21
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 March 31, 1996
Commission File Number 0-18563
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
Massachusetts 04-3025607
(State or other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
200 Clarendon 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-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
INDEX
PART I: FINANCIAL INFORMATION PAGE
Item 1 - Financial Statements:
Balance Sheets at March 31, 1996 and
December 31, 1995 3
Statements of Operations for the Three
Months Ended March 31, 1996 and 1995 4
Statements of Partners' Equity for the
Three Months Ended March 31, 1996 and
for the Year Ended December 31, 1995 5
Statements of Cash Flows for the Three
Months Ended March 31, 1996 and 1995 6
Notes to Financial Statements 7-14
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 15-21
PART II: OTHER INFORMATION 22
2
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
BALANCE SHEETS
(Unaudited)
ASSETS
March 31, December 31,
1996 1995
---- ----
Current assets:
Cash and cash equivalents $2,815,681 $2,431,272
Restricted cash 10,693 6,323
Other current assets 156,739 282,343
----------- -----------
2,983,113 2,719,938
Investment in property:
Land 8,410,535 8,410,535
Building and improvements 24,942,540 24,942,540
----------- -----------
33,353,075 33,353,075
Less: accumulated depreciation 4,026,787 3,819,371
----------- -----------
29,326,288 29,533,704
Investment in joint venture 7,813,059 7,907,123
Long-term restricted cash 90,123 91,885
Deferred expenses, net of accumulated
amortization of $799,826 in 1996 and
$724,584 in 1995 1,548,633 1,556,764
Other assets 15,138 15,138
----------- -----------
Total assets $41,776,354 $41,824,552
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $235,724 $240,389
Accounts payable to affiliates 44,733 38,412
----------- -----------
Total current liabilities 280,457 278,801
Partners' equity/(deficit):
General partner's (34,112) (44,553)
Limited partners' 41,530,009 41,590,304
----------- -----------
Total partners' equity 41,495,897 41,545,751
----------- -----------
Total liabilities and partners'
equity $41,776,354 $41,824,552
=========== ===========
See Notes to Financial Statements
3
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
1996 1995
---- ----
Income:
Rental income $889,435 $855,159
Income from joint venture 181,516 188,211
Interest income 32,725 37,712
---------- ----------
Total income 1,103,676 1,081,082
Expenses:
Depreciation 207,416 207,416
Property operating expenses 56,352 64,206
Amortization of deferred expenses 75,242 46,854
General and administrative expenses 51,816 54,228
---------- ----------
Total expenses 390,826 372,704
---------- ----------
Net income $712,850 $708,378
========== ==========
Allocation of net income:
General Partner $48,576 $47,217
John Hancock Limited Partner - -
Investors 664,274 661,161
---------- ----------
$712,850 $708,378
========== ==========
Net Income per Unit $0.28 $0.27
========== ==========
See Notes to Financial Statements
4
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
STATEMENTS OF PARTNERS' EQUITY
(Unaudited)
Three Months Ended March 31, 1996 and
Year Ended December 31, 1995
<TABLE>
<CAPTION>
General Limited
Partner Partners Total
------- -------- -----
<S> <C> <C> <C>
Partners' equity/(deficit) at January 1, 1995
(2,415,234 Units outstanding) ($78,720) $41,898,654 $41,819,934
Less: Cash distributions (152,541) (2,898,274) (3,050,815)
Add: Net income 186,708 2,589,924 2,776,632
--------- ----------- -----------
Partners' equity/(deficit) at December 31, 1995
(2,415,234 Units outstanding) (44,553) 41,590,304 41,545,751
Less: Cash distributions (38,135) (724,569) (762,704)
Add: Net income 48,576 664,274 712,850
--------- ----------- -----------
Partners' equity/(deficit) at March 31, 1996
(2,415,234 Units outstanding) ($34,112) $41,530,009 $41,495,897
========= =========== ===========
</TABLE>
5
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1996 1995
---- ----
<S> <C> <C>
Operating activities:
Net income $712,850 $708,378
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 207,416 207,416
Amortization of deferred expenses 75,242 46,854
Cash distributions over/(under) equity
in income from joint venture 94,064 (27,253)
---------- ---------
1,089,572 935,395
Changes in operating assets and liabilities:
(Increase)/decrease in restricted cash (2,608) 3,250
Decrease/(increase) in other current assets 125,604 (103,275)
(Decrease)/increase in accounts payable and
accrued expenses (4,665) 16,531
Increase in accounts payable to affiliates 6,321 4,558
---------- ---------
Net cash provided by operating activities 1,214,224 856,459
Investing activities:
Acquisition of deferred expenses
and other assets (67,111) (7,358)
---------- ---------
Net cash used in investing activities (67,111) (7,358)
Financing activities:
Cash distributed to Partners (762,704) (762,704)
---------- ---------
Net cash used in financing activities (762,704) (762,704)
---------- ---------
Net increase in cash and cash equivalents 384,409 86,397
Cash and cash equivalents at beginning
of year 2,431,272 2,637,722
---------- ---------
Cash and cash equivalents at end
of period $2,815,681 $2,724,119
