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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 0-16542
Exact Name of Registrant as Specified in Its Charter: T. ROWE PRICE REALTY
INCOME FUND III, AMERICA'S SALES-COMMISSION-FREE REAL ESTATE LIMITED
PARTNERSHIP
State or other Jurisdiction of Incorporation or Organization: Delaware
I.R.S. Employer Identification No.: 52-1512713
Address and Zip Code of Principal Executive Offices: 100 E. 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
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The financial statements of T. Rowe Price Realty Income Fund III,
America's Sales-Commission-Free Real Estate Limited Partnership
("Partnership") are set forth on pages 5-9 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 2-4 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.
All other items are omitted because they are not applicable or the answers are
none.
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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 III, AMERICA'S SALES-COMMISSION-FREE
REAL ESTATE LIMITED PARTNERSHIP
By: T. Rowe Price Realty Income Fund III 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
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QUARTERLY REPORT
FOR THE PERIOD ENDED
SEPTEMBER 30, 1995
FELLOW PARTNERS:
Revenues continued to decline at a greater rate than expenses for the nine
months ended September 30, and net income from operations was down 23% from
last year's comparable level. Revenues were also lower for the third quarter
and expenses were up, resulting in a 57% decline in net income from
operations. A lower average leased status at several properties had a negative
effect on the rental income comparison, which declined by $114,000 in this
year's quarter and $336,000 year to date. The properties involved were
Fairchild, Winnetka, Clark Avenue, and Riverview. The first three properties
also contributed to the poor third quarter rental income comparison. The lack
of revenues from Beinoris, one of three Wood Dale buildings which was sold in
the third quarter last year, was offset by the absence of expenses related to
the property. As a result, the sale has not had an impact on this year's
operating results. The gain on the sale had a positive effect on the Fund's
bottom line performance in 1994.
Because the borrower defaulted on the River Run participating mortgage
loan in June, we began foreclosure proceedings on the property and stopped
accruing interest income on the loan in the third quarter. Loss of $215,000 in
loan interest further contributed to the significant decline in overall
revenues for both the quarter and nine months.
Assuming ownership of River Run involved the writedown of the carrying
value of the loan to the estimated fair value of the shopping center plus
out-of-pocket costs associated with the foreclosure. These items are reflected
in the $63,000 loan loss provision in the income statement on page 5. As of
October 10, the Fund became the owner of River Run, and its rental revenues
and expenses will be reflected in the portfolio's operating results.
Management fees were down sharply from 1994 because of less cash
available for distribution, and the decline nearly offset the effect of the
loan loss provision and bad debt expense associated with the River Run loan
for the nine months ended September 30, 1995. In the third quarter, however,
the combination of the loan loss provision and a $38,000 bad debt charge
related to a prior tenant at Riverview caused overall expenses for the quarter
ended September 30 to rise by more than the management fee savings. For the
nine-month comparison, collections from prior tenants at Riverview and
Winnetka totaled $119,000, but increased reserves at Westbrook and Tierrasanta
offset almost half of the collections, so overall bad debt excluding River Run
only decreased by $62,000.
Even though the quarterly distributions decreased substantially from
last year, cash increased less in 1995 because there were no proceeds from
property dispositions. In addition, greater expenditures for improvements were
also made this year-principally at Fairchild and Westbrook in order to make
them more attractive locations for tenants and, over the longer term, to
potential buyers.
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
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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 four office properties in the Fund- Scripps Terrace, Tierrasanta,
Clark Avenue, and Fairchild Corporate Center-are all in suburban markets,
which are recovering, as a general rule, more quickly than central business
districts. This group represents 31% of the total square footage in the
portfolio and 34% of revenues for the quarter ended September 30, 1995. Only
one of the four, Fairchild Corporate Center, is a multi-story building with
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
With the signing of six new and two expansion leases, the Fund's overall
occupancy increased over the prior quarter's level. In total, occupancy
improved at three properties while the status at another four remained the
same. Moreover, there are now two properties which are 100% leased.
The most notable improvement in occupancy occurred at Fairchild
Corporate Center, where two new tenants signed leases representing 13% of the
property. These gains were partially offset, however, 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 will 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.
