T. ROWE PRICE
REALTY INCOME
FUND II
AMERICA'S SALES-COMMISSION-FREE
REAL ESTATE LIMITED PARTNERSHIP
QUARTERLY REPORT
FOR THE PERIOD ENDED
March 31, 1997
For information on your
Realty Income Fund account, call:
1-800-962-8300 toll free
410-625-6500 Baltimore area
For information on your
mutual fund account, call:
1-800-225-5132 toll free
410-625-6500 Baltimore area
T. Rowe Price Real Estate Group
100 East Pratt Street
Baltimore, Maryland 21202
Invest With Confidence(registered trademark)
T. Rowe Price
FELLOW PARTNERS:
As you know from our letter dated April 15, 1997, we signed
purchase and sale agreements on April 11 with Glenborough Realty
Trust Incorporated for the sale of all Fund properties at a
contract sales price of $30.4 million before selling expenses.
Glenborough is a real estate investment trust whose shares are
publicly traded on the New York Stock Exchange. We also closed
on the sale of AMCC in January and on South Point Plaza in
April, after the end of the reporting period. The disposition of
two other properties, Bonnie Lane and Glenn Avenue, discussed in
our last report, did not go through as originally planned.
However, they are included in the pending sale to Glenborough,
which will liquidate the Fund's real estate portfolio if
consummated.
Real Estate Investments (Dollars in thousands)
__________________________________________________
Average Contri-
Leased bution to
Leased Status Status Net Income
_________ _______ _______
Three Three
Gross Months Months
Leasable Ended Ended
Property Area March 31, March 31, March 31,
Name (Sq. Ft.) 1997 1996 1997 1996 1997
________ ________ ____ ____ ____ ____ ____
Atlantic 187,844 100% 92% 100% $ 63 $ 56
Coronado 95,732 100 100 100 52 51
Oakbrook
Corners 123,948 94 61 94 (34) 76
Baseline 100,204 96 91 93 37 73
Business
Plaza 66,342 88 72 90 17 33
Tierrasanta 104,236 62 100 62 36 19
________ ____ ____ ____ __________
678,306 91 87 91 171 308
Held for Sale
South Point
Plaza 49,163 90 61 91 1 (28)
Bonnie Lane 119,590 100 89 100 49 93
Glenn Avenue 82,000 100 100 100 34 99
________ ____ ____ ____ __________
929,059 93 87 93 255 472
Properties Sold - - - - 396 199
Fund Expenses
Less Interest
Income - - - - (42) (99)
________ ____ ____ ____ __________
Total 929,059 93% 87% 93% $ 609 $ 572
These developments are in keeping with our previously announced intention
to shift our emphasis from the production of income to the strategic
positioning of Fund properties to maximize potential sales proceeds. In order
for the Fund to complete the sale of its properties to Glenborough, a
majority in interest of limited partners must consent to the transactions
through a consent solicitation vote, which we expect to take place in late
June or sometime in July. As we cautioned in our letter of April 15, this
sale is subject to further due diligence by Glenborough, which could result
in changes to the properties in the transaction, the sales proceeds to be
received, or the cancellation of the sale. It is possible that the Fund may
not be liquidated this year if the sale falls through.
It is worth mentioning again some of our reasons for accepting
Glenborough's offer:
o The offer represents more than 100% of the property valuations used in
our last estimated unit value and is substantially more per unit on an
adjusted basis than two recent tender offers from unaffiliated third
parties, which ranged from approximately 40% to 75% of the estimated
valuation.
o Selling the properties in bulk will reduce transaction and operating
expenses and allow for a more accelerated return of principal to
investors than the original disposition plan, which contemplated a
gradual return of capital over the next 13 to 21 months.
o There is no financing contingency, and Glenborough's financial resources
appear adequate to consummate the transaction.
Cash Distributions
The Fund made a distribution representing 100% of the Fund's proceeds from
the sale of AMCC to limited partners of record on March 31, 1997. Proceeds
from the sale of South Point Plaza were distributed separately in May to
limited partners as of April 30, 1997. Deducting the AMCC distribution of
$93.50 and the South Point Plaza distribution of $17.28 from the December
1996 adjusted estimated unit value of $471 results in $360. Pending the
completion of the sale to Glenborough, the Fund has suspended cash
distributions from operations. Assuming all properties are sold during the
next few months, the Fund plans to accrue for anticipated closing costs and
then make a liquidating cash distribution. Based on the negotiated sale price
and other information currently available, we expect total future
distributions to exceed the figure mentioned above.
