SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 1995
Commission File Number 0-17664
JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
Massachusetts 04-2969061
(State or other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
200 Berkeley Street, Boston, MA 02117
(Address of Principal Executive Office) (Zip Code)
(800) 722-5457
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal
year, if changed since last report)
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 __
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
INDEX
PART I: FINANCIAL INFORMATION PAGE
Item 1 - Financial Statements:
Balance Sheets at September 30, 1995 and
December 31, 1994 3-4
Statements of Operations for the Three and
Nine Months Ended September 30, 1995 and 1994 5
Statements of Partners' Equity for the
Nine Months Ended September 30, 1995 and
for the Year Ended December 31, 1994 6
Statements of Cash Flows for the Nine
Months Ended September 30, 1995 and 1994 7
Notes to Financial Statements 8-15
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 16-21
PART II: OTHER INFORMATION 22
2
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
BALANCE SHEETS
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $3,407,101 $2,561,288
Restricted cash 35,851 24,557
Other current assets 160,351 92,152
----------- -----------
Total current assets 3,603,303 2,677,997
Real estate loans 6,677,621 6,874,539
Investment in property:
Land 5,560,000 5,560,000
Buildings and improvements 18,836,994 18,836,994
----------- -----------
24,396,994 24,396,994
Less: accumulated depreciation 4,367,414 3,896,483
----------- -----------
20,029,580 20,500,511
Investment in joint venture 7,895,603 7,882,420
Long-term restricted cash 107,885 86,214
Deferred expenses, net of accumulated
amortization of $922,153 in 1995
and $723,147 in 1994 1,316,007 1,391,729
----------- -----------
Total assets $39,629,999 $39,413,410
=========== ===========
</TABLE>
Continued on next page
3
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
BALANCE SHEETS (Continued)
(Unaudited)
LIABILITIES AND PARTNERS' EQUITY
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
---- ----
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses $528,886 $200,424
Accounts payable to affiliates 33,522 30,213
----------- -----------
Total current liabilities 562,408 230,637
Partners' equity/(deficit):
General Partner's deficit (152,972) (151,822)
Limited Partners' equity 39,220,563 39,334,595
----------- -----------
Total partners' equity 39,067,591 39,182,773
----------- -----------
Total liabilities and partners' equity $39,629,999 $39,413,410
=========== ===========
</TABLE>
See Notes to Financial Statements
4
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income:
Rental income $608,739 $573,736 $1,779,294 $1,588,307
Interest income 220,680 208,884 658,522 633,370
Income/(loss) from joint venture 193,829 139,528 557,024 52,656
---------- ---------- ---------- ----------
Total income 1,023,248 922,148 2,994,840 2,274,333
Expenses:
Depreciation 156,957 157,050 470,931 471,150
Property operating expenses 148,708 155,068 384,713 364,089
General and administrative expenses 53,524 50,723 163,336 159,525
Amortization of deferred expenses 68,162 68,752 199,006 208,683
---------- ---------- ---------- ----------
Total expenses 427,351 431,593 1,217,986 1,203,447
---------- ---------- ---------- ----------
Net income $595,897 $490,555 $1,776,854 $1,070,886
========== ========== ========== ==========
Allocation of net income:
General Partner $5,959 $4,906 $17,769 $10,709
John Hancock Limited Partner - - - -
Investors 589,938 485,649 1,759,085 1,060,177
---------- ---------- ---------- ----------
$595,897 $490,555 $1,776,854 $1,070,886
========== ========== ========== ==========
Net income per Unit $0.23 $0.19 $0.68 $0.41
========== ========== ========== ==========
</TABLE>
See Notes to Financial Statements
5
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
STATEMENTS OF PARTNERS' EQUITY
(Unaudited)
Nine Months Ended September 30, 1995 and
Year Ended December 31, 1994
<TABLE>
<CAPTION>
General Limited
Partner Partners Total
------- -------- -----
<S> <C> <C> <C>
Partners' equity/(deficit) at
January 1, 1994 (2,601,552
Units outstanding) ($146,449) $39,866,829 $39,720,380
Less: Cash distributions (25,224) (2,497,490) (2,522,714)
Add: Net income 19,851 1,965,256 1,985,107
-------- ----------- -----------
Partners' equity/(deficit) at
December 31, 1994 (2,601,552
Units outstanding) (151,822) 39,334,595 39,182,773
Less: Cash distributions (18,919) (1,873,117) (1,892,036)
Add: Net income 17,769 1,759,085 1,776,854
-------- ----------- -----------
Partners' equity/(deficit) at
September 30, 1995 (2,601,552
Units outstanding) ($152,972) $39,220,563 $39,067,591
======== =========== ===========
</TABLE>
See Notes to Financial Statements
6
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1995 1994
---- ----
<S> <C> <C>