========== ==========
</TABLE>
See Notes to Financial Statements
6
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. Organization of Partnership
---------------------------
John Hancock Realty Income Fund-III Limited Partnership (the
"Partnership") was formed under the Massachusetts Uniform Limited
Partnership Act on November 4, 1988. As of March 31, 1996, 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-III Assignor, Inc. (the "Assignor Limited Partner"); and 2,667
Unitholders (the "Investors"). The Assignor Limited Partner holds
five Investor Limited Partnership Interests for its own account and
2,415,229 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 $2,100, representing capital contributions of
$1,000 from the General Partner, $1,000 from the John Hancock
Limited Partner, and $100 from the Assignor Limited Partner. The
Amended Agreement of Limited Partnership of the Partnership (the
"Partnership Agreement") authorized the issuance of up to 5,000,000
Units at $20 per unit. During the offering period, which
terminated on February 15, 1991, 2,415,229 Units were sold and the
John Hancock Limited Partner made additional capital contributions
of $3,863,366. There were no changes in the number of Units
outstanding subsequent to the termination of the offering period.
The Partnership is engaged solely in the business of acquiring,
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. Although the Partnership's
properties were acquired and are held free and clear of mortgage
indebtedness, the Partnership may incur mortgage indebtedness under
certain circumstances as specified in the Partnership Agreement.
The latest date on which the Partnership is due to terminate is
December 31, 2019, 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
properties of the Partnership will be disposed of, and the
Partnership terminated, before December 31, 2019.
7
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-III 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 presentation
have been included. Operating results for the three month period
ended March 31, 1996 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1996. 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, 1995.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting
period. Actual results may differ from those estimates.
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 current or long-term
based upon the terms of the related lease agreements.
Investments in property are recorded at cost less any property
write-downs for permanent impairment in value. 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.
8
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
2. Significant Accounting Policies (continued)
-------------------------------
Acquisition fees for the joint venture investment have been
deferred and are being amortized on a straight-line basis over a
period of thirty-one and a half years. Other deferred acquisition
fees are being amortized on a straight-line basis over a period of
eighty-four months. Capitalized tenant improvements and lease
commissions are being amortized on a straight-line basis over the
terms of the leases to which they relate.
No provision for income taxes has been made in the financial
statements as such taxes are the responsibility of the individual
partners and not of the Partnership.
The net income per Unit for the three months ended March 31, 1996
and 1995 was calculated by dividing the Investors' share of net
income by the number of Units outstanding at the end of such
periods.
3. The Partnership Agreement
-------------------------
Distributable Cash from Operations (defined in the Partnership
Agreement) is distributed 5% to the General Partner and the
remaining 95% 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 John Hancock Limited Partner
until it receives a 7% non-cumulative, non-compounded annual cash
return on its Invested Capital; and third, to the Investors and the
John Hancock Limited Partner in proportion to their respective
Capital Contributions (defined in the Partnership Agreement).
However, any Distributable Cash from Operations which is available
as a result of a reduction in working capital reserves funded by
Capital Contributions of the Investors will be distributed 100% to
the Investors.
9
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
3. The Partnership Agreement (continued)
-------------------------
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 for that year. If
such profits are greater than Distributable Cash from Operations
for any year, they are allocated 5% to the General Partner and 95%
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.
4. Transactions with the General Partner and Affiliates
----------------------------------------------------
Fees, commissions and other costs incurred or paid by the General
Partner or its affiliates during the three months ended March 31,
1996 and 1995, and to which the General Partner or its affiliates
are entitled to reimbursement from the Partnership, were $44,733
and $34,611, respectively. These expenses are included in expenses
on the Statements of Operations.
Accounts payable to affiliates represents 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.
