PAGE 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
Commission File Number 0-15575
Exact Name of Registrant as Specified in Its Charter: T. ROWE PRICE
REALTY INCOME FUND II, AMERICA'S SALES-COMMISSION-FREE REAL ESTATE
LIMITED PARTNERSHIP
State or Other Jurisdiction of Incorporation or Organization:
Delaware
I.R.S. Employer Identification No.: 52-1470895
Address and zip code of principal executive offices: 100 East Pratt
Street, Baltimore, Maryland 21202
Registrant's Telephone Number, including area code: 1-800-638-5660
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>
PAGE 2
PART I - FINANCIAL INFORMATION
Item 1.Financial Statements
The financial statements of T. Rowe Price Realty Income Fund
II, America's Sales-Commission-Free Real Estate Limited Partnership
("Partnership") are set forth on pages 2-4 of Exhibit 19 hereto,
which statements are incorporated by reference herein.
Item 2.Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Liquidity and Capital Resources and Results of Operations
The Partnership's liquidity and capital resources and its
results of operations are discussed in the Chairman's letter to
partners and Investment Advisor's Report on pages 5-9 of Exhibit 19
hereto, the Partnership's Quarterly Report to Security-Holders,
which letter and Report are hereby incorporated by reference
herein.
PART II - OTHER INFORMATION
Item 6.Exhibits and Reports on Form 8-K:
(a)Exhibits.
19 - Quarterly Report Furnished to Security-Holders,
including Financial
Statements of the Partnership.
(b)Reports on Form 8-K
Report on Form 8-K dated June 30, 1995, regarding the
sale of the Sullyfield Circle property.<PAGE>
PAGE 3
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.
T. ROWE PRICE REALTY INCOME FUND II,
AMERICA'S SALES-COMMISSION-FREE
REAL ESTATE LIMITED PARTNERSHIP
By: T. Rowe Price Realty Income Fund II
Management, Inc., General Partner
Date: November 13, 1995 By: /s/ Charles E. Vieth
Charles E. Vieth
Vice President
Date: November 13, 1995 By: /s/ Joseph P. Croteau
Joseph P. Croteau
Principal Financial Officer of the
Partnership
Date: November 13, 1995 By: /s/ Gary C. Younker
Gary C. Younker
Chief Accounting Officer of the
Partnership
<PAGE>
PAGE 1
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
PAGE 2
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
PAGE 3
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
PAGE 4
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
________ ________
PAGE 5
$ 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 -
PAGE 6
_______ _______ _______ _______
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
________ ________
________ ________
PAGE 7
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.
