5
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the period ended September 30, 1997
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________.
Commission File Number: 0-18149
DEAN WITTER REALTY YIELD PLUS II, L.P.
(Exact name of registrant as specified in governing instrument)
Delaware 13-3469111
(State of organization) (IRS Employer
Identification No.)
2 World Trade Center, New York, NY 10048
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212)
392-1054
Former name, former address and former fiscal year, if changed
since last report: not applicable
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 1 of 17
<TABLE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DEAN WITTER REALTY YIELD PLUS II, L.P.
BALANCE SHEETS
<CAPTION>
September 30,
December 31,
1997 1996
<S> <C>
<C>
ASSETS
Investment in participating mortgage loan, net of
allowance of $11,264,750 $13,755,767
$13,755,767
Investment in unconsolidated partnership 18,632,924
19,166,087
Building and improvements, net of accumulated
depreciation of $1,161,660 and $1,012,772 6,142,966
6,291,854
Cash and cash equivalents 2,963,803
2,963,298
Deferred expenses, net 399,994
561,626
Other assets 278,270
265,380
$42,173,724
$43,004,012
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and other liabilities $ 267,846 $
205,676
Security deposits 97,919
97,919
365,765
303,595
Partners' capital:
General partners 3,516,500
3,605,746
Limited partners ($500 per Unit, 173,164 Units issued)
38,291,459 39,094,671
Total partners' capital 41,807,959
42,700,417
$42,173,724
$43,004,012
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
DEAN WITTER REALTY YIELD PLUS II, L.P.
STATEMENTS OF OPERATIONS
Three and nine months ended September 30, 1997 and 1996
<CAPTION>
Three months ended Nine
months ended
September 30,
September 30,
1997 1996 1997 1996
<S> <C> <C> <C>
<C>
Revenues:
Interest on participating
mortgage loan $125,929 $ 501,085 $ 251,849
$1,497,808
Rental 394,127 393,212 1,156,478
1,090,414
Equity in earnings of
unconsolidated partnership 212,069 181,231
646,125 596,807
Interest and other 39,098 36,255 122,833
96,899
771,223 1,111,783 2,177,285
3,281,928
Expenses:
Property operating 212,476 196,760 664,880
607,804
Depreciation and amortization 103,507 98,713
310,520 296,140
General and administrative 116,955 92,619
290,551 246,704
Loss on impairment of
participating mortgage loan - 1,477,000
- - 1,477,000
432,938 1,865,092 1,265,951
2,627,648
Net income (loss) $338,285 $ (753,309) $ 911,334
$ 654,280
Net income (loss) allocated to:
Limited partners $304,457 $ (677,978) $ 820,201
$ 588,852
General partners 33,828 (75,331) 91,133
65,428
$338,285 $ (753,309) $ 911,334
$ 654,280
Net income (loss) per Unit of
limited partnership interest $ 1.76 $ (3.92) $
4.74 $ 3.40
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
DEAN WITTER REALTY YIELD PLUS II, L.P.
STATEMENT OF PARTNERS' CAPITAL
Nine months ended September 30, 1997
<CAPTION>
Limited General
Partners Partners Total
<S> <C> <C>
<C>
Partners' capital at January 1, 1997 $39,094,671
$3,605,746 $42,700,417
Net income 820,201 91,133
911,334
Cash distributions (1,623,413)
(180,379) (1,803,792)
Partners' capital at September 30, 1997 $38,291,459
$3,516,500 $41,807,959
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
DEAN WITTER REALTY YIELD PLUS II, L.P.
STATEMENTS OF CASH FLOWS
Nine months ended September 30, 1997 and 1996
<CAPTION>
1997 1996
<S> <C>
<C>
Cash flows from operating activities:
Net income $ 911,334 $
654,280
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 310,520
296,140
Equity in earnings of unconsolidated partnership
(646,125) (596,807)
Loss on impairment of participating mortgage loan -
1,477,000
Increase in operating assets:
Other assets (12,890)
(36,755)
Increase (decrease) in operating liabilities:
Accounts payable and other liabilities 62,170
(63,613)
Net cash provided by operating activities
625,009 1,730,245
Cash flows from investing activities:
Contributions to unconsolidated partnership (311,484)
(914,514)
Distributions from unconsolidated partnership
1,490,772 1,490,606
Additions to building and improvements -
(212,002)
Net cash provided by investing activities
1,179,288 364,090
Cash flows used in financing activities:
Cash distributions (1,803,792)
(1,803,792)
Increase in cash and cash equivalents 505
290,543
Cash and cash equivalents at beginning of period
2,963,298 2,233,451
Cash and cash equivalents at end of period $ 2,963,803 $
2,523,994
See accompanying notes to consolidated financial
statements.