Results of Operations
Net income of $572,000 for the first three months of 1997 was $37,000 less
than for the comparable 1996 period. The absence of operating income from
Regal Row after its sale last year, and from AMCC after its sale in January,
resulted in a decrease in income from operations of $197,000. However, this
was substantially offset by increased income from operations at Oakbrook
Corners, Bonnie Lane, and Glenn Avenue. The increased average leased status
along with lower depreciation expense at Oakbrook Corners and Bonnie Lane
resulted in the higher income at these properties, while higher rental rates
and tenant reimbursements fueled the gain at Glenn Avenue. Fund expenses rose
during the past three months, primarily as a result of necessary costs
incurred in responding to the recent tender offers for partnership units.
At the property level, we signed new, renewal, and expansion leases for
about 3% of the portfolio's square footage. However, leases representing
approximately 3% of the portfolio expired. The net result was only a minimal
change in the leased status of Fund properties since December, but there was
an improvement of six percentage points in average leased status over the
comparable 1996 period because of improved leasing activity.
The increase in the Fund's cash position compared with the same period
in 1996 resulted from proceeds received from the disposition of AMCC.
Outlook
Our reasons for wanting to liquidate the Fund's portfolio while the real
estate market is strengthening are unchanged. As mentioned previously, our
primary goal is to take advantage of rising property values as the Fund nears
the end of its planned lifespan. Real estate markets have been improving
during the past few years, and we have used this opportunity to capture
higher prices for our investors. Rising real estate values could eventually
lead to an increased supply of new properties, resulting in softer prices
some time later. This is a normal pattern as the real estate cycle runs its
course.
No one can forecast precisely when prices will reach their peak, and it
is possible that by selling Fund properties now we might miss further
advances later on. However, demand from tenants and investors is currently
very strong, causing the supply of properties to grow in many markets. We
believe it is prudent to sell into strength while prices are still advancing.
It is critical that you promptly read the consent solicitation materials
and return the card as soon as you receive them, so that we can minimize Fund
expenses and implement the orderly liquidation of your investment.
Thank you in advance for your cooperation in this matter.
Sincerely,
James S. Riepe
Chairman
May 7, 1997
CONDENSED CONSOLIDATED BALANCE SHEETS
Unaudited
(In thousands)
March 31, December 31,
1997 1996
___________ ___________
Assets
Real Estate Property
Investments
Land . . . . . . . . . . $ 8,443 $ 8,443
Buildings and
Improvements . . . . . 19,537 19,352
________ ________
27,980 27,795
Less: Accumulated
Depreciation and
Amortization . . . . . . (6,858) (6,625)
________ ________
21,122 21,170
Properties Held
for Sale . . . . . . . 7,039 14,860
________ ________
28,161 36,030
Cash and Cash
Equivalents. . . . . . . 10,561 3,667
Accounts Receivable
(less allowances of
$28 and $22) . . . . . . 196 162
Other Assets. . . . . . . . 288 333
________ ________
$ 39,206 $ 40,192
________ ________
________ ________
Liabilities and Partners' Capital
Security Deposits and
Prepaid Rents. . . . . . $ 397 $ 505
Accrued Real Estate
Taxes. . . . . . . . . . 392 394
Accounts Payable and
Other Accrued
Expenses . . . . . . . . 219 307
________ ________
Total Liabilities . . . . . 1,008 1,206
Partners' Capital . . . . . 38,198 38,986
________ ________
$ 39,206 $ 40,192
________ ________
________ ________
See accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
(In thousands except per-unit amounts)
Three Months Ended
March 31,
1997 1996
____ ____
Revenues
Rental
Income. . . . . . . . . . . $ 1,318 $ 1,545
Interest
Income. . . . . . . . . . . 100 78
________ ________
1,418 1,623
________ ________
Expenses
Property Operating
Expenses. . . . . . . . . . 241 267
Real Estate Taxes . . . . . . . 175 218
Depreciation and
Amortization. . . . . . . . 242 470
Recovery of Property
Values, Net . . . . . . . . (30) (112)
Management Fee to
General Partner . . . . . . 57 55
Partnership Management
Expenses. . . . . . . . . . 161 116
________ ________
846 1,014
________ ________
Net Income. . . . . . . . . . . $ 572 $ 609
________ ________
________ ________
Activity per Limited
Partnership Unit
Net Income. . . . . . . . . . . $ 6.73 $ 7.17
________ ________
________ ________
Cash Distributions Declared
from Sale Proceeds. . . . . $ 93.50 $ 42.95
from Operations . . . . . . - 6.50
________ ________
Total Distributions Declared. . $ 93.50 $ 49.45
________ ________
________ ________
Units Outstanding . . . . . . . 84,099 84,099
________ ________
________ ________
See accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