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Real Estate Investments
________________________________________________________________
Gross % Leased
Leasable _________________
Area Prior Current
Property (Sq. Ft.) Quarter Quarter
________ _______ ________ ________
Equity Investments:
Scripps Terrace 56,800 92% 82%
Winnetka 188,300 94 100
South Point 48,400 69 67
Tierrasanta 104,200 75 75
Wood Dale 89,700 100 100
Clark Avenue 40,000 72 72
Riverview 113,700 96 96
Westbrook Commons 121,600 97 99
Fairchild Corporate Center 104,800 73 80
_______ _____ _____
Subtotal 867,500 88% 90%
Participating Mortgage Loan:
River Run 92,800 95% 90%
_______ _____ _____
Fund Total 960,300 88% 90%
We also experienced sizable gains during the quarter at Winnetka, where
we signed one new lease representing 6% of the property and renewed another
tenant who doubled its space from 7% of the total square footage to 14%.
The largest declines in leased status occurred at Scripps Terrace and
River Run. At the former property, one tenant vacated as expected while at the
latter we lost two tenants due to financial problems. This River Run loss was
only partially offset by the signing of two new and one renewal lease.
Other Issues
As mentioned in the Chairman's Letter, on October 10, the Fund officially took
possession of River Run after bidding in a public auction. As the owner, we
now have the ability to operate and lease the property according to the Fund's
objectives. We anticipate that some repairs and capital will be required to
position this retail center so that it will be able to make a more significant
contribution in the future. As a result of our repositioning efforts,
occupancy may decline in the near term as we focus on improving both tenant
credit and mix.
Office Highlights
The Philadelphia submarket in which Clark Avenue competes is somewhat
stagnant. Occupancy has only improved by one percentage point-from 83% to
84%-in the past 12 months, while rental rates have remained flat.
On the other hand, the California markets in which your properties
compete have begun to improve. 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 the San Diego area, occupancy
in the Scripps Terrace submarket has climbed from 82% to 89% in the past 12
months, while Tierrasanta's has improved from 80% to 86%. Moreover, rental
rates have risen substantially 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
The Fund's occupancy has returned to the year-end 1994 level, and we have a
number of prospective tenants for vacancies. In addition, 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
longer-term cash flows and occupancy levels for Fund III.
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As the leased status improves, capital expenditures for tenant
improvements will increase. While this will affect cash flow over the near
term, it should result in improved performance in the future.
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 . . . . . . . . . . . . . . . . $11,068 $11,068
Buildings and Improvements . . . . . 27,861 27,424
________ ________
38,929 38,492
Less:
Accumulated Depreciation
and Amortization . . . . . . . . . (7,662) (7,037)
Valuation Allowance. . . . . . . . (1,605) (1,685)
________ ________
29,662 29,770
Participating Mortgage Loan
(less allowance of $1,736 in 1994) . . 7,700 7,840
Cash and Cash Equivalents. . . . . . . 3,864 3,663
Accounts Receivable
(less allowances of $161 and $238) . . 355 434
Other Assets . . . . . . . . . . . . . 218 178
________ ________
$41,799 $41,885
________ ________
________ ________
Liabilities and Partners' Capital
Security Deposits and Prepaid Rents. . $ 368 $ 385
Accrued Real Estate Taxes. . . . . . . 612 441
Accounts Payable and
Other Accrued Expenses . . . . . . . . 211 238
________ ________
Total Liabilities. . . . . . . . . . . 1,191 1,064
Partners' Capital. . . . . . . . . . . 40,608 40,821
________ ________
$41,799 $41,885
________ ________
________ ________
CONDENSED CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
Unaudited (In thousands)
General Limited
Partner PartnersTotal
________ ______________
Balance, December 31, 1994 . . . . . $ (186)$41,007 $40,821
Net Income . . . . . . . . . . . . . 14 1,398 1,412
Redemptions of Units . . . . . . . . - (1) (1)
Cash Distributions . . . . . . . . . (16)(1,608) (1,624)
________________________
Balance, September 30, 1995. . . . . $ (188)$40,796 $40,608
________________________
________________________
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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 EndedNine Months Ended
September 30, September 30,
1995 1994 1995 1994
_______ _______ _______ _______
Revenues
Rental Income. . . . . . . . $1,285 $1,399 $3,764 $4,100
Interest Income from Participating
Mortgage Loan. . . . . . . . - 207 429 621
Other Interest Income. . . . 42 38 121 91
_______ _______ _______ _______
1,327 1,644 4,314 4,812
_______ _______ _______ _______
Expenses