10
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
5. Investment in Property
----------------------
Investment in property at cost, less any write-downs, consists of
managed, fully-operating, commercial real estate as follows:
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1995
-------------- -----------------
<S> <C> <C>
Palms of Carrollwood Shopping Center $10,930,578 $10,930,578
Yokohama Tire Warehouse 9,352,221 9,352,221
Purina Mills Distribution Building 4,203,406 4,203,406
Allmetal Distribution Building 1,636,050 1,636,050
Stone Container Building 2,088,804 2,088,804
Business Center at Pureland 5,142,016 5,142,016
----------- -----------
$33,353,075 $33,353,075
=========== ===========
</TABLE>
The real estate market is cyclical in nature and is materially
affected by general economic trends and economic conditions in the
market where a property is located. As a result, determination of
real estate values involves subjective judgments. These judgments
are based on current market conditions and assumptions related to
future market conditions. These assumptions involve, among other
things, the availability of capital, occupancy rates, rental rates,
interest rates and inflation rates. Amounts ultimately realized
from each property may vary significantly from the market values
presented and the differences could be material. Actual market
values of real estate can be determined only by negotiation between
the parties in a sales transaction.
6. Investment in Joint Venture
---------------------------
On December 28, 1988, the Partnership invested $75,000 to acquire a
0.5% interest in JH Quince Orchard Partners ( the "Affiliated Joint
Venture"), a joint venture between the Partnership and John Hancock
Realty Income Fund-II Limited Partnership ("Income Fund-II"). The
Partnership had an initial 0.5% interest and Income Fund-II had an
initial 99.5% interest in the Affiliated Joint Venture. Pursuant
to the partnership agreement of the Affiliated Joint Venture, the
Partnership 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, the Partnership
exercised such option and Income Fund-II transferred a 49.5%
interest in the Affiliated Joint Venture to the Partnership 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.
11
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
6. Investment in Joint Venture (continued)
---------------------------
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 March 31, 1996,
97.55% has been contributed by the Affiliated Joint Venture. The
Affiliated Joint Venture continues to hold a 75% interest in QOCC-1
Associates.
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.
12
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
7. Deferred Expenses
-----------------
Deferred expenses consist of the following:
<TABLE>
<CAPTION>
Unamortized Unamortized
Balance at Balance at
Description March 31, 1996 December 31, 1995
----------- -------------- -----------------
<S> <C> <C>
$152,880 of acquisition fees for
investment in the Affiliated Joint
Venture. This amount is amortized
over a period of 31.5 years. $117,896 $119,109
$829,622 of tenant improvements. These
amounts are amortized over the terms of
the leases to which they relate. 743,092 719,916
$292,336 of lease commissions. These
amounts are amortized over the terms
of the leases to which they relate. 227,522 219,273
$1,073,621 of acquisition fees paid to the
General Partner. This amount is
amortized over a period of
eighty-four months. 460,123 498,466
---------- ----------
$1,548,633 $1,556,764
========== ==========
</TABLE>
13
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
8. 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>
Three Months Ended March 31,
1996 1995
---- ----
<S> <C> <C>
Net income per Statements of Operations $712,850 $708,378
Add: Excess of book depreciation
over tax depreciation 35,505 35,505
Excess of book amortization
over tax amortization 33,432 18,927
Other income (39,792) (71,467)
-------- --------
Net income for federal income tax purposes $741,995 $691,343
======== ========
</TABLE>
14
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-III 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 February 17, 1989 to February 15, 1991,
the Partnership sold 2,415,229 Units representing gross proceeds (exclusive
of the John Hancock Limited Partner's contribution which was used to pay
sales commissions) of $48,304,580. The proceeds of the offering were used
to acquire investment properties, fund reserves and pay acquisition fees
and organizational and offering expenses. These investments are described
more fully in Notes 5 and 6 to the Financial Statements included in Item 1
of this Report.
Liquidity and Capital Resources
- -------------------------------
At March 31, 1996, the Partnership had $2,815,681 in cash and cash
equivalents, $10,693 in restricted cash and $90,123 in long-term restricted
cash.
The Partnership has a working capital reserve with a current balance of
approximately 4% of the offering proceeds. The General Partner anticipates
that such amount will be sufficient to satisfy the Partnership's general
liquidity requirements. Based upon the current balance of the working
capital reserve and the projected level of cash flows to be generated from
the Partnership's properties, the Partnership will increase cash
distributions to Investors from an annualized rate of 6% to an annualized
rate of 7%, effective with the May 15, 1996 distribution. The
Partnership's 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
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.