</TABLE>
DEAN WITTER REALTY YIELD PLUS II, L.P.
Notes to Financial Statements
1. The Partnership
Dean Witter Realty Yield Plus II, L.P. (the
"Partnership") is a limited partnership organized under
the laws of the State of Delaware in 1988. The
Managing General Partner of the Partnership is Dean
Witter Realty Yield Plus II Inc., which is wholly-owned
by Dean Witter Realty Inc. ("Realty").
The Partnership's records are maintained on the accrual
basis of accounting for financial and tax reporting
purposes.
The Partnership accounts for its investment in DW
Michelson Associates under the equity method.
Net income per Unit amounts were calculated by dividing
net income allocated to Limited Partners, in accordance
with the Partnership Agreement, by the weighted average
number of Units outstanding.
In the opinion of management, the accompanying
financial statements, which have not been audited,
include all adjustments necessary to present fairly the
results for the interim periods. Except for reserves
of uncollected interest relating to the participating
mortgage loan in 1997 and the loss on impairment of the
participating mortgage loan in 1996, such adjustments
consist only of normal recurring accruals.
These financial statements should be read in
conjunction with the annual financial statements and
notes thereto included in the Partnership's annual
report on Form 10-K filed with the Securities and
Exchange Commission for the year ended December 31,
1996. Operating results of interim periods may not be
indicative of the operating results for the entire
year.
The Financial Accounting Standards Board has recently
issued several new accounting pronouncements.
Statement No. 128, "Earnings per Share" establishes
standards for computing and presenting earnings per
share, and Statement No. 129, "Disclosure
DEAN WITTER REALTY YIELD PLUS II, L.P.
Notes to Financial Statements
of Information about Capital Structure" establishes
standards for disclosing information about an entity's
capital structure. These two standards will be
effective for the Partnership's 1997 year-end financial
statements. Statement No. 130, "Reporting
Comprehensive Income" establishes standards for
reporting and display of comprehensive income and its
components. Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information"
establishes standards for the way that public business
enterprises report information about operating segments
in annual financial statements and requires that those
enterprises report selected information about operating
segments in interim financial reports issued to
shareholders. It also establishes standards for
related disclosure about products and services,
geographic areas, and major customers. These two
standards are effective for the Partnership's 1998
financial statements.
Management of the Partnership does not believe that
these new standards will have any effect on the
Partnership's computation or presentation of net income
or net income per unit of limited partnership interest,
or its disclosures of capital structure, or other
disclosures.
2. Investment in Participating
Mortgage Loan
In October 1996, the owner/borrower of the One Congress
Street property defaulted on the participating mortgage
loan (the "Loan") made by the Partnership (42%) and an
affiliate, Dean Witter Realty Yield Plus, L.P. (58%)
("Yield Plus"; and collectively, with the Partnership,
the "Lender") by failing to timely pay its debt
service. Thereafter, the Lender accelerated the Loan
and attempted to take possession of the property. On
October 15, 1996, the owner/borrower filed a voluntary
petition under Chapter 11 of the U.S. Bankruptcy Code.
DEAN WITTER REALTY YIELD PLUS II, L.P.
Notes to Financial Statements
During the first nine-months of 1997, the
owner/borrower paid to the Partnership $251,849 of
$1,486,915 total interest due. The Partnership
reserved the remaining accrued but unpaid interest. As
of September 30, 1997, the Partnership's total reserves
against accrued but unpaid interest approximate
$1,703,000.
On October 27, 1997, the Lender entered into a
settlement agreement with the owner/borrower (the
"Agreement"). As part of the Agreement, a new
corporation which is jointly owned by the Partnership
and Yield Plus in proportion to their participations in
the Loan, has become the sole general partner (with a
19% ownership interest) (the "New General Partner") of
the owner/borrower. The Partnership and Yield Plus
have agreed to make all decisions concerning the
property jointly. The Lender has retained an affiliate
of the owner/borrower's original general partner as
property manager.
The Agreement also provides for the following:
(a) as a result of their interests in the New General
Partner, the Partnership and Yield Plus are
required to make additional loans to fund future
tenant improvements at the property (the "New
Loans") in proportion to their participations in
the Loan. Any New Loans will bear interest at
12%, payable monthly from available cash flow
generated by the property after payment of debt
service on the first mortgage loan and certain
operating escrows;
(b) the interest rate on the principal of the Loan,
default penalties and past due interest thereon
aggregating approximately $12.3 million has been
increased to 10%, payable monthly from available
cash flow generated by the property after payment
of debt service on the New Loans;
(c) any future unpaid debt service will accrue
interest at 10%; and
DEAN WITTER REALTY YIELD PLUS II, L.P.
