QUARTERLY REPORT FOR THE PERIOD ENDED JUNE 30, 1996
FELLOW PARTNERS:
During our recent annual review of the strategic plan for the Fund, we
concluded that the alignment between (1) the fundamental operating environment
and (2) capital flows into real estate is the best it has been for a number of
years. New construction was rather stagnant, occupancy and rental rates
appeared to be stabilizing or improving, and returns on real estate
investments started to improve. Property values also began showing signs of
recovery in a number of areas.
NCREIF Total Return
1993 1994 1995 95Q2-96Q1
_____ _____ _____ __________
All Properties 0.6% 6.9% 8.9% 9.5%
Source: NCREIF-Classic Index, LaSalle Advisors Investment Research.
Money is again flowing into real estate investments, particularly into
Real Estate Investment Trusts (REITS) who, in turn, have become active buyers.
The strong capital infusion provided by REITS in particular has contributed to
a more liquid market for good properties. And, for reasons we will discuss
later, it appears market conditions will continue to improve. As a result, we
believe the time is right to begin liquidating the Fund's 10 properties shown
on page 2. If the generally favorable environment continues, and barring any
significant change in local market conditions, our plan calls for the last
property to be sold by the end of 1998. While this is our target date, a
variety of factors could cause the timeframe to accelerate or be delayed.
As has been true in the past, the timing of individual sales within the
expected liquidation period will be governed by our assessment of the benefits
to our partners of holding versus selling immediately and by the availability
of interested buyers. Some properties appear to be candidates for near-term
liquidation, while others may take a little longer based on property type and
the local market.
Perhaps some historical perspective will be helpful at this point. In
October 1987, the final partners were admitted to the Fund and the first
property, Scripps Terrace in San Diego, was acquired the following year. The
tenth investment in the Fund's initial portfolio, the loan secured by River
Run, was made in June of 1989. Subsequently, the Fund disposed of its interest
in Rancho Penasquitos, and in December of 1990 acquired Westbrook Commons
through a joint venture with Fund IV. Based on our outlook for the real estate
environment during the acquisition phase, we anticipated holding the
properties for no more than seven to 10 years. Therefore, assuming we
successfully complete our disposition plan, the timing will be in line with
our original expectations. As you may recall, we did take advantage of a
specific opportunity to sell Beinoris, one of the three buildings in the Wood
Dale industrial complex in Illinois. The net proceeds from this 1994 sale were
distributed to you in November of that year.
Results of Operations
Once again, the change in River Run's status from a participating mortgage
loan to ownership had the most notable impact on year-to-date revenue and
expense comparisons. We now include the property's rental income and expenses,
rather than interest on the mortgage receivable in the Fund's results. As the
Real Estate Investments table indicates, River Run is the largest contributor
to the Fund's income from operations, and its performance was almost equal to
last year's.
Higher average leased status and increased rental rates also led to
better revenue comparisons at Winnetka, Riverview, and Tierrasanta this year.
Scripps Terrace benefited from increased rental rates. These gains more than
offset the effect on revenues of declines in the average leased status at two
other portfolio holdings - Fairchild Corporate Center and Clark Avenue -
compared with the year ago first half. At June 30, however, Fairchild's
occupancy had improved (also see Disposition Update for the status of its
sale). Clark Avenue's leased status was unchanged from the previous quarter,
and results are not expected to improve until the single-tenant vacant space
is leased. The contribution to net income from Fairchild and Clark Avenue also
declined, as did Wood Dale's, South Point's, and Westbrook Commons'. At Wood
Dale, higher real estate taxes put pressure on the bottom line, while at South
Point, a recovery in property value helped boost its contribution in the first
half of 1995 but not this year. Revenues were down only slightly at Westbrook,
but the increase in expenses, while individually insignificant, had a
noticeable effect in the aggregate.
Results at Scripps Terrace, Tierrasanta, and Riverview improved relative
to last year, and Winnetka was stable even though bad debt expense rose at all
but one of the four properties - Tierrasanta. It appears that operations at
several other properties have stabilized or might improve over the near term.
At South Point, for instance, a tenant who signed a lease for 35% of the
center's space earlier this year will begin paying rent this month. (Some of
the effect of the higher income stream, however, will be offset by increased
depreciation related to significant improvements made for this tenant.) In
addition, the submarket is strong in terms of rental rates, which could bode
well for rents on new and renewal leases at this retail center. The Wood Dale
and Westbrook Commons markets are healthy, so LaSalle is optimistic about
leasing activity at those locations.
