QUARTERLY REPORT
FOR THE PERIOD ENDED
SEPTEMBER 30, 1996
FELLOW PARTNERS:
We are pleased to report that the sale of Fairchild was completed in August
and that proceeds of $27.91 per unit will be distributed to you in November.
This sale is quite an important indication of the improving California
markets, particularly the Irvine area, where the sale produced the greatest
price per square foot for this type of property in recent years.
As we move forward in the process of liquidating the Fund's properties,
our primary focus will shift from the production of income to the strategic
positioning of the properties to maximize potential sales proceeds.
Results of Operations
Rental income held steady in the quarter ended September 30, 1996, relative to
the 1995 period, even though Regal Row, which was sold in mid-February, made
no contribution this year and Fairchild was in the portfolio for two months
versus the full quarter in 1995. The year-to-date revenue comparison, however,
was affected by the absence of rental income from these two properties.
Net income comparisons for the third quarter and nine months were both
influenced by properties sold as well as by those held for sale. For the
nine-month period, the decline in AMCC's carrying value was the primary reason
net income was down. For the third quarter, the gain on the sale of Fairchild,
a higher recovery in property value than was experienced last year, and the
absence of depreciation on AMCC and the properties sold were the major
contributors to the threefold increase in net income.
Excluding the sold and held-for-sale properties, Tierrasanta and
Baseline had the greatest improvement year-to-date in operating income
relative to the comparable 1995 period. It was not enough, however, to offset
the drop in income from operations at Business Plaza. In 1995, this property's
value was adjusted upward by $243,000, so its contribution last year was only
$39,000 if you exclude this change in valuation (see the table on page 1).
While the property's average leased status lagged that of the first nine
months of 1995, there was a significant improvement in the third quarter of
1996.
The opposite is true for Tierrasanta where, as we reported last quarter,
a tenant who occupied 38% of the total space did not renew upon expiration in
August. There is interest in the property and the market is tightening, but we
want to caution that the costs associated with re-leasing, including making
the buildings more accessible to the physically challenged, may be high. At
Baseline, 100% of the leases will expire between now and the end of 1997, and
our strategy here will be to find replacement tenants with better credit than
those who do not renew while focusing on longer lease terms.
Even though cash from operating activities has declined this year, the
inclusion of sale proceeds resulted in a greater increase in the cash position
than in the 1995 period. As discussed below, the Fairchild proceeds are being
distributed to you this month.
Cash Distributions
Cash from operations again allowed us to make the planned $6.50 per unit
distribution for the third quarter. After the year ends, we will evaluate this
amount and, if appropriate, make a change in the fourth quarter distribution.
An additional $27.91 per unit is being paid to you for the Fund's 24%
share of the Fairchild sale proceeds. As you may remember, Realty Income Funds
III and IV own the remaining 76% of that property.
Disposition Update
We are actively negotiating a purchase and sales agreement for AMCC and
currently hope to have a signed contract in the near future. Meanwhile, the
building remains 100% leased to a single tenant.
You will see in the table on page 1 that two properties have been added
to the held-for-sale category - Bonnie Lane and Glenn Avenue. These industrial
buildings are being offered as part of a package which includes three similar
holdings in Realty Income Fund III.
As we discussed in the June report, capital flows into real estate are
rising, particularly from large institutional investors. The return of these
buyers has the potential benefit of enabling your Fund to sell more than one
of its holdings, in this case in conjunction with another T. Rowe Price realty
income fund, at one time to one buyer. Many real estate investors may not be
interested in buying an industrial building for, say, $3 million but might
find a larger portfolio of five such properties located in different regions
attractive. One of the advantages of such "portfolio" sales is that it
broadens the base of potential buyers. In addition, the brokerage fees and
other costs associated with closings covering multiple properties may be less.
Another name will be in the held-for-sale category at the end of
December. In October, the Fund's Investment Review Committee approved
LaSalle's recommendation to put South Point Plaza up for sale, and an
agreement has been signed with a listing broker.
Outlook
Over the past 12 months, occupancy and rental rates in most of the regions
where your properties are located stabilized or improved. In LaSalle's
opinion, this trend should continue into next year. During the current year,
we will continue to poise the portfolio to take advantage of the more
favorable operating environment. With four of your 10 portfolio holdings
currently for sale, we look forward to updating you on the status of our
marketing efforts in the annual report. In addition, we expect to begin
actively marketing several other properties in the coming year.