Notes to Financial Statements
(d) the Partnership's and Yield Plus' interest in
adjusted net revenue and capital proceeds
generated by the property was increased from 58%
to 80%.
The Agreement has effectively changed the Partnership
from a participating lender to an equity owner in a
joint venture which owns the One Congress Street
property. As a result, the Partnership will receive
its share of net cash flow from the property (as it did
prior to the bankruptcy) and it will be required to
expend its share of costs for building improvements,
tenant improvements and leasing commissions in
connection with the leasing of vacant space as is
customary in most real estate markets.
In the Partnership's financial statements, as of
October 27, 1997, the investment in the Loan will be
replaced by an investment in a joint venture; partners'
capital will not be affected by these changes.
Thereafter, the Partnership will not recognize interest
income on the Loan; instead it will record its equity
in earnings or loss of the joint venture. The joint
venture will record rental income, property operating
expenses, interest expense and depreciation.
3. Investment in Unconsolidated
Partnership
Summarized financial information of DW Michelson is as
follows:
Three months ended Nine
months ended
September 30, September 30,
1997 1996 1997 1996
Revenues $1,688,465 $1,852,876 $5,021,044
$5,150,739
Expenses 1,257,343 1,484,447 3,707,515
3,937,471
Net income $ 431,122 $ 368,429 $1,313,529
$1,213,268
DEAN WITTER REALTY YIELD PLUS II, L.P.
Notes to Financial Statements
4. Related Party Transactions
An affiliate of Realty provided property management
services for two of the Partnership's properties during
1997 and 1996. The affiliate received property
management fees of $93,925 and $96,560 for the nine
months ended September 30, 1997 and 1996, respectively,
for these services. These amounts are included in
property operating expenses.
Realty performs administrative functions, processes
investor transactions and prepares tax information for
the Partnership. During each of the nine-month periods
ended September 30, 1997 and 1996, the Partnership
incurred approximately $159,000 for these services.
These amounts are included in general and
administrative expenses.
As of September 30, 1997, Realty and its affiliate were
owed a total of approximately $28,000 for these
services.
5. Litigation
Various public partnerships sponsored by Realty
(including the Partnership and its Managing General
Partner) are defendants in purported class action
lawsuits pending in state and federal court. The
complaints allege a number of claims, including breach
of fiduciary duty, fraud and misrepresentation, and
seek an accounting of profits, compensatory and other
damages in an unspecified amount, possible liquidation
of the Partnership under a receiver's supervision and
other equitable relief. The defendants are vigorously
defending these actions. It is impossible to predict
the effect, if any, the outcome of these actions might
have on the Partnership's financial statements.
DEAN WITTER REALTY YIELD PLUS II, L.P.
Notes to Financial Statements
6. Subsequent Event
On October 29, 1997, the Partnership paid a cash
distribution of $3.125 per Unit to Limited Partners.
The cash distribution aggregated $601,264 with $541,137
distributed to the Limited Partners and $60,127
distributed to the General Partners.
DEAN WITTER REALTY YIELD PLUS II, L.P.
ITEM 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Liquidity and Capital Resources
The Partnership raised $86,582,000 through a public
offering which was terminated in 1990. The Partnership
has no plans to raise additional capital.
The Partnership committed the gross proceeds raised in
the offering to three investments. No additional
investments are planned.
Employment growth, especially in business services and
technology industries, has increased demand for office
space. Such increasing demand and the limited amount
of speculative office construction has resulted in
falling vacancies, rising rents and increasing property
values in many markets. Some office markets are faring
better than others and, in certain areas, improved
market conditions can support new construction.
Recently, the market vacancy in the downtown financial
markets and government center of Boston (the location
of One Congress Street) has decreased to 5%. The
relative absence of office construction and growth in
demand from professional service firms is resulting in
an absorption of office space and an increase in rental
rates in the Class A office market in Orange County, CA
(the location of 2600 Michelson Drive). The industrial
property market in the South Bay area of Los Angeles
(the location of the Century Alameda Distribution
Center) remains strong, and is experiencing increasing
rental rates and a limited supply of large vacant
blocks of Class A space.