<TABLE>
Real Estate Investments (Dollars in thousands)
__________________________________________________________________________________________________
Leased Status Average Leased Status Contribution to Net Income
____________ _________________________ __________________________
Gross
Property Leasable June 30, Six Months Ended June 30, Six Months Ended June 30,
Name Area (Sq. Ft.) 1996 1995 1996 1995 1996
____________ __________ _______ ________ ________ ________ ________
<S> <C> <C> <C> <C> <C> <C>
Scripps Terrace 56,796 71% 81% 79% $ 59 $ 94
Winnetka 188,260 100 94 100 178 176
South Point
Plaza 50,497 88 65 58 50 4
Tierrasanta 104,236 100 76 100 31 74
Wood Dale 89,718 86 100 95 130 61
Clark Avenue 40,000 72 86 72 81 42
Riverview 113,700 100 92 98 98 120
Westbrook
Commons 121,558 96 98 94 229 186
River Run 92,787 94 - 93 321 313
_________ _________ _________ _________ _________ _________
857,552 93 89 92 1,177 1,070
Held for Sale
Fairchild 104,823 79 80 73 85 (38)
_________ _________ _________ _________ _________ _________
962,375 92 88 90 1,262 1,032
Fund Expenses
Less Interest
Income - - - - (122) (121)
_________ _________ _________ _________ _________ _________
Total 962,375 92% 88% 90% $1,140 $911
</TABLE>
We are making every effort to minimize the effect of the expiration of a
lease for 38% of Tierrasanta, but want to caution that it will take a while to
fill this space because the market is somewhat soft.
The Fund's cash position has declined thus far this year relative to
1995, primarily because distributions paid to partners were up by almost $1
million.
Cash Distributions
Cash from operations again allowed us to make the planned $2.00 per-unit
distribution for the second quarter. As the year progresses, we will
reevaluate this amount and report in next quarter's report if any changes are
appropriate.
Disposition Update
We had received an unsolicited offer for Fairchild when we last communicated
with you. A purchase and sale agreement has now been signed, and the sale is
expected to close by the end of August. The net proceeds from the sale are
estimated at $9.8 million, and 56% will be distributed to you in November if
the deal closes as anticipated. Realty Income Funds II and IV account for the
remaining interest in this property.
Now that we are in the portfolio liquidation phase, some properties may
be managed differently than if we were planning to hold them for a longer
period. For instance, if a property would require a significant infusion of
capital in order to stabilize its occupancy around the 90% to 95% level,
LaSalle might make concessions on the sale price and give the new owners the
flexibility to make their own changes. We measure our capital expenditures
against the potential for an immediate return on our investment. Obviously,
the more we put into a property, the more we expect to get out of it.
One practice which does not change, however, is our close watch on
day-to-day expenses. LaSalle will continue to re-bid service contracts, appeal
real estate tax increases or seek reassessments, and take whatever other steps
it can to pare the costs of operating the properties in order to make them
more attractive to potential buyers.
Another change we have noted in the overall commercial real estate
market is that buyers appear to have shortened their investment horizon.
Rather than the seven to 10-year holding period we envisioned when building
the Fund's portfolio, buyers are now looking at a five-year timeframe. As a
result, in negotiating new and renewal leases, LaSalle will try to manage
lease terms and expirations to achieve the five-year average cash flows and
cap rates currently demanded by the market.
Outlook
A number of factors point to continued improvement for real estate in the near
future. Within the market itself, speculative construction remains sparse in
most areas, and foreclosure rates are falling. In addition, low unemployment,
subdued inflation, favorable interest rates, and increasing returns from real
estate relative to stocks and bonds contribute to a more optimistic outlook.
The return of large institutional investors, especially the REITs, means
there is more capital available for real estate investment and, therefore, a
market more accommodating to property sales. Of equal importance, the rate of
return (or "cap" rate) required by potential buyers tends to decline as
investment dollars flow into real estate. The relationship between cap rates
and real estate values is like that between interest rates and bond prices -
lower rates mean rising values.
Future reports will update you on our progress toward liquidating the
portfolio. The purpose of this discussion is to inform you of the improving
conditions we see in the real estate market and to outline our liquidation
strategy. We are optimistic that our plan is reasonable and will continue
working hard to bring it to fruition. Our focus in selling your
holdings is the same as that we employed in acquiring and managing each
property - to serve the interests of our partners.