Operating activities:
Net income $1,776,854 $1,070,886
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 470,931 471,150
Amortization of deferred expenses 199,006 208,683
Cash distributions over/(under) equity
in income/(loss) from joint venture (13,183) 218,585
---------- ----------
2,433,608 1,969,304
Changes in operating assets and liabilities:
Decrease in restricted cash (32,965) (58,179)
Increase in other current assets (68,199) (68,627)
Increase/(decrease) in accounts payable
and accrued expenses 328,462 (302,940)
Increase in accounts payable to
affiliates 3,309 21,178
---------- ----------
Net cash provided by operating activities 2,664,215 1,560,736
Investing activities:
Increase in investment in joint venture - (1,104,902)
Principal payments on real estate loans 196,918 287,214
Increase in deferred expenses and other assets (123,284) (47,240)
---------- ----------
Net cash provided by/(used in)
investing activities 73,634 (864,928)
Financing activities:
Cash distributed to Partners (1,892,036) (1,890,145)
---------- ----------
Net cash used in financing activities (1,892,036) (1,890,145)
---------- ----------
Net increase/(decrease) in cash and cash
equivalents 845,813 (1,194,337)
Cash and cash equivalents at beginning
of year 2,561,288 3,742,273
---------- ----------
Cash and cash equivalents at end
of period $3,407,101 $2,457,936
========== ==========
</TABLE>
See Notes to Financial Statements
7
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. Organization of Partnership
---------------------------
John Hancock Realty Income Fund-II Limited Partnership (the
"Partnership") was formed under the Massachusetts Uniform Limited
Partnership Act on June 30, 1987. As of September 30, 1995 the
partners in the Partnership consisted of John Hancock Realty
Equities, Inc. (the "General Partner"), a wholly-owned, indirect
subsidiary of John Hancock Mutual Life Insurance Company; John
Hancock Realty Funding, Inc. (the "John Hancock Limited Partner");
John Hancock Income Fund-II Assignor, Inc. (the "Assignor Limited
Partner"); and 4,649 Unitholders (the "Investors"). The Assignor
Limited Partner holds 2,601,552 Assignee Units (the "Units"),
representing economic and certain other rights attributable to
Investor Limited Partnership Interests in the Partnership, for the
benefit of the Investors. The John Hancock Limited Partner, the
Assignor Limited Partner and the Investors are collectively
referred to as the Limited Partners. The General Partner and the
Limited Partners are collectively referred to as the Partners. The
initial capital of the Partnership was $2,000, representing capital
contributions of $1,000 by the General Partner and $1,000 from the
John Hancock Limited Partner. The Amended Agreement of Limited
Partnership of the Partnership (the "Partnership Agreement")
authorized the issuance of up to 5,000,000 Assignee Units at $20
per Unit. During the offering period, which terminated on January
2, 1989, 2,601,552 Units were sold and the John Hancock Limited
Partner made additional capital contributions of $4,161,483. There
were no changes in the number of Units outstanding subsequent to
the termination of the offering period. The Partnership is engaged
in the business of (i) acquiring, improving, holding for investment
and disposing of existing income-producing retail, industrial and
office properties on an all-cash basis, free and clear of mortgage
indebtedness, and (ii) making mortgage loans consisting of
conventional first mortgage loans and participating mortgage loans
secured by income-producing retail, industrial and office
properties. Although the Partnership's properties were acquired
and are held free and clear of mortgage indebtedness, the
Partnership may incur mortgage indebtedness on its properties under
certain circumstances as specified in the Partnership Agreement.
The latest date on which the Partnership is due to terminate is
December 31, 2017, unless it is sooner terminated in accordance
with the terms of the Partnership Agreement. It is expected that,
in the ordinary course of the Partnership's business, the
investments of the Partnership will be disposed of, and the
Partnership terminated, before December 31, 2017.
8
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
2. Significant Accounting Policies
-------------------------------
The accompanying unaudited financial statements have been prepared
in accordance with generally accepted accounting principles for
interim financial information and with the instructions for Form 10-
Q and Rule 10-01 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair representation
have been included. Operating results for the nine month period
ended September 30, 1995 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1995.
For further information, refer to the financial statements and
footnotes thereto included in the Partnership's Annual Report on
Form 10-K for the year ended December 31, 1994.