During the three months ended March 31, 1996, cash from working capital
reserves in the aggregate amount of $67,111 was used for the payment of
leasing costs incurred at the Palms of Carrollwood Shopping Center ("Palms
of Carrollwood") and Business Center at Pureland properties. The General
Partner anticipates that the Partnership will incur an aggregate of
approximately $626,000 of additional leasing costs at the Palms of
Carrollwood, Stone Container and Business Center at Pureland properties
during the remainder of 1996. The General Partner anticipates that the
current balance in the working capital reserve should be sufficient to pay
such leasing costs.
15
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-III 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)
- -------------------------------
During the three months ended March 31, 1996, approximately $8,000 of cash
generated from the Partnership's operations was used to fund non-recurring
maintenance and repair expenses incurred at Palms of Carrollwood. The
General Partner anticipates that the Partnership will incur additional non-
recurring repair and maintenance expenses in the aggregate amount of
approximately $215,000 during the remainder of 1996, the majority of which
is anticipated to be incurred at the Palms of Carrollwood. These
additional expenses 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 amount of $762,704, generated from the Partnership's
operations, was distributed to the General Partner and the Investors during
the first quarter of 1996. Effective with the May 15, 1996 distribution,
the Partnership will increase cash distributions to approximately $845,000
during each of the remaining three quarters of 1996. The General Partner
anticipates that the Partnership will make distributions during the third
and fourth quarters of 1996 comparable to the distribution made on May 15,
1996.
One of the anchor tenants at the Palms of Carrollwood vacated the property
during June 1995. In July 1995, the General Partner secured a new anchor
tenant to occupy this space under a lease commencing in November 1995.
Three tenants at the Palms of Carrollwood have leases that contain clauses
that make reference to the situation in which the former anchor tenant
ceased operations at the property and an acceptable replacement tenant, in
accordance with the terms of the respective tenants' leases, was not
secured. The following table sets forth the approximate amount of square
feet leased by these three tenants, their applicable lease expiration dates
and the applicable lease clauses relating to the replacement of the former
anchor tenant:
<TABLE>
<CAPTION>
Amount of Lease Expiration
Square Feet Leased Date Lease Clause Relating to Replacement of Former Anchor Tenant
- ------------------ ---- ------------------------------------------------------------
<S> <C> <C>
38,000 November 2004 Reduce rental payments by 25%
10,500 January 2005 Reduce rental payments by 25% or terminate lease obligations
10,500 February 1997 Terminate lease obligations
</TABLE>
16
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-III 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 tenant leasing approximately 38,000 square feet reduced its rental
payments effective November 28, 1995. In the General Partner's opinion,
the replacement tenant is acceptable (in accordance with the terms of the
tenant's lease) and, therefore, the tenant does not have the right to such
a reduction. During March 1996, the General Partner filed a complaint
against this tenant demanding payment in full of all unpaid rent. The
General Partner will continue to use all available legal remedies in order
to obtain collection of any outstanding amounts due under the lease
agreement resulting from this rental reduction.
The tenant leasing approximately 10,500 square feet, and whose lease is due
to expire in January 2005, reduced its rental payments effective April
1996. In the General Partner's opinion, this tenant does not have the
right to such a reduction. The General Partner intends to use all
available legal remedies in order to obtain collection of any outstanding
amounts resulting from this rental reduction that may become due under the
lease agreement.
The other tenant leasing approximately 10,500 square feet continues to make
its scheduled rental payments.
The General Partner does not believe that any reduction in rental payments
or any possible lease terminations resulting from the replacement of the
original anchor tenant will have a material adverse affect on the
Partnership's liquidity.
In addition, the General Partner obtained legal judgments against two
former tenants that vacated the Palms of Carrollwood and ceased paying rent
prior to the expiration of their respective leases. During January 1996,
the Partnership received approximately $7,100 from a bankruptcy court,
representing the final settlement of the Partnership's judgment amount
against one of these delinquent tenants. With respect to the other
delinquent tenant, the Partnership continues to pursue collection of a
summary judgment in the amount of $57,000. Based upon the financial
condition of this other tenant, however, there can be no assurance that the
Partnership will be able to collect all, or any, of this amount.
