $ 5,030 $ 4,754
________ ________
________ ________
The accompanying notes are an integral part of the condensed consolidated
financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
The unaudited interim condensed consolidated 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 consolidated financial statements should be read in
conjunction with the consolidated financial statements contained in the 1994
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 earns a partnership management fee equal to
9% of net operating proceeds. The General Partner earned a partnership
management fee of $250,000 during the first nine months of 1995. In addition,
the General Partner's share of cash available for distribution from operations
totaled $21,000 for the first nine months of 1995.
In accordance with the partnership agreement, certain operating expenses
are reimbursable to the General Partner. The General Partner's reimbursement
of such expenses totaled $77,000 for communications and administrative
services performed on behalf of the Partnership during the first nine months
of 1995.
An affiliate of the General Partner earned a normal and customary fee of
$14,000 from the money market mutual funds in which the Partnership made its
interim cash investments during the first nine months of 1995.
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 1995 totaled
$113,000.
NOTE 2 - PROPERTY SALE
On June 29, 1995, the Partnership sold Sullyfield Circle and received net
proceeds of $2,622,000. The net book value of this property at the date of
disposition was also $2,622,000, after accumulated depreciation expense and
previously recorded permanent value impairment and property valuation
allowances. Therefore, no gain or loss was recognized on the property sale.
The Partnership recognized a $95,000 valuation charge related to Sullyfield in
the first half of 1995.
NOTE 3 - PROPERTY VALUATIONS
During the first nine months of 1995, the Partnership reduced the previously
established valuation allowances for Business Plaza, Regal Row and South Point
Plaza by $500,000, related to depreciation expense recognized on these
properties.
NOTE 4 - SUBSEQUENT EVENT
The Partnership declared a quarterly cash distribution of $8.75 per unit to
Limited Partners of the Partnership as of the close of business on September
30, 1995, the record date. The distribution totals $743,000 and represents
cash available for distribution from operations for the period July 1, 1995
through September 30, 1995. The Limited Partners will receive $736,000, and
the General Partner will receive $7,000.