Cash equivalents are highly liquid investments with maturities of
three months or less when purchased. These investments are
recorded at cost plus accrued interest, which approximates market
value. Restricted cash represents funds restricted for tenant
security deposits and has been designated as short or long-term
based upon the term of the related lease agreement.
Real estate loans are recorded at amortized cost unless it is
determined by the General Partner that in economic substance the
loan represents an investment in property or joint venture. In
such instances, these investments are accounted for using the
equity method.
Investments in property are recorded at cost. Cost includes the
initial purchase price of the property plus acquisition and legal
fees, other miscellaneous acquisition costs and the cost of
significant improvements.
Depreciation has been provided on a straight-line basis over the
estimated useful lives of the various assets: thirty years for the
buildings and five years for related improvements. Maintenance and
repairs are charged to operations as incurred.
Investment in joint venture is recorded using the equity method.
Fees paid to the General Partner for the acquisition of joint
venture and mortgage loan investments have been deferred and are
being amortized over the life of the investments to which they
relate. Subsequent to June 30, 1993, the Partnership reduced the
period over which its remaining deferred acquisition fees are
amortized from thirty years, the estimated useful life of the
buildings owned by the Partnership, to eight and one-half years,
the then estimated remaining life of the Partnership. Capitalized
tenant improvements and lease commissions are being amortized on a
straight-line basis over the terms of the leases to which they
relate.
The net income per Unit for the three and nine months ended
September 30, 1995 and 1994 was calculated by dividing the
Investors' share of net income by the number of Units outstanding
at the end of such period.
9
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
2. Significant Accounting Policies (continued)
-------------------------------
No provision for income taxes has been made in the Financial
Statements since such taxes are the responsibility of the
individual Partners and not of the Partnership.
3. The Partnership Agreement
-------------------------
Distributable Cash from Operations (defined in the Partnership
Agreement) is distributed 1% to the General Partner and the
remaining 99% in the following order of priority: first, to the
Investors until they receive a 7% non-cumulative, non-compounded
annual cash return on their Invested Capital (defined in the
Partnership Agreement); second, to the General Partner to pay the
Subordinated Allocation (defined in the Partnership Agreement)
equal to 3 1/2% of Distributable Cash from Operations for managing
the Partnership's activities; third, to the John Hancock Limited
Partner until it receives a 7% non-cumulative, non-compounded
annual cash return on its Invested Capital; fourth, to the
Investors and the John Hancock Limited Partner in proportion to
their respective Capital Contributions (defined in the Partnership
Agreement), until they have received a 10% non-cumulative,
non-compounded annual cash return on their Invested Capital; fifth,
to the General Partner to pay the Incentive Allocation equal to 2
1/2% of Distributable Cash from Operations; and sixth, to the
Investors and the John Hancock Limited Partner in proportion to
their respective Capital Contributions. However, any Distributable
Cash from Operations, which is available as a result of reduction
of working capital reserves funded by Capital Contributions of the
Investors, will be distributed 100% to the Investors.
Profits for tax purposes from the normal operations of the
Partnership for each fiscal year are allocated to the Partners in
the same amounts as Distributable Cash from Operations for that
year. If such profits are less than Distributable Cash from
Operations for any year, they are allocated in proportion to the
amounts of Distributable Cash from Operations allocated for that
year. If such profits are greater than Distributable Cash from
Operations for any year, they are allocated 1% to the General
Partner and 99% to the John Hancock Limited Partner and the
Investors, with the allocation made between the John Hancock
Limited Partner and the Investors in proportion to their respective
Capital Contributions. Losses for tax purposes from the normal
operations of the Partnership are allocated 1% to the General
Partner and 99% to the John Hancock Limited Partner and the
Investors, with the allocation made between the John Hancock
Limited Partner and the Investors in proportion to their respective
Capital Contributions. However, all tax aspects of the
Partnership's payment of the sales commissions from the Capital
Contributions made by the John Hancock Limited Partner are
allocated 1% to the General Partner and 99% to the John Hancock
Limited Partner and not to the Investors. Depreciation deductions
are allocated 1% to the General Partner and 99% to the Investors,
and not to the John Hancock Limited Partner. Notwithstanding the
foregoing, any such profits or losses or other items which were
based upon the Partnership's operations prior to the first day of
the month in which the initial closing date occurred were allocated
1% to the General Partner and 99% to the John Hancock Limited
Partner.