At March 31, 1996, Palms of Carrollwood was 80% occupied. During the
remainder of 1996, no significant leases are scheduled to expire at the
property. The General Partner will continue to offer competitive leasing
packages in an effort to secure lease renewals with existing tenants as
well as secure new tenants for the remaining vacant space.
17
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-III 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 Partnership's warehouse properties are presently 100% occupied. The
following table sets forth the names of the lessees at each of the
Partnership's warehouse properties and the earliest date on which the
applicable lessee's lease obligations may terminate.
<TABLE>
<CAPTION>
Property Lessee Lease Expiration
-------- ------ ----------------
<S> <C> <C>
Yokohama Tire Warehouse Yokohama Tire Corp. March 31, 2006
Purina Mills Distribution Building Purina Mills, Inc. December 1, 1998
Allmetal Distribution Building Allmetal, Inc. August 31, 1998
Stone Container Building Stone Container Corp. December 31, 2011
Business Center at Pureland Forbo Wallcoverings, Inc. December 31, 1998
Business Center at Pureland National Polystyrene
Recycling Co., L.P. May 31, 2001
</TABLE>
The General Partner anticipates that the warehouse properties should
provide the Partnership with stable income performance during 1996.
During 1995, a tenant holding a lease for approximately 60,500 square feet,
or 51%, of the Business Center at Pureland property, renewed its lease for
an additional three-year term commencing in January 1996. During the three
months ended March 31, 1996, the Partnership paid approximately $37,200 in
leasing costs in connection with this renewal. The Partnership expects to
spend an additional $105,000 in leasing costs in connection with this
renewal during the remainder of 1996. The current balance in the working
capital reserve should be sufficient to pay such leasing costs.
During 1995, Stone Container Corporation, the sole tenant at the Stone
Container Building, requested approval from the Partnership to construct
additional office space within the existing 80,000 square foot area of the
building. The General Partner agreed to construct the additional office
space in exchange for i) an increase in the tenant's rental rate, in an
amount equivalent to the total cost of constructing the additional office
space through the end of the existing term of the lease (December 2001) and
ii) the tenant exercising its two five-year lease options to extend the
term of the lease to December 2011. The General Partner anticipates that
it will incur approximately $124,000 in construction costs during 1996 in
connection with this transaction. The General Partner believes that the
construction of this additional space and the extension of the tenant's
lease at the property will have a favorable impact on the market value of
the property.
18
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-III 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 had the Stone Container Building property independently
appraised during the first quarter of 1996. Based upon the appraiser's
investigation and analysis, the property's market value is estimated to be
approximately $2,100,000 as of March 31, 1996. The net book value of the
Stone Container Building property of approximately $1,874,000 at March 31,
1996 was evaluated in comparison to its estimated future undiscounted cash
flows and the independent appraisal, and, based upon such evaluation, the
General Partner determined that no permanent impairment in value existed
and that a write-down in value was not required. The Partnership's
cumulative investment in the property, before accumulated depreciation, is
approximately $2,089,000. The appraiser estimates that the property's
market value will be approximately $2,200,000 upon completion of the
additional office space.
The General Partner evaluated the carrying value of each of the
Partnership's other properties and its investment in the Affiliated Joint
Venture as of December 31, 1995 by comparing such carrying value to the
related property's future undiscounted cash flows and the then most recent
internal appraisal in order to determine whether a permanent impairment in
value existed. Based upon such evaluations, the General Partner determined
that no permanent impairment in values existed and, therefore, no write-
downs were recorded as of December 31, 1995.
The General Partner will continue to conduct property valuations, using
internal or independent appraisals, in order to determine whether a
permanent impairment in value exists on any of the Partnership's
properties.
Results of Operations
- ---------------------
Net income for the three months ended March 31, 1996 was $712,850, as
compared to net income of $708,378 for the same period in 1995,
representing an increase in the Partnership's net income of $4,472, or 1%.
Average occupancy for the Partnership's investments was as follows:
Three Months Ended March 31,
1996 1995
---- ----
Palms of Carrollwood Shopping Center 81% 78%
Quince Orchard Corporate Center
(Affiliated Joint Venture) 100% 100%
Yokohama Tire Warehouse 100% 100%
Purina Mills Distribution Building 100% 100%
Allmetal Distribution Building 100% 100%
Stone Container Building 100% 100%
Business Center at Pureland 100% 100%
19
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-III 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)
- ---------------------
Interest income for the three months ended March 31, 1996 decreased by
$4,987, or 13%, as compared to the same period in 1995. This decrease is
primarily due to a decrease in the interest rates earned on the
Partnership's working capital reserves.