The Managing General Partner has identified a potential
purchaser of the 2600 Michelson Drive property and has
begun to negotiate a sale agreement. The Managing
General Partner expects to market for sale the
Partnership's remaining investments over the next two
years. However, there is no assurance that the
Partnership will be able to sell the Partnership's
properties in the near future.
DEAN WITTER REALTY YIELD PLUS II, L.P.
The Partnership's liquidity depends upon the cash flow
from operations of its real estate investments,
interest on the participating mortgage loan and
expenditures for tenant improvements and leasing
commissions in connection with the leasing of space.
During the nine months ended September 30, 1997, both
the Century Alameda property and the Michelson joint
venture generated positive cash flow from operations,
and it is anticipated that they will continue to do so
for the remainder of 1997 and in 1998. As described in
Note 2 to the financial statements, the owner/borrower
of the One Congress Street property was in Chapter 11
bankruptcy proceedings until October 27, 1997, and did
not pay approximately $375,000 and $1,235,000 of its
minimum debt service during the three- and nine-month
periods ending September 30, 1997, respectively.
The Partnership's liquidity will also be affected by
sales of the Partnership's property interests; as
interests are sold, Partnership cash from operations
available to fund investor distributions and capital
expenditures decreases.
During the nine months ended September 30, 1997,
Partnership cash flows from operations, interest on the
participating mortgage loan and distributions from DW
Michelson Associates approximated distributions to
investors and contributions to DW Michelson Associates.
As of September 30, 1997, the Partnership has
commitments to fund approximately $180,000 to DW
Michelson Associates for lease-related capital
expenditures.
On October 27, 1997, the Partnership negotiated a
settlement with the owner/borrower of the participating
mortgage loan, who had filed a voluntary petition under
Chapter 11 of the U.S. bankruptcy code in October 1996.
See Note 2 to the financial statements.
The cash flow generated from the lease of the garage at
the One Congress Street property is projected to be
sufficient to pay the debt service due under the first
mortgage loan on the property.
DEAN WITTER REALTY YIELD PLUS II, L.P.
The lease at the One Congress Street property with the
General Services Administration ("GSA"), the sole
tenant of the office space at the property, expired
July 31, 1997. GSA continues to occupy its remaining
office space, and GSA and the owner/borrower are
negotiating a new lease. If the negotiations with the
GSA are not successful, there may be a significant
amount of time before a new tenant is found for this
space, and the rent to be received from a new tenant
and, as a result, the Partnership's cash flow from the
property may significantly decrease.
Also, the lease of Tools Exchange, a tenant which
occupies approximately 22% of the space at the Century
Alameda Distribution Center, expired in October 1997.
Tools Exchange continues to occupy its office space and
is negotiating a new lease with the Partnership. If
these negotiations are not successful, there may be a
significant amount of time before a new tenant is found
for this space, and the Partnership's cash flow from
the property may significantly decrease.
Until new leases are signed with GSA at One Congress
Street and/or Tools Exchange at the Century Alameda
property, the Partnership can not determine the amount
of operating cash flow it will receive from these
properties during the remainder of 1997 and in 1998,
and the amount of capital expenditures it will need to
attract and retain tenants at its properties. If the
Partnership incurs cash shortfalls in the future, the
Partnership will use its cash reserves to fund a
portion of cash distributions to investors and it might
need to reduce cash distributions.
On October 29, 1997, the Partnership paid a cash
distribution of $3.125 per Unit to the Limited
Partners. The cash distribution aggregated $601,264,
with $541,137 distributed to the Limited Partners and
$60,127 distributed to the General Partners.
Except as discussed above and in the financial
statements, the Managing General Partners is not aware
of any trends or events, commitments or uncertainties
that may have a material impact on liquidity.
DEAN WITTER REALTY YIELD PLUS II, L.P.
Operations
Fluctuations in the Partnership's operating results for
the three- and nine-month periods ended September 30,
1997 compared to 1996 are primarily attributable to the
following:
The Partnership's interest income on its participating
mortgage loan secured by the One Congress Street
property decreased in 1997 compared to 1996 due to
reserves of accrued but uncollected interest as
described above in Note 2 to the financial statements.
During the third quarter of 1996, the Partnership
recorded a loss on the impairment of its participating
mortgage loan.
There were no other individually significant factors
which caused changes in revenues or expenses.
A summary of the markets where the Partnership's
properties, and the property underlying the
Partnership's investment in participating mortgage loan
are located, and the performance of each property, is
as follows:
There has been no significant new construction in the
industrial building market in Lynwood, California, the
location of the Century Alameda Distribution Center.
The demand for space in industrial properties remains
strong with a current vacancy rate of 7%. Rental rates
continue to increase in this market as a result of a
limited supply of large vacant blocks of class A space.