10
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
3. The Partnership Agreement (continued)
-------------------------
Upon the occurrence of a Sale, Financing or Repayment (defined in
the Partnership Agreement) of a Partnership Investment, the General
Partner first applies the proceeds to the payment of all debts and
liabilities of the Partnership then due and then funds any reserves
for contingent liabilities which it deems to be appropriate. Cash
from Sales, Financings or Repayments is distributed and paid in the
following order of priority: first, to the Investors and the John
Hancock Limited Partner, with the distribution made between the
Investors and the John Hancock Limited Partner in proportion to
their respective Capital Contributions, until the Investors and the
John Hancock Limited Partner have received an amount equal to their
Invested Capital; second, to the Investors until they have
received, after giving effect to all previous distributions of
Distributable Cash from Operations and any previous distributions
of Cash from Sales, Financings or Repayments after the return of
their Invested Capital, the Cumulative Return on Investment; third,
to the John Hancock Limited Partner until it has received, after
giving effect to all previous distributions of Distributable Cash
from Operations and any previous distributions of Cash from Sales,
Financings or Repayments after the return of its Invested Capital,
the Cumulative Return on Investment; fourth, to the General Partner
to pay any Subordinated Disposition Fees then payable pursuant to
Section 6.4(c) of the Partnership Agreement; and fifth, 99% to the
Investors and the John Hancock Limited Partner and 1% to the
General Partner, with the distribution made between the Investors
and the John Hancock Limited Partner in proportion to their
respective Capital Contributions.
4. Transactions with the General Partner and Affiliates
----------------------------------------------------
Fees and expenses incurred and/or paid by the General Partner or
its affiliates on behalf of the Partnership during the nine months
ended September 30, 1995 and 1994 and to which the General Partner
or its affiliates are entitled to reimbursement from the
Partnership were $99,897 and $105,455, respectively. These
expenses are included in expenses on the Statements of Operations.
Accounts payable to affiliates represent amounts due to the General
Partner and its affiliates for various services provided to the
Partnership.
The General Partner serves in a similar capacity for three other
affiliated real estate limited partnerships.
11
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
5. Investment in Property
----------------------
Investment in property at cost consists of managed, fully-
operating, commercial real estate as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
---- ----
<S> <C> <C>
Park Square Shopping Center $12,886,230 $12,886,230
Fulton Business Park 5,138,786 5,138,786
Miami International Distribution Center 6,371,978 6,371,978
----------- -----------
$24,396,994 $24,396,994
=========== ===========
</TABLE>
The net realizable value of a real estate investment held for long-
term investment purposes is measured by the recoverability of the
investment through its expected future cash flows on an
undiscounted basis, which may exceed the related property's current
market value.
6. Real Estate Loans
-----------------
On March 10, 1988, the Partnership made a $1,700,000 participating
non-recourse mortgage loan to a non-affiliated borrower, secured by
a first mortgage on commercial real estate known as 205 Newbury
Street, located in Boston, Massachusetts. Under the terms of the
loan agreement, the borrower is required to pay interest only
monthly at an annual rate of 9.5% with the entire outstanding
principal balance due on April 1, 1998. In addition to these
amounts, the borrower is also obligated to pay the Partnership 25%
of the net cash flow derived from the operations of the property
during the term of the loan and a specified portion of the net
sales price or mutually agreed upon fair market value of the
property upon its sale or refinancing. Contingent interest
payments, based on the net cash flow from the property, have not
been received since 1990 because the property has not generated any
cash flow in excess of the required minimum debt service payments.
12
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
6. Real Estate Loans (continued)
-----------------
On June 30, 1989, the Partnership made a $5,500,000 mortgage loan
to a non-affiliated borrower, secured by a first mortgage on
commercial real estate known as the General Camera Corporation
Building, located in New York, New York. Under the original terms
of the loan agreement, General Camera Corporation ("GCC") was
required to pay interest only monthly at an annual rate of 11%.
Effective June 1, 1994, the loan agreement was amended i) to
require GCC to make a one-time payment of $250,000 towards the
outstanding balance of the loan and ii) to require that all future
monthly payments include amounts to amortize the outstanding loan
balance. GCC was required to make payments of $60,416 per month on
the first day of the month commencing on July 1, 1994 and ending on
June 1, 1995. Commencing on July 1, 1995, payments of $85,416 per
month are required on the first day of each month. The entire
unamortized principal balance and all accrued but unpaid interest
are due on July 1, 1996.
Real estate loans are evaluated for collectibility on an on-going
basis.