Sincerely,
James S. Riepe
Chairman
November 8, 1996
Real Estate Investments (Dollars in thousands)
___________________________________________________________________________
Leased Average Leased Contribution to
Status Status Net Income
_______ ________________ __________________
Gross Nine Months Ended Nine Months Ended
Property Leasable September September 30, September 30,
Name Area(Sq. Ft.) 30, 1996 1995 1996 1995 1996
________ _________ _________ ________ ________ ________ _______
Atlantic 187,844 92% 99% 92% $ 196 $ 168
Coronado 95,732 100 100 100 147 155
Oakbrook
Corners 123,948 83 70 71 (63) (38)
Baseline 100,204 88 88 91 67 101
Business
Plaza 66,342 89 86 76 282 69
South Point
Plaza 50,497 88 66 69 69 8
Tierra-
santa 104,236 62 76 96 53 109
_________ _____ _____ _____ ______ ______
728,803 86 86 87 751 572
Held for Sale
AMCC 99,950 100 100 100 688 (642)
Bonnie
Lane 119,590 100 77 95 143 204
Glenn
Avenue 82,000 100 100 100 125 135
____________ _____ _____ _____ ________ _______
1,030,343 90 87 90 1,707 269
Properties
Sold - - - - 255 845
Fund Expenses
Less Interest
Income - - - - (170) (197)
__________ ____ ____ ____ _______ ______
Total 1,030,343 90% 87% 90% $1,792 $ 917
CONDENSED CONSOLIDATED BALANCE SHEETS
Unaudited
(In thousands)
September 30, December 31,
1996 1995
___________ ____________
Assets
Real Estate Property Investments
Land. . . . . . . . . . . . . . . . . . $ 9,797 $ 14,544
Buildings and Improvements. . . . . . . 30,499 45,170
________ ________
40,296 59,714
Less: Accumulated Depreciation
and Amortization . . . . . . . . . . (14,795) (18,049)
________ ________
25,501 41,665
Held for Sale . . . . . . . . . . . . . 12,707 3,500
________ ________
38,208 45,165
Cash and Cash Equivalents. . . . . . . . 5,759 4,782
Accounts Receivable
(less allowances of $15 and $165). . 243 172
Other Assets . . . . . . . . . . . . . . 404 410
________ ________
$ 44,614 $ 50,529
________ ________
________ ________
Liabilities and Partners' Capital
Security Deposits and Prepaid Rents. . . $ 402 $ 493
Accrued Real Estate Taxes. . . . . . . . 460 502
Accounts Payable and Other
Accrued Expenses . . . . . . . . . . 231 433
________ ________
Total Liabilities. . . . . . . . . . . . 1,093 1,428
Partners' Capital. . . . . . . . . . . . 43,521 49,101
________ ________
$ 44,614 $ 50,529
________ ________
________ ________
See the accompanying notes to 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,
1996 1995 1996 1995
_______ _______ _______ _______
Revenues
Rental Income. . . . . . . . . $1,593 $1,596 $4,613 $4,999
Interest Income. . . . . . . . 43 76 182 188
________ ________ ________ ________
1,636 1,672 4,795 5,187
________ ________ ________ ________
Expenses
Property Operating
Expenses. . . . . . . . . . . 273 294 834 750
Real Estate Taxes. . . . . . . 152 226 565 681
Depreciation and
Amortization. . . . . . . . . 411 592 1,365 1,775
Decline (Recovery) of
Property Values . . . . . . . (217) (168) 1,292 (405)
Management Fee to
General Partner . . . . . . . 55 74 164 250
Partnership Management
Expenses. . . . . . . . . . . 115 112 357 344
________ ________ ________ ________
789 1,130 4,577 3,395
________ ________ ________ ________
Income from Operations before
Gain on Real Estate Sold. . . 847 542 218 1,792
Gain on Real Estate Sold . . . 699 - 699 -
________ ________ ________ ________
Net Income . . . . . . . . . . $1,546 $ 542 $ 917 $1,792
________ ________ ________ ________
________ ________ ________ ________
Activity per Limited
Partnership Unit
Net Income . . . . . . . . . . $18.20 $ 6.38 $10.79 $21.10
________ ________ ________ ________
________ ________ ________ ________
Cash Distributions Declared
from Operations. . . . . . . $ 6.50 $ 8.75 $19.50 $26.25
from Sale Proceeds . . . . . 27.91 - 70.86 31.17
________ ________ ________ ________
Total Distributions
Declared. . . . . . . . . . . $34.41 $ 8.75 $90.36 $57.42
________ ________ ________ ________
________ ________ ________ ________
Units Outstanding. . . . . . . 84,099 84,099 84,099 84,099
________ ________ ________ ________
________ ________ ________ ________
See the accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
Unaudited
(In thousands)
General Limited
Partner Partners Total
________ ________ ________
Balance,
December 31, 1995 . . . . $ (275) $49,376 $49,101
Net Income . . . . . . . . 9 908 917
Cash Distributions . . . . (21) (6,476) (6,497)
_______ _______ _______
Balance,
September 30, 1996. . . . $ (287) $43,808 $43,521
_______ _______ _______
_______ _______ _______
See the accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In thousands)
Nine Months Ended
September 30,
1996 1995
___________ ___________
Cash Flows from Operating Activities
Net Income . . . . . . . . . . . . . . . $ 917 $ 1,792
Adjustments to Reconcile Net Income
to Net Cash Provided by Operating Activities
Depreciation and Amortization . . . . . 1,365 1,775
Decline (Recovery) of
Property Values . . . . . . . . . . . 1,292 (405)
Gain on Real Estate Sold . . . . . . . (699) -
Other Changes in Assets and
Liabilities . . . . . . . . . . . . . (409) 89
________ ________
Net Cash Provided by
Operating Activities. . . . . . . . . . 2,466 3,251
________ ________
Cash Flows from Investing Activities
Proceeds from Property Dispositions. . . 5,959 2,622
Investments in Real Estate . . . . . . . (951) (577)
________ ________
Net Cash Provided by
Investing Activities. . . . . . . . . . 5,008 2,045
________ ________
Cash Flows Used in Financing Activities
Cash Distributions . . . . . . . . . . . (6,497) (5,085)
________ ________
Cash and Cash Equivalents
Net Increase during Period . . . . . . . 977 211
At Beginning of Year . . . . . . . . . . 4,782 4,819
________ ________
At End of Period . . . . . . . . . . . . $ 5,759 $ 5,030
________ ________
________ ________
See the accompanying notes to 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 financial statements contained in the 1995 Annual Report
to Partners.
