QUARTERLY REPORT
FOR THE PERIOD ENDED
SEPTEMBER 30, 1996
FELLOW PARTNERS:
The gain on the sale of Fairchild Corporate Center and the change in River
Run's status from a participating mortgage loan to ownership were the driving
forces behind the favorable year-to-date and third quarter net income
comparisons.
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. Thus,
while we will continue to try to keep lease rates as high as possible, we will
place additional emphasis on longer-term leases with creditworthy, stable
tenants who are the most highly valued by prospective purchasers. It may take
somewhat longer to obtain such tenants, but we believe this strategy will help
us obtain higher sales prices.
As the Real Estate Investments table indicates, River Run was the
largest contributor to the Fund's income from operations for the first nine
months of the year, and its performance thus far in 1996 is well ahead of last
year when the Fund's interest in the property was in the form of a loan. Over
$865,000 of the increase in rental income over the nine-month period ended
September 30, 1995, was attributable to River Run, while expenses associated
with the property accounted for $265,000 of the overall rise in expenses. Of
course, since this investment is no longer producing interest income, that
income category declined substantially so that the net increase in River Run's
contribution to net income was $173,000.
The change from a loan to ownership occurred in the fourth quarter of
1995, so the effect of this property on operating results will not be as
dramatic in the future. Because the Fund did not accrue interest on the River
Run loan during third quarter 1995, the effect of the change to ownership was
more pronounced for the third quarter comparison with an increased
contribution of $181,000. In fact, we are continuing to try to improve the
credit quality of the tenant mix, which entails doing more extensive credit
analysis on prospective tenants and removing those who are delinquent. As a
result, we could see higher vacancy at River Run over the short term.
As we reported last quarter, a tenant that occupied 38% of Tierrasanta
did not renew its lease, which expired at the end of August. There is interest
in the property, 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. Wood Dale also experienced a decline in occupancy
during the third quarter when a tenant who leased 18% of the property vacated.
Activity at this industrial property is good, and we have two prospects who
could bring the leased status back to 100% if they sign leases, but that is
not certain at this point.
Even though the Fund has distributed more cash to limited partners than
it did in the first nine months of 1995, the cash position increased
significantly this year. The reason is the inclusion of the proceeds from the
sale of Fairchild, which will be distributed to you in November.
Cash Distributions
Cash from operations again allowed us to make the planned $2.00 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.
An additional $21.60 per unit is being paid to you for the Fund's 56%
share of the Fairchild sale proceeds. As you may remember, Realty Income Funds
II and IV owned the remaining 44% of that property.
Disposition Update
You will see on page 1 that three properties are now being held for sale -
Winnetka, Wood Dale, and Riverview. These industrial buildings are being
offered as part of a package which includes two similar holdings in Realty
Income Fund II.
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. We will continue to poise
the portfolio to take advantage of the more favorable operating environment.
In addition, each property not currently being held for sale will be closely
analyzed to determine the optimum time to begin an active marketing program.
With four of your nine portfolio holdings currently for sale, we look forward
to updating you on the status of our marketing efforts in the annual report.
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
________ _________ _________ ________ ________ ________ _______
Scripps
Terrace 56,796 71% 81% 76% $ 91 $ 123
South Point
Plaza 50,497 88 66 69 71 8
Tierra-
santa 104,236 62 76 96 56 111
Clark
Avenue 40,000 72 81 72 100 71
Westbrook
Commons 121,558 97 98 95 344 285
River Run 92,787 94 - 94 260 433
________ ____ ____ ____ ______ ______
465,874 82 83 88 922 1,031
Held for Sale
Winnetka 188,260 100 95 100 245 309
Wood Dale 89,718 68 100 90 183 107
Riverview 113,700 100 92 99 146 187
________ ____ ____ ____ ______ ______
857,552 87 89 92 1,496 1,634
Properties
Sold - - - - 91 1,638
Fund Expenses
Less Interest
Income - - - - (175) (190)
________ ____ ____ ____ ______ ______
Total 857,552 87% 89% 92% $1,412 $3,082
CONDENSED CONSOLIDATED BALANCE SHEETS
Unaudited
(In thousands)
September 30, December 31,
1996 1995
___________ ____________
Assets
Real Estate Property Investments
Land. . . . . . . . . . . . . . . . . . $ 8,411 $ 12,181
Buildings and Improvements. . . . . . . 19,618 33,139
________ ________
28,029 45,320
Less: Accumulated Depreciation
and Amortization . . . . . . . . . . . (4,752) (7,831)
________ ________
23,277 37,489
Held for Sale . . . . . . . . . . . . . 10,190 -
________ ________
33,467 37,489
Cash and Cash Equivalents. . . . . . . . 7,808 3,436
Accounts Receivable
(less allowances of $158 and $230). . . 462 529
Other Assets . . . . . . . . . . . . . . 353 279
________ ________
$ 42,090 $ 41,733
________ ________
________ ________
Liabilities and Partners' Capital
Security Deposits and Prepaid Rents. . . $ 311 $ 391
Accrued Real Estate Taxes. . . . . . . . 570 433
Accounts Payable and