7. Investment in Joint Venture
---------------------------
On December 28, 1988, the Partnership invested $14,726,079 to
acquire a 99.5% interest in JH Quince Orchard Partners (the
"Affiliated Joint Venture"), a joint venture between the
Partnership and John Hancock Realty Income Fund-III Limited
Partnership ("Income Fund-III"). The Partnership had an initial
99.5% interest and Income Fund-III had an initial 0.5% interest in
the Affiliated Joint Venture. Pursuant to the partnership
agreement of the Affiliated Joint Venture, Income Fund-III had the
option, exercisable prior to December 31, 1990, to increase its
investment and interest in the Affiliated Joint Venture to 50%.
During the second quarter of 1989, Income Fund-III exercised its
option and the Partnership transferred a 49.5% interest in the
Affiliated Joint Venture to Income Fund-III for cash in the
aggregate amount of $7,325,672. The Partnership has held a 50%
interest in the Affiliated Joint Venture since the second quarter
of 1989.
On December 28, 1988, the Affiliated Joint Venture contributed 98%
of the invested capital of, and acquired a 75% interest in, QOCC-1
Associates, an existing partnership which owns and operates the
Quince Orchard Corporate Center, a three-story office building and
related land and improvements located in Gaithersburg, Maryland.
During the years ended December 31, 1994 and 1993, the partners in
QOCC-1 Associates were required to make additional capital
contributions towards the funding of leasing costs incurred at the
property. In accordance with the terms of the partnership
agreement of QOCC-1 Associates, the Affiliated Joint Venture
contributed 95% of such additional capital, the Partnership's share
of which amounted to an aggregate of $1,282,242. Of the cumulative
total invested capital in QOCC-1 Associates at September 30, 1995,
97.55% has been contributed by the Affiliated Joint Venture. The
Affiliated Joint Venture continues to hold a 75% interest in QOCC-1
Associates.
13
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
7. Investment in Joint Venture (continued)
---------------------------
Net cash flow from QOCC-1 Associates is distributed in the
following order of priority: first, to the payment of all debts
and liabilities of QOCC-1 Associates and to fund reserves deemed
reasonably necessary; second, to the partners in proportion to
their respective invested capital until each has received a 9%
return on invested capital; third, the balance, if any, to the
partners in proportion to their interests. Since its inception,
QOCC-1 Associates has not provided the partners with a return in
excess of 9% on their invested capital.
8. Deferred Expenses
-----------------
Deferred expenses consist of the following:
<TABLE>
<CAPTION>
Unamortized Unamortized
Balance at Balance at
Description September 30, 1995 December 31, 1994
------------ ------------------ -----------------
<S> <C> <C>
$35,072 acquisition fee for 205 Newbury St.
loan. This amount is amortized over the
term of the loan. $9,479 $12,322
$113,468 acquisition fee for GCC mortgage
loan. This amount is amortized over the
term of the loan. 12,157 24,315
$152,880 acquisition fee for investment
in the Affiliated Joint Venture. This
amount is amortized over a period of 31.5 years. 120,322 123,962
$1,203,097 acquisition fees paid to the
General Partner. Prior to June 30, 1993,
this amount was amortized over a period
of 30 years. Subsequent to June 30, 1993,
the unamortized balance is amortized over
a period of 8.5 years. 757,837 848,777
$223,773 of tenant improvements. These amounts
are amortized over the terms of the leases to
which they relate. 132,584 105,252
$509,870 of lease commissions. These amounts
are amortized over the terms of the leases to
which they relate. 283,628 277,101
---------- ----------
$1,316,007 $1,391,729
========== ==========
</TABLE>
14
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
9. Federal Income Taxes
--------------------
A reconciliation of the net income reported in the Statements of
Operations to the net income reported for federal income tax
purposes is as follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1995 1994
---- ----
<S> <C> <C>
Net income per Statements of Operations $1,776,854 $1,099,626
Add/(deduct): Excess of book depreciation
over tax depreciation 80,117 80,031
Excess of book amortization
over tax amortization 66,239 37,209
Other income (214,403) -
---------- ----------
Net income for federal income tax purposes $1,708,807 $1,142,448
========== ==========
</TABLE>
15
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
- -------
During the offering period, from October 2, 1987 to January 2, 1989, the
Partnership sold 2,601,552 Units representing gross proceeds (exclusive of
the John Hancock Limited Partners' contribution, which was used to pay
sales commissions) of $52,031,040. The proceeds of the offering were used
to acquire investments, fund reserves, and pay acquisition fees and
organizational and offering expenses. A descriptive list of these
investments is set forth in Notes 5, 6 and 7 to the Financial Statements
included in Item 1 of this Report.
Liquidity and Capital Resources
- -------------------------------
At September 30, 1995, the Partnership had $3,407,101 in cash and cash
equivalents, $35,851 in restricted cash and $107,885 in long-term
restricted cash.