NOTE 1 - TRANSACTIONS WITH RELATED PARTIES AND OTHER
As compensation for services rendered in managing the affairs of the
Partnership, the General Partner earns a partnership management fee equal to
9% of net operating proceeds. The General Partner earned a partnership
management fee of $164,000 during the first nine months of 1996. In addition,
the General Partner's share of cash available for distribution from operations
totaled $16,000 for the first nine months of 1996.
In accordance with the partnership agreement, certain operating expenses
are reimbursable to the General Partner. The General Partner's reimbursement
of such expenses totaled $87,000 for communications and administrative
services performed on behalf of the Partnership during the first nine months
of 1996.
An affiliate of the General Partner earned a normal and customary fee of
$9,000 from the money market mutual funds in which the Partnership made its
interim cash investments during the first nine months of 1996.
LaSalle Advisors Limited Partnership ("LaSalle") is the Partnership's
advisor and is compensated for its advisory services directly by the General
Partner. LaSalle is reimbursed by the Partnership for certain operating
expenses pursuant to its contract with the Partnership to provide real estate
advisory, accounting and other related services to the Partnership. LaSalle's
reimbursement for such expenses during the first nine months of 1996 totaled
$113,000.
An affiliate of LaSalle earned $87,000 in the first nine months of 1996
as property manager for several of the Partnership's properties.
NOTE 2 - PROPERTY DISPOSITIONS
On February 14, 1996, the Partnership sold Regal Row and received net proceeds
of $3,612,000. The net book value of the property at that date was also
$3,612,000, after accumulated depreciation and previously recorded property
valuation adjustments. Therefore, no gain or loss is reflected in the
accompanying financial statements. The Partnership recognized a $112,000
valuation recovery in the first quarter of 1996 prior to the disposition of
Regal Row.
On August 28, 1996, Fairchild Corporate Center, an office property in
which the Partnership had a 24% interest was sold. The Partnership has
subsequently received net proceeds of $2,347,000. The net book value of the
Partnership's interest at the date of sale was $1,648,000, after deduction of
accumulated depreciation and previously recorded permanent impairments.
Accordingly, the Partnership recognized a $699,000 gain on the sale of this
property in the third quarter.
Income from operations for these properties, before the gain on real
estate sold, was $146,000 and $279,000 for the nine months ended September 30,
1996 and 1995, respectively.
NOTE 3 - PROPERTIES HELD FOR SALE
The Partnership began actively marketing its two midwest industrial
properties, Bonnie Lane and Glenn Avenue, and has classified them as held for
sale in the accompanying September 30, 1996 balance sheet.
The Partnership began actively marketing AMCC in June 1996 and
classifies this property as held for sale in the accompanying September 30,
1996 balance sheet. The Partnership previously recognized a $1.6 million
decline of property value in the second quarter of 1996. The Partnership
recognized a $217,000 valuation recovery in the third quarter of 1996 to
reflect the estimated net sales proceeds of AMCC.
Results of operations for these properties, after including the net
decline in value of AMCC, resulted in a net loss of $303,000 for the nine
months ended September 30, 1996 and net income of $954,000 for the nine months
ended September 30, 1995.
NOTE 4 - SUBSEQUENT EVENT
The Partnership declared a quarterly cash distribution of $34.41 per unit to
Limited Partners of the Partnership as of the close of business on September
30, 1996. The distribution totals $2,899,000 and represents $6.50 per unit
from operations and $27.91 per unit from Fairchild Corporate Center sale
proceeds. The Limited Partners will receive $2,894,000, and the General
Partner will receive $5,000.