Unaudited
(In thousands)
General Limited
Partner Partners Total
_______ _______ ______
Balance,
December 31,
1996 . . . . . . . . $ (308)$ 39,294 $ 38,986
Net Income. . . . . . . 6 566 572
Cash Distri-
butions. . . . . . . (14) (1,346) (1,360)
_______ _______ _______
Balance, March 31,
1997 . . . . . . . . $ (316)$ 38,514 $ 38,198
_______ _______ _______
_______ _______ _______
See accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In thousands)
Three Months Ended
March 31,
1997 1996
________ ________
Cash Flows from Operating
Activities
Net Income. . . . . . . . . . . . $ 572 $ 609
Adjustments to Reconcile
Net Income to Net Cash
Provided by Operating Activities
Depreciation and
Amortization . . . . . . . . 242 470
Recovery of Property
Values, Net. . . . . . . . . (30) (112)
Increase in Accounts
Receivable, Net of
Allowances . . . . . . . . . (34) (9)
Decrease in Other Assets . . . 45 41
Decrease in Security
Deposits and Prepaid
Rent . . . . . . . . . . . . (108) (79)
Decrease in Accrued Real
Estate Taxes . . . . . . . . (2) (117)
Decrease in Accounts
Payable and Other
Accrued Expenses . . . . . . (88) (114)
________ ________
Net Cash Provided by
Operating Activities . . . . . 597 689
________ ________
Cash Flows from Investing
Activities
Proceeds from Property
Disposition. . . . . . . . . . 7,863 3,612
Investments in Real Estate. . . . (206) (178)
________ ________
Net Cash Provided by
Investing Activities . . . . . 7,657 3,434
________ ________
Cash Flows Used in
Financing Activities
Cash Distributions. . . . . . . . (1,360) (1,780)
________ ________
Cash and Cash Equivalents
Net Increase during Period. . . . 6,894 2,343
At Beginning of Year. . . . . . . 3,667 4,782
________ ________
At End of Period. . . . . . . . . $ 10,561 $ 7,125
________ ________
________ ________
See 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 consolidated financial statements contained in the
1996 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 $57,000 during the first three months of 1997.
In accordance with the partnership agreement, certain operating
expenses are reimbursable to the General Partner. The General Partner's
reimbursement of such expenses totaled $37,000 for communications and
administrative services performed on behalf of the Partnership during the
first three months of 1997.
An affiliate of the General Partner earned a normal and customary fee
of $5,000 from the money market mutual funds in which the Partnership made
its interim cash investments during the first three months of 1997.
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
three months of 1997 totaled $38,000.
An affiliate of LaSalle earned $31,000 in the first three months of
1997 for property management fees and leasing commissions on tenant
renewals and extensions for several of the Partnership's properties.
NOTE 2 - REAL ESTATE PROPERTY INVESTMENTS
On January 23, 1997, the AMCC property was sold and the Partnership
received net proceeds of $7,863,000. The net book value of the
Partnership's interest in this property at the date of disposition was
also $7,863,000, after accumulated depreciation expense and previously
recorded property valuation allowances. Therefore, no gain or loss was
recognized on the property sale. Results of operations for this property
during the first quarter of 1997 include a $95,000 recovery of property
value prior to its sale.
In April 1997, South Point Plaza, a shopping center in which the
Partnership had a 50% interest, was sold and the Partnership received net
proceeds of $ 1,452,930. The net book value of the Partnership's interest
in this property at the date of disposition was also $1,452,930 after
accumulated depreciation expense and previously recorded property
valuation allowances. Therefore, no gain or loss was recognized on the
property sale. Results of operations for this property during the first
quarter of 1997 include a $65,000 decline of property value.
The Partnership began actively marketing its two midwest industrial
properties, Bonnie Lane and Glenn Avenue in 1996, and classifies them as
held for sale in the accompanying balance sheets.
On April 11, 1997, the Partnership and its consolidated ventures
entered into contracts with a buyer for the sale of all property
investments, including the two midwest industrial properties. The total
sales price is $30,441,000 before selling expenses. The transactions are
subject to further due diligence by the buyer and the approval of the
Limited Partners which could result in changes to or the cancellation of
the contracts. If the transactions are closed, the Partnership will have
sold all of its real estate property investments and will begin
liquidation.
NOTE 3 - SUBSEQUENT DISTRIBUTIONS
The Partnership declared a cash distribution of $93.50 per unit to the
Limited Partners of the Partnership as of the close of business on March
31, 1997. The distribution of $7,863,000 to the Limited Partners is 100%
of the Partnership's share of the AMCC sales proceeds.