During the nine-month period ended September 30, 1997,
the property remained 100% leased to 3 tenants. As
discussed in "Liquidity and Capital Resources", Tools
Exchange continues to occupy its space at the property,
and is negotiating a new lease with the Partnership.
No other leases expire until 2005.
During the third quarter of 1997, the market vacancy
rate for Class A office space in Irvine, California,
the location of 2600 Michelson Drive, decreased
slightly to 14%. Rental rates have increased in this
market because of the continued strong demand for
quality Class A space and the lack of significant new
construction.
DEAN WITTER REALTY YIELD PLUS II, L.P.
During the third quarter of 1997, occupancy at the
property increased to 95%. Leases on approximately 26%
and 17% of the space at the property expire in 1998 and
1999, respectively.
During the third quarter of 1997, the downtown Boston
office market, the location of One Congress Street,
continued to strengthen and experienced a slight
increase in rental rates. There is no significant new
construction in this market. As discussed above, GSA
is the sole tenant of the office space, which is 70%
occupied at September 30, 1997. The owner/borrower is
negotiating a new lease with GSA because GSA's existing
lease expired July 31, 1997. GSA still occupies its
space while it negotiates a new lease. Also, the
retail space, which is not a significant portion of the
overall space, remained substantially vacant at
September 30, 1997.
Inflation
Inflation has been consistently low during the periods
presented in the financial statements and, as a result,
has not had a significant effect on the operations of
the Partnership or its properties.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits.
An exhibit index has been filed as part of
this Report on Page E1.
b) Report on Form 8-K.
None.
DEAN WITTER REALTY YIELD PLUS II, L.P.
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.
DEAN WITTER REALTY YIELD
PLUS II, L.P.
By: Dean Witter Realty Yield
Plus II Inc.
Managing General Partner
Date: November 14, 1997 By: /s/E. Davisson
Hardman, Jr.
E. Davisson Hardman, Jr.
President
Date: November 14, 1997 By: /s/Lawrence
Volpe
Lawrence Volpe
Controller
(Principal Financial and
Accounting Officer)
DEAN WITTER REALTY YIELD PLUS II, L.P.
Quarter Ended September 30, 1997
Exhibit Index
Exhibit
No. Description
27 Financial Data Schedule
E1
[ARTICLE] 5
[LEGEND]
Registrant is a limited partnership which invests in real estate,
participating mortgage loans, and real estate joint ventures. In
accordance with industry practice, its balance sheet is unclassified. For
full information, refer to the accompanying unaudited financial statements.
<TABLE>
<S> <C>
[PERIOD-TYPE] 9-MOS
[FISCAL-YEAR-END] DEC-31-1997
[PERIOD-END] SEP-30-1997
[CASH] 2,963,803
[SECURITIES] 0
[RECEIVABLES] 278,270
[ALLOWANCES] 0
[INVENTORY] 0
[CURRENT-ASSETS] 0
[PP&E] 0
[DEPRECIATION] 0
[TOTAL-ASSETS] 42,173,724<F1>
[CURRENT-LIABILITIES] 0
[BONDS] 0
[COMMON] 0
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[OTHER-SE] 41,807,959<F2>
[TOTAL-LIABILITY-AND-EQUITY] 42,173,724<F3>
[SALES] 0
[TOTAL-REVENUES] 2,177,285<F4>
[CGS] 0
[TOTAL-COSTS] 0
[OTHER-EXPENSES] 1,265,951<F5>
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 0
[INCOME-PRETAX] 911,334
[INCOME-TAX] 0
[INCOME-CONTINUING] 911,334
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 911,334
[EPS-PRIMARY] 4.74<F6>
[EPS-DILUTED] 0
<FN>
<F1>In addition to cash and receivables, total assets include net investments
in building and improvements of $6,142,966, investment in unconsolidated
partnership of $18,632,924, net investment in participating mortgage loan
of $13,755,767 and net deferred expenses of $399,994.
<F2>Represents partners' capital.
<F3>Liabilities include accounts payable and other liabilities of $267,846 and
security deposits of $97,919.
<F4>Total revenue includes rent of $1,156,478, net interest on participating
mortgage loan of $251,849, equity in earnings of unconsolidated
partnership of $646,125 and other revenue of $122,833.
<F5>Other expenses include property operating expenses of $664,880,
depreciation and amortization of $310,520 and general and administrative
expenses of $290,551.
<F6>Represents net income per Unit of limited partnership interest.
</FN>
</TABLE>