Other Accrued Expenses. . . . . . . . . 197 335
________ ________
Total Liabilities. . . . . . . . . . . . 1,078 1,159
Partners' Capital. . . . . . . . . . . . 41,012 40,574
________ ________
$ 42,090 $ 41,733
________ ________
________ ________
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. . . . . . . . . $1,470 $1,285 $4,720 $3,764
Interest Income from
Participating
Mortgage Loan . . . . . . . . - - - 429
Interest Income. . . . . . . . 53 42 128 121
________ ________ ________ ________
1,523 1,327 4,848 4,314
________ ________________ ________
Expenses
Property Operating
Expenses. . . . . . . . . . . 253 339 1,121 908
Real Estate Taxes. . . . . . . 270 234 839 693
Depreciation and
Amortization. . . . . . . . . 312 311 1,033 906
Recovery of Property
Values. . . . . . . . . . . . - (25) - (80)
Provision for Loan Loss. . . . - 63 - 63
Management Fee to
General Partner . . . . . . . 50 40 113 120
Partnership Management
Expenses. . . . . . . . . . . 97 93 290 292
________ ________ ________ ________
982 1,055 3,396 2,902
________ ________ ________ ________
Income from Operations before
Gain on Real Estate Sold . . 541 272 1,452 1,412
Gain on Real Estate Sold . . . 1,630 - 1,630 -
________ ________ ________ ________
Net Income . . . . . . . . . . $2,171 $ 272 $3,082 $1,412
________ ________ ________ ________
________ ________ ________ ________
Activity per Limited Partnership Unit
Net Income . . . . . . . . . . $ 8.48 $ 1.06 $12.03 $ 5.51
________ ________ ________ ________
________ ________ ________ ________
Cash Distributions Declared
from Operations. . . . . . . $ 2.00 $ 1.58 $ 6.00 $ 4.74
from Sale Proceeds . . . . . 21.60 - 21.60 -
________ ________ ________ ________
Total Distributions
Declared. . . . . . . . . . . $23.60 $ 1.58 $27.60 $ 4.74
________ ________ ________ ________
________ ________ ________ ________
Units Outstanding. . . . . . . 253,599 253,599 253,599 253,599
________ ________ ________ ________
________ ________ ________ ________
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 . . . . $ (188) $40,762 $40,574
Net Income . . . . . . . . 31 3,051 3,082
Cash Distributions . . . . (14) (2,630) (2,644)
_______ _______ _______
Balance,
September 30, 1996. . . . $ (171) $41,183 $41,012
_______ _______ _______
_______ _______ _______
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 . . . . . . . . . . . . . . . $ 3,082 $ 1,412
Adjustments to Reconcile Net Income
to Net Cash Provided by Operating Activities
Depreciation and Amortization. . . . . 1,033 906
Recovery of Property Values. . . . . . - (80)
Changes in Loan Loss Provision . . . . - 140
Gain on Real Estate Sold . . . . . . . (1,630) -
Other Changes in Assets
and Liabilities . . . . . . . . . . . (104) 166
________ ________
Net Cash Provided by
Operating Activities. . . . . . . . . . 2,381 2,544
________ ________
Cash Flows from Investing Activities
Proceeds from Property Disposition . . . 5,477 -
Investments in Real Estate . . . . . . . (842) (718)
________ ________
Net Cash Provided by (Used in)
Investing Activities. . . . . . . . . . 4,635 (718)
________ _______
Cash Flows Used in Financing Activities
Cash Distributions . . . . . . . . . . . (2,644) (1,624)
Redemption of Units. . . . . . . . . . . - (1)
________ ________
Net Cash Used in
Financing Activities. . . . . . . . . . (2,644) (1,625)
________ ________
Cash and Cash Equivalents
Net Increase during Period . . . . . . . 4,372 201
At Beginning of Year . . . . . . . . . . 3,436 3,663
________ ________
At End of Period . . . . . . . . . . . . $ 7,808 $ 3,864
________ ________
________ ________
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 $113,000 during the first nine months of 1996. In addition,
the General Partner's share of cash available for distribution from operations
totaled $15,000 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 $67,000 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
$4,000 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
$90,000.
An affiliate of LaSalle earned $70,000 in the first nine months of 1996
as property manager for several of the Partnership's properties.
NOTE 2 - PROPERTY DISPOSITIONS
On August 28, 1996, Fairchild Corporate Center, an office property in which
the Partnership had a 56% interest was sold. The Partnership has subsequently
received net proceeds of $5,477,000. The net book value of the Partnership's
interest at the date of sale was $3,847,000, after deduction of accumulated
depreciation, and previously recorded permanent impairments. Accordingly, the
Partnership recognized a $1,630,000 gain on the sale of this property in the
third quarter.
Income from operations for this property, before the gain on real estate
sold, was $7,000 and $91,000 for the nine months ended September 30, 1996 and
1995, respectively.
NOTE 3 - PROPERTIES HELD FOR SALE
The Partnership began actively marketing its three midwest industrial
properties, Wood Dale, Winnetka, and Riverview, and has classified them as
held for sale in the accompanying September 30, 1996 balance sheet.
Results of operations for these properties resulted in a net income of
$602,000 and $573,000 for the nine months ended September 30, 1996 and 1995,
respectively.
NOTE 4 - SUBSEQUENT EVENT
The Partnership declared a quarterly cash distribution of $23.60 per unit to
Limited Partners of the Partnership as of the close of business on September
30, 1996. The distribution totals $5,989,000 and represents $2.00 per unit
from operations and $21.60 per unit from Fairchild Corporate Center sale
proceeds. The Limited Partners will receive $5,984,000, and the General
Partner will receive $5,000.