The Partnership has a working capital reserve with a current balance of
approximately 5% of the offering proceeds. The General Partner anticipates
that such amount should be sufficient to satisfy the Partnership's general
liquidity requirements. Liquidity would, however, be materially adversely
affected if there were a significant reduction in revenues or significant
unanticipated operating costs or unanticipated capital expenditures. If
any or all of these events were to occur, to the extent that working
capital reserves would be insufficient to satisfy the cash requirements of
the Partnership, it is anticipated that additional funds would be obtained
through a further reduction of cash distributions to Investors, bank loans,
short-term loans from the General Partner or its affiliates, or the sale or
financing of Partnership investments.
A tenant at the Miami International Distribution Center that had occupied
approximately 70,000 square feet, or 33% of the property, has been
delinquent in rental payments and expense reimbursements since July 1993
and vacated the property in September 1993. The tenant's lease obligations
expired in December 1994. The General Partner has brought an action
against the former tenant to obtain full collection of all delinquent and
other amounts due under the lease agreement in the aggregate amount of
approximately $550,000. The matter had been scheduled to be heard by the
court during the fourth quarter of 1995; however, because the General
Partner amended its complaint, the action has been delayed and the matter
is currently expected to be heard by the court during the second quarter of
1996.
16
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Liquidity and Capital Resources (continued)
- -------------------------------
The General Partner subsequently secured two replacement tenants for the
vacated space at the Miami International Distribution Center. One tenant
took occupancy of approximately 28,000 square feet, or 13% of the property,
under a lease commencing during June 1994 and the other tenant took
occupancy of approximately 42,000 square feet, or 20% of the property,
under a lease commencing during July 1994. However, the tenant leasing the
28,000 square foot space and whose lease is scheduled to expire in
September 2004, subsequently vacated the space and is delinquent in rental
payments and expense reimbursements due since November 1, 1994. The
General Partner filed a complaint demanding payment from this tenant for
delinquent rental amounts as well as all future obligations due under the
lease agreement. The Partnership received a default judgment against this
tenant on November 1, 1995 and is seeking a final judgment in the amount of
approximately $1,830,000 plus accrued interest from the date of the
judgment. Based upon the financial condition of this tenant, there can be
no assurance that the Partnership will be able to collect upon this amount.
The General Partner has also been seeking a replacement tenant for this
space.
The Miami International Distribution Center is located in an area that the
Miami Airport Authority has targeted for future expansion. In this regard,
the Miami Airport Authority has contacted the General Partner concerning a
potential sale of the property. It is possible that under certain
circumstances the Miami Airport Authority could obtain this property
through its powers of eminent domain, although at this time no such plans
have been announced or otherwise communicated to the General Partner. A
resolution of this matter is expected during the first quarter of 1996.
The Fulton Business Park's occupancy was 95% at September 30, 1995 and is
100% occupied as of the date hereof. During the third quarter of 1995 two
new tenants took occupancy of the property under leases representing
approximately 22,000 square feet, or 15% of the property. Another new
tenant entered into a lease representing approximately 7,500 square feet,
or 5% of the property, which commenced on November 1, 1995. During the
first nine months of 1995, two existing tenants renewed their leases, one
representing approximately 30,500 square feet, or 20% of the property, and
the other representing approximately 6,500 square feet. This latter tenant
also decided to expand the space it occupies at the property by
approximately 7,000 square feet, for an aggregate of approximately 13,500
square feet, or 9% of the property. However, two tenants occupying an
aggregate of approximately 7,500 square feet, or 5% of the property,
vacated the property upon the expiration of their leases during the first
six months of 1995.
During 1994 a tenant at the Fulton Business Park with a lease representing
approximately 20,000 square feet, or 13% of the property, and who was
delinquent in meeting its rental obligations, requested an amendment to its
lease to reduce the amount of space it occupied by approximately 7,000
square feet, or 5% of the property. The General Partner agreed to the
tenant's space reduction request, on the condition that the tenant execute
a promissory note for delinquent amounts due under the lease. Payments on
the promissory note were originally scheduled to commence on July 1, 1995,
however, the General Partner has amended the terms of the promissory note
to provide for payments commencing on January 1, 1996. This tenant was
current on rental payments due the Partnership as of September 30, 1995.
17
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Liquidity and Capital Resources (continued)
- -------------------------------
At September 30, 1995 the Park Square Shopping Center's occupancy was 86%.
The General Partner will continue to offer aggressive rental packages in an
effort to secure new tenants for the vacant space at the property.