Sincerely,
James S. Riepe
Chairman
August 9, 1996
CONDENSED CONSOLIDATED BALANCE SHEETS
Unaudited
(In thousands)
June 30, December 31,
1996 1995
___________ ____________
Assets
Real Estate Property Investments
Land . . . . . . . . . . . . . . . . . . . . . $ 10,548 $ 12,181
Buildings and Improvements . . . . . . . . . . 30,915 33,139
________ ________
41,463 45,320
Less: Accumulated Depreciation and
Amortization. . . . . . . . . . . . . . . . (7,961) (7,831)
________ ________
33,502 37,489
Held for Sale. . . . . . . . . . . . . . . . . 3,783 -
________ ________
37,285 37,489
Cash and Cash Equivalents. . . . . . . . . . . . 2,375 3,436
Accounts Receivable
(less allowances of $217 and $230) . . . . . . 367 529
Other Assets . . . . . . . . . . . . . . . . . . 400 279
________ ________
$ 40,427 $ 41,733
________ ________
________ ________
Liabilities and Partners' Capital
Security Deposits and Prepaid Rents. . . . . . . $ 373 $ 391
Accrued Real Estate Taxes. . . . . . . . . . . . 523 433
Accounts Payable and Other Accrued Expenses. . . 178 335
________ ________
Total Liabilities. . . . . . . . . . . . . . . . 1,074 1,159
Partners' Capital. . . . . . . . . . . . . . . . 39,353 40,574
________ ________
$ 40,427 $ 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 Six Months Ended
June 30, June 30,
1996 1995 1996 1995
_______ _______ _______ _______
Revenues
Rental Income. . . . . . . . . . $ 1,666 $ 1,229 $ 3,250 $ 2,479
Interest Income from
Participating Mortgage Loan. . - 215 - 429
Other Interest Income. . . . . . 29 45 75 79
________ ________ ________ ________
1,695 1,489 3,325 2,987
________ ________ ________ ________
Expenses
Property Operating Expenses. . . 448 314 868 569
Real Estate Taxes. . . . . . . . 278 205 569 459
Depreciation and Amortization. . 373 301 721 595
Recovery of Property Values. . . - (28) - (55)
Management Fee to
General Partner. . . . . . . . 51 40 63 80
Partnership Management
Expenses . . . . . . . . . . . 104 110 193 199
________ ________ ________ ________
1,254 942 2,414 1,847
________ ________ ________ ________
Net Income . . . . . . . . . . . $ 441 $ 547 $ 911 $ 1,140
________ ________ ________ ________
________ ________ ________ ________
Activity per Limited Partnership Unit
Net Income . . . . . . . . . . . $ 1.72 $ 2.14 $ 3.56 $ 4.45
________ ________ ________ ________
________ ________ ________ ________
Cash Distributions Declared. . . $ 2.00 $ 1.58 $ 4.00 $ 3.16
________ ________ ________ ________
________ ________ ________ ________
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 . . . . . . . . . . . 9 902 911
Cash Distributions . . . . . . . (9) (2,123) (2,132)
_______ _______ _______
Balance, June 30, 1996 . . . . . $ (188) $ 39,541 $ 39,353
_______ _______ _______
_______ _______ _______
See the accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In thousands)
Six Months Ended
June 30,
1996 1995
_________ _________
Cash Flows from Operating Activities
Net Income . . . . . . . . . . . . . . . . . . . $ 911 $ 1,140
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Depreciation and Amortization. . . . . . . . . 721 595
Recovery of Property Values. . . . . . . . . . - (55)
Other Changes in Assets and Liabilities. . . . (44) 97
________ ________
Net Cash Provided by Operating Activities. . . . 1,588 1,777
________ ________
Cash Flows Used in Investing Activities
Investments in Real Estate . . . . . . . . . . . (517) (549)
________ ________
Cash Flows Used in Financing Activities
Cash Distributions . . . . . . . . . . . . . . . (2,132) (1,220)
Redemption of Units. . . . . . . . . . . . . . . - (1)
________ ________
Net Cash Used in Financing Activities. . . . . . (2,132) (1,221)
________ ________
Cash and Cash Equivalents
Net Increase (Decrease) during Period. . . . . . (1,061) 7
At Beginning of Year . . . . . . . . . . . . . . 3,436 3,663
________ ________
At End of Period . . . . . . . . . . . . . . . . $ 2,375 $ 3,670
________ ________
________ ________
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 $63,000 during the first six months of 1996. In addition,
the General Partner's share of cash available for distribution from operations
totaled $10,000 for the first six 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 $44,000 for communications and administrative
services performed on behalf of the Partnership during the first six months of
1996.
An affiliate of the General Partner earned a normal and customary fee of
$3,000 from the money market mutual funds in which the Partnership made its
interim cash investments during the first six 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 six months of 1996 totaled
$60,000.
An affiliate of LaSalle earned $52,000 in the first six months of 1996
as property manager for several of the Partnership's properties.
NOTE 2 - PROPERTY HELD FOR SALE
Fairchild 234, a general partnership in which the Partnership holds a 56%
interest, holds a note secured by a deed of trust on Fairchild Corporate
Center. The other general partners are affiliates of the Partnership.
Fairchild 234 has entered into an agreement to sell its interest in Fairchild
Corporate Center, and the transaction is anticipated to close in the third
quarter, with estimated net proceeds to the Partnership of $5,466,000. The net
book value of the Partnership's interest in Fairchild Corporate Center is
classified as held for sale in the accompanying balance sheets and was
$3,784,000 at June 30, 1996. Results of operations at the property resulted in
a net loss of $38,000 for the six months ended June 30, 1996, and net income
of $85,000 for the six months ended June 30, 1995.
NOTE 3 - SUBSEQUENT EVENT
The Partnership declared a quarterly cash distribution of $2.00 per unit to
Limited Partners of the Partnership as of the close of business on June 30,
1996. The Limited Partners will receive $507,000, and the General Partner will
receive $5,000.