Property Operating Expenses. 339 276 908 927
Real Estate Taxes. . . . . . 234 276 693 701
Depreciation and
Amortization . . . . . . . . 311 304 906 892
Recovery of Property Values. (25) (28) (80) (91)
Provision for Loan Loss. . . 63 - 63 -
Management Fee to
General Partner. . . . . . . 40 90 120 262
Partnership Management
Expenses . . . . . . . . . . 93 92 292 280
_______ _______ _______ _______
1,055 1,010 2,902 2,971
_______ _______ _______ _______
Net Income from Operations before
Real Estate Sold . . . . . . 272 634 1,412 1,841
Gain on Real Estate Sold . . - 80 - 80
_______ _______ _______ _______
Net Income . . . . . . . . . $ 272 $ 714 $1,412 $1,921
_______ _______ _______ _______
_______ _______ _______ _______
Activity per Limited Partnership Unit
Net Income . . . . . . . . . $1.06 $2.79 $5.51 $7.50
_______ _______ _______ _______
_______ _______ _______ _______
Cash Distributions Declared
from Operations. . . . . . $1.58 $3.55 $4.74 $10.35
from Sale Proceeds . . . . - 3.92 - 3.92
_______ _______ _______ _______
Total Distributions Declared $1.58 $7.47 $4.74 $14.27
_______ _______ _______ _______
_______ _______ _______ _______
Units Outstanding. . . . . .253,599 253,605 253,599 253,605
_______ _______ _______ _______
_______ _______ _______ _______
The accompanying notes are an integral part of the condensed consolidated
financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited (In thousands)
<PAGE>
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Nine Months Ended
September 30,
1995 1994
______________________
Cash Flows from Operating Activities
Net Income . . . . . . . . . . . . . . . $ 1,412 $ 1,921
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Depreciation and Amortization . . . . . 906 892
Recovery of Property Values . . . . . . (80) (91)
Changes in Loan Loss Provision. . . . . 140 -
Gain on Real Estate Sold. . . . . . . . - (80)
Change in Accounts Receivable,
Net of Allowances . . . . . . . . . . . 79 (59)
Increase in Other Assets. . . . . . . . (40) (72)
Change in Security Deposits and
Prepaid Rents . . . . . . . . . . . . . (17) 3
Increase in Accrued Real Estate Taxes . 171 34
Decrease in Accounts Payable and
Other Accrued Expenses. . . . . . . . . (27) (32)
________ ________
Net Cash Provided by Operating Activities 2,544 2,516
________ ________
Cash Flows from Investing Activities
Proceeds from Property Disposition . . . - 994
Investments in Real Estate . . . . . . . (718) (531)
________ ________
Net Cash Provided by (Used in)
Investing Activities . . . . . . . . . . (718) 463
________ ________
Cash Flows Used in Financing Activities
Cash Distributions . . . . . . . . . . . (1,624) (2,531)
Redemptions of Units . . . . . . . . . . (1) (1)
________ ________
Net Cash Used in Financing Activities. . (1,625) (2,532)
________ ________
Cash and Cash Equivalents
Net Increase During Period . . . . . . . 201 447
At Beginning of Year . . . . . . . . . . 3,663 4,509
________ ________
At End of Period . . . . . . . . . . . . $ 3,864 $ 4,956
________ ________
________ ________
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
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[9% of net operating proceeds. The General Partner earned a partnership
management fee of $120,000 during the first nine months of 1995. In addition,
the General Partner's share of cash available for distribution from operations
totaled $12,000 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 $56,000 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
$9,000 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
$90,000.
NOTE 2 - PROPERTY VALUATIONS
During the first nine months of 1995, the Partnership reduced the previously
established valuation allowance for South Point by $80,000, related to
depreciation expense recognized on the property.
NOTE 3 - PARTICIPATING MORTGAGE LOAN
In July 1995, the Partnership began consentual foreclosure on the
participating mortgage loan secured by the River Run Shopping Center and
ceased the accrual of interest income. At September 30, 1995, the carrying
value of the loan was reduced to $7,700,000, the estimated fair value of the
underlying property, and additional loan losses of $63,000 were recognized.
During the second quarter, the Partnership recorded reserves for uncollectible
interest of $84,000.
On October 10, 1995, the Partnership purchased the property and, in
connection therewith, reclassified the participating mortgage loan as an
investment in real estate.
NOTE 4 - SUBSEQUENT EVENT
The Partnership declared a quarterly cash distribution of $1.58 per unit to
Limited Partners of the Partnership as of the close of business on September
30, 1995, the record date. The distribution totals $405,000 and represents
cash available for distribution from operations for the period July 1, 1995
through September 30, 1995. The Limited Partners will receive $401,000, and
the General Partner will receive $4,000.
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