Cash in the aggregate amount of $123,284 was used during the first nine
months of 1995 for the payment of leasing costs incurred at the
Partnership's properties. The General Partner anticipates that the
Partnership will incur an aggregate of approximately $225,000 of additional
leasing costs at its properties during the remainder of 1995. The current
balance in the working capital reserve should be sufficient to pay such
costs.
During the nine months ended September 30, 1995, approximately $42,000 of
cash generated from the Partnership's operations was used to fund non-
recurring repair and maintenance costs incurred at the Miami International
Distribution Center. The General Partner anticipates that the Partnership
will incur additional non-recurring repair and maintenance costs in the
aggregate amount of approximately $88,000 at its properties during the
remainder of 1995. These additional costs will be funded from the
operations of the Partnership's properties and are not expected to have a
significant impact on the Partnership's liquidity.
Cash in the aggregate amount of $1,892,036, generated from the
Partnership's operations, was distributed to the General Partner and the
Investors during the first nine months of 1995. The General Partner
anticipates that the Partnership will make a distribution during the fourth
quarter of 1995 comparable to the distributions made during each of the
first three quarters of 1995.
Both of the borrowers on the Partnership's mortgage investments, 205
Newbury Associates and General Camera Corporation, remained current on
their minimum required debt service payments as of September 30, 1995 and
as of the date hereof. Contingent interest payments on the 205 Newbury
Associates mortgage investment, which are based upon the net cash flow of
the property, have not been received since 1990 because the property has
not generated any cash flow in excess of the minimum required debt service
payments. The entire unamortized principal balance and all accrued but
unpaid interest on the mortgage loan to General Camera Corporation is due
on July 1, 1996. The General Partner has no reason to believe, based upon
current information and events, that the minimum required debt service
payments will not continue to be met or that the outstanding principal
balance of the loans will not be repaid upon maturity. Should either of
the borrowers fail to meet the minimum required debt service payments,
there would be a material adverse affect upon the Partnership's liquidity
as well as a permanent impairment in the book value of the mortgage
investment.
The General Partner had the Fulton Business Park property independently
appraised during the second quarter of 1995. Based upon the appraiser's
investigation and analysis, the property's market value was estimated to be
approximately $3,150,000. The net book value of the Fulton Business Park
property of approximately $4,054,000 at September 30, 1995 was evaluated in
comparison to the estimated future undiscounted cash flows and the recent
independent appraisal and, based upon such evaluation, the General Partner
determined that no permanent impairment in value exists and that a write-
down in value was not required as of September 30, 1995. The Partnership's
cumulative investment in the property, before accumulated depreciation is
approximately $5,139,000.
18
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Liquidity and Capital Resources (continued)
- -------------------------------
The General Partner evaluated the carrying value of each of the
Partnership's properties and its joint venture investment as of December
31, 1994 by comparing each such carrying value to the related property's
future undiscounted cash flows and the then most recent independent or
internal appraisals, in order to determine whether any permanent impairment
in values existed. In addition, the General Partner evaluated the status
of its mortgage investments and their ultimate collectibility as of
December 31, 1994. Based upon such evaluations, the General Partner
determined that no permanent impairment in values existed and, therefore,
no write-downs were recorded.
The General Partner will continue to conduct periodic property and
investment valuations, using internal or independent appraisals, in order
to determine whether a permanent impairment in value exists on any of the
Partnership's investments.
Results of Operations
- ---------------------
Net income for the nine months ended September 30, 1995 was $1,776,854, as
compared to net income of $1,070,886 for the same period in 1994. The
increase in net income is primarily attributable to an increase in income
from the Partnership's joint venture investment (the "Affiliated Joint
Venture") as well as an increase in the performance of the Miami
International Distribution Center.
Average occupancy for the Partnership's equity real estate investments for
the nine months ended September 30, 1995 was as follows:
Park Square Shopping Center 85%
Fulton Business Park 86%
Miami International Distribution Center 87%
Quince Orchard Corporate Center
(Affiliated Joint Venture) 100%
Rental income at the Partnership's properties for the nine months ended
September 30, 1995 increased by $190,987, or 12%, as compared to the nine
months ended September 30, 1994. Rental income at the Miami International
Distribution Center increased by 23% between periods due to an increase in
average occupancy from 68% to 87%. Rental income at the Fulton Business
Park increased by 20% during the first nine months of 1995 as compared to
same period in 1994 primarily due to increases in the rental rates paid by
certain tenants. In addition, the first nine months of 1994 were affected
by a decrease in rental income due to the fact that two tenants at the
Fulton Business Park were delinquent in their rental obligations during
that period. Rental income at the Park Square Shopping Center was
consistent between periods.