The Partnership's share of property operating expenses for the three months
ended March 31, 1996, decreased by $7,854, or 12% as compared to the same
period in 1995. This decrease is primarily due to a decrease in its share
of property operating expenses at the Palms of Carrollwood property
resulting from an increase in tenant reimbursements collected for such
expenses between periods. Tenant reimbursements increased at the Palms of
Carrollwood primarily due to an increase in the reimbursement calculation
used for the new anchor tenant, in accordance with the terms of its lease,
and due to an increase in average occupancy at the property. The
Partnership's share of property operating expenses at its
warehouse/distribution properties was consistent between periods.
Amortization of deferred expenses for the three months ended March 31, 1996
increased by $28,388, or 61%, as compared to the same period in 1995. This
increase is primarily due to the leasing activity which occurred at the
Palms of Carrollwood and the Business Center at Pureland properties during
1995 and the amortization of the leasing costs associated with these new
leases.
The General Partner believes that inflation has had no significant impact
on the Partnership's income from operations during the three months ended
March 31, 1996, and the General Partner anticipates that it will not have a
significant impact during the remainder of 1996.
20
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-III 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:
Three Months Ended March 31,
1996 1995
---- ----
Net cash provided by operating
activities (a) $1,214,224 $856,459
Net change in operating assets
and liabilities (a) (124,652) 78,936
---------- ---------
Net cash provided by operations (a) 1,089,572 935,395
Increase in working capital reserves (199,751) (172,691)
---------- ---------
Cash from operations (b) 889,821 762,704
Decrease in working capital reserves - -
---------- ---------
Distributable cash from operations (b) $889,821 $762,704
========== =========
Allocation to General Partner $44,491 $38,135
Allocation to John Hancock Limited Partner - -
Allocation to Investors 845,330 724,569
---------- ---------
$889,821 $762,704
========== =========
(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 second quarter of 1996, the Partnership will make a cash
distribution in the amount of $845,330 to the Investors, representing a 7%
annualized return to all Investors of record on March 31, 1996, based on
Distributable Cash from Operations for the quarter then ended.
The source of future cash distributions is dependent upon cash generated by
the Partnership's properties and the use of working capital reserves. The
General Partner currently anticipates that the Partnership's Distributable
Cash from Operations during each of the remaining three quarters of 1996
will be comparable to that generated during the first quarter of 1996.
21
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
In February 1996, a putative class action complaint was filed in
the Superior Court in Essex County, New Jersey by a single
investor in a limited partnership affiliated with the Partnership.
The complaint named as defendants the Partnership, the General
Partner, certain other affiliates of the General Partner, and
certain unnamed officers, directors, employees and agents of the
named defendants.
The plaintiff sought unspecified damages stemming from alleged
misrepresentations and omissions in the marketing and offering
materials associated with the Partnership and two limited
partnerships affiliated with the Partnership. The complaint
alleged, among other things, that the marketing materials for the
Partnership and the affiliated limited partnerships did not
contain adequate risk disclosures.
The General Partner believes the allegations are totally without
merit and intends to vigorously contest the action.
There are no other 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 first quarter of
1996.
Item 3. Defaults Upon Senior Securities
There were no defaults upon senior securities during the first
quarter of 1996.
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 first quarter of 1996.
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 first
quarter of 1996.
22
JOHN HANCOCK REALTY INCOME FUND-III 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 15th day of May, 1996.
John Hancock Realty Income Fund-III
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> 0000842741
<NAME> JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 2,916,497
<SECURITIES> 0
<RECEIVABLES> 156,739
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,983,113
<PP&E> 33,353,075
<DEPRECIATION> 4,026,787
<TOTAL-ASSETS> 41,776,354
<CURRENT-LIABILITIES> 280,457
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 41,495,897
<TOTAL-LIABILITY-AND-EQUITY> 41,776,354
<SALES> 0
<TOTAL-REVENUES> 1,103,676
<CGS> 0
<TOTAL-COSTS> 108,168
<OTHER-EXPENSES> 282,658
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 712,850
<INCOME-TAX> 0
<INCOME-CONTINUING> 712,850
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 712,850
<EPS-PRIMARY> 0.28
<EPS-DILUTED> 0.28
</TABLE>