The Partnership was allocated income of $557,024 from the Affiliated Joint
Venture during the first nine months of 1995 as compared to $52,656 during
the same period of 1994, representing an increase of $504,368. This
increase is primarily due to the termination of the former tenant's lease
at the Quince Orchard Corporate Center in September 1993 and the present
tenant taking occupancy of the property in March 1994.
19
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Results of Operations (continued)
- ---------------------
Property operating expenses for the nine months ended September 30, 1995
increased by $20,624, or 6%, as compared to the same period in 1994. The
Partnership's share of property operating expenses at the Miami
International Distribution Center increased by 9% between periods primarily
due to certain non-recurring maintenance and repairs incurred at the
property during the nine months ended September 30, 1995. The
Partnerships' share of property operating expenses at the Fulton Business
Park increased by 23% between periods primarily due to the fact that a
refund of a portion of the prior year's real estate taxes was received
during the nine months ended September 30, 1994, and, therefore, decreased
property operating expenses during that period. Excluding such tax refund,
the Partnership's share of operating expenses at the property remained
consistent between periods. The Partnership's share of property operating
expenses at the Park Square Shopping Center was consistent between periods.
The General Partner believes that inflation has had no significant impact
on income from operations during the nine months ended September 30, 1995,
and the General Partner anticipates that inflation will not have a
significant impact during the remainder of 1995.
20
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Cash Flow
- ---------
The following table provides the calculations of Cash from Operations and
Distributable Cash from Operations which are calculated in accordance with
Section 17 of the Partnership Agreement:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1995 1994
---- ----
<S> <C> <C>
Net cash provided by operating
activities (a) $2,664,215 $1,560,736
Net change in operating assets and liabilities (a) (230,607) 408,568
---------- ----------
Net cash provided by operations (a) 2,433,608 1,969,304
Increase in working capital reserves (541,570) (77,266)
---------- ----------
Cash from operations (b) 1,892,038 1,892,038
Decrease in working capital reserves - -
---------- ----------
Distributable cash from operations (b) $1,892,038 $1,892,038
========== ==========
Allocation to General Partner $18,920 $18,920
Allocation to Investors 1,873,118 1,873,118
Allocation to John Hancock Limited Partner - -
---------- ----------
$1,892,038 $1,892,038
========== ==========
</TABLE>
(a) Net cash provided by operating activities, net change in operating
assets and liabilities, and net cash provided by operations are as
calculated in the Statements of Cash Flows included in Item 1 of
this Report.
(b) As defined in the Partnership Agreement. Distributable Cash from
Operations should not be considered as an alternative to net
income (i.e. not an indicator of performance) or to reflect cash
flows or availability of discretionary funds.
During the fourth quarter of 1995, the Partnership will make a cash
distribution in the amount of $624,372 to the Investors, representing a 5%
annualized return to all Investors of record at September 30, 1995, based
on Distributable Cash from Operations for the quarter then ended.
21
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
There are no material pending legal proceedings, other than
ordinary routine litigation incidental to the business of the
Partnership, to which the Partnership is a party or to which any
of its properties is subject.
Item 2. Changes in Securities
There were no changes in securities during the third quarter of
1995.
Item 3. Defaults upon Senior Securities
There were no defaults upon senior securities during the third
quarter of 1995.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders of
the Partnership during the third quarter of 1995.
Item 5. Other information
Item 6. Exhibits and Reports on form 8-K
(a) There are no exhibits to this report
(b) There were no reports on Form 8-K filed during the third
quarter of 1995.
22
JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
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, on the 14th day of November, 1995.
John Hancock Realty Income Fund-II
Limited Partnership
By: John Hancock Realty Equities, Inc.,
General Partner
By: WILLIAM M. FITZGERALD
-------------------------------
William M. Fitzgerald, President
By: RICHARD E. FRANK
-------------------------------
Richard E. Frank, Treasurer
(Chief Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000818257
<NAME> JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 3,550,837
<SECURITIES> 0
<RECEIVABLES> 160,351
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,603,303
<PP&E> 24,396,994
<DEPRECIATION> 4,367,414
<TOTAL-ASSETS> 39,629,999
<CURRENT-LIABILITIES> 562,408
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 39,067,591
<TOTAL-LIABILITY-AND-EQUITY> 39,629,999
<SALES> 0
<TOTAL-REVENUES> 2,336,318
<CGS> 0
<TOTAL-COSTS> 384,713
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,776,854
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,776,854
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,776,854
<EPS-PRIMARY> 0.68
<EPS-DILUTED> 0.68
</TABLE>
