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, 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 02116
(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 September 30, 1996 and
December 31, 1995 3
Statements of Operations for the Three and
Nine Months Ended September 30, 1996 and 1995 4
Statements of Partners' Equity for the
Nine Months Ended September 30, 1996 and
for the Year Ended December 31, 1995 5
Statements of Cash Flows for the Nine
Months Ended September 30, 1996 and 1995 6
Notes to Financial Statements 7-13
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 14-22
PART II: OTHER INFORMATION 23
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
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $2,950,245 $2,431,272
Restricted cash 16,894 6,323
Other current assets 155,568 282,343
----------- -----------
3,122,707 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 4,441,619 3,819,371
----------- -----------
28,911,456 29,533,704
Investment in joint venture 7,721,523 7,907,123
Long-term restricted cash 89,415 91,885
Deferred expenses, net of accumulated
amortization of $964,511 in 1996 and
$724,584 in 1995 1,667,973 1,556,764
Other assets 15,138 15,138
----------- -----------
Total assets $41,528,212 $41,824,552
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $468,896 $240,389
Accounts payable to affiliates 34,850 38,412
----------- -----------
Total current liabilities 503,746 278,801
Partners' equity/(deficit):
General partner's (31,248) (44,553)
Limited partners' 41,055,714 41,590,304
----------- -----------
Total partners' equity 41,024,466 41,545,751
----------- -----------
Total liabilities and partners' equity $41,528,212 $41,824,552
=========== ===========
</TABLE>
See Notes to Financial Statements
3
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income:
Rental income $906,320 $821,548 $2,687,025 $2,537,864
Income from joint venture 189,930 193,829 572,844 557,024
Interest income 38,997 45,273 108,278 124,446
---------- ---------- ---------- ----------
Total income 1,135,247 1,060,650 3,368,147 3,219,334
Expenses:
Depreciation 207,416 207,416 622,248 622,248
Property operating expenses 70,668 80,058 184,655 193,485
Amortization of deferred expenses 85,589 49,926 239,927 146,097
General and administrative
expenses 46,564 53,015 157,885 165,811
---------- ---------- ---------- ----------
Total expenses 410,237 390,415 1,204,715 1,127,641
---------- ---------- ---------- ----------
Net income $725,010 $670,235 $2,163,432 $2,091,693
========== ========== ========== ==========
Allocation of net income:
General Partner $49,598 $45,433 $147,541 $140,201
John Hancock Limited Partner 121,062 - 359,941 -
Investors 554,350 624,802 1,655,950 1,951,492
---------- ---------- ---------- ----------
$725,010 $670,235 $2,163,432 $2,091,693
========== ========== ========== ==========
Net income per Unit $0.23 $0.26 $0.69 $0.81
========== ========== ========== ==========
</TABLE>
See Notes to Financial Statements
4
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
STATEMENTS OF PARTNERS' EQUITY
(Unaudited)
Nine Months Ended September 30, 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 (134,236) (2,550,481) (2,684,717)
Add: Net income 147,541 2,015,891 2,163,432
--------- ----------- -----------
Partners' equity/(deficit) at September 30, 1996
(2,415,234 Units outstanding) ($31,248) $41,055,714 $41,024,466
========= =========== ===========
</TABLE>
See Notes to Financial Statements
5
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1996 1995
---- ----
<S> <C> <C>
Operating activities:
Net income $2,163,432 $2,091,693
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 622,248 622,248
Amortization of deferred expenses 239,927 146,097
Cash distributions over/(under) equity
in income from joint venture 185,600 (13,183)
---------- ----------
3,211,207 2,846,855
Changes in operating assets and liabilities:
(Increase)/decrease in restricted cash (8,101) 3,250
Decrease/(increase) in other current assets 126,775 (22,914)
Increase in other assets - (350)
Increase in accounts payable and accrued
expenses 228,507 570,607
(Decrease)/increase in accounts payable to affiliates (3,562) 10,368
---------- ----------
Net cash provided by operating activities 3,554,826 3,407,816
Investing activities:
Acquisition of deferred expenses and other
assets (351,136) (589,810)
---------- ----------
Net cash used in investing activities (351,136) (589,810)
Financing activities:
Cash distributed to Partners (2,684,717) (2,288,112)
---------- ----------
Net cash used in financing activities (2,684,717) (2,288,112)
---------- ----------
Net increase in cash and cash equivalents 518,973 529,894
Cash and cash equivalents at beginning
of year 2,431,272 2,637,722
---------- ----------
Cash and cash equivalents at end
of period $2,950,245 $3,167,616
========== ==========
</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 September 30, 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 2,644
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 nine month period
ended September 30, 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.
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.
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)
-------------------------------
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 nine months ended September 30,
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.
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.
9
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
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 nine months ended September
30, 1996 and 1995, and to which the General Partner or its
affiliates are entitled to reimbursement from the Partnership, were
$127,338 and $126,066, 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.
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>
September 30, 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.
10
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
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.
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. Of the cumulative
total invested capital in QOCC-1 Associates at September 30, 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 that
exceeds 9% on their invested capital. However, the General Partner
believes that QOCC-1 Associates may provide the partners with a
return exceeding 9% on their Invested Capital for the year ending
December 31, 1996.
11
<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 September 30, 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. $115,469 $119,109
$1,075,398 of tenant improvements. These
amounts are amortized over the terms of
the leases to which they relate. 925,280 719,916
$330,585 of lease commissions. These
amounts are amortized over the terms
of the leases to which they relate. 243,788 219,273
$1,073,621 of acquisition fees paid to the
General Partner. This amount is
amortized over a period of
eighty-four months. 383,436 498,466
---------- ----------
$1,667,973 $1,556,764
========== ==========
</TABLE>
12
<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>
Nine Months Ended September 30,
1996 1995
---- ----
<S> <C> <C>
Net income per Statements of Operations $2,163,432 $2,091,693
Add: Excess of book depreciation
over tax depreciation 106,516 106,516
Excess of book amortization
over tax amortization 121,355 58,597
Other income (119,377) (214,402)
----------- -----------
Net income for federal income tax purposes $2,271,926 $2,042,404
=========== ===========
</TABLE>
13
<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 September 30, 1996, the Partnership had $2,950,245 in cash and cash
equivalents, $16,894 in restricted cash and $89,415 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 balance of the working capital
reserve and the projected level of cash flows to be generated from the
Partnership's properties, the Partnership increased quarterly cash
distributions to Investors from an annualized rate of 6% to an annualized
rate of 7%, effective with the May 15, 1996 distribution. Based upon the
Distributable Cash from Operations generated during the nine months ended
September 30, 1996 and in accordance with the Partnership Agreement, the
Partnership will make a quarterly cash distribution on November 15, 1996 to
the John Hancock Limited Partner at an annualized rate of 7%.
The Partnership's liquidity would, however, be materially adversely
affected if there were a significant reduction in revenues or significant
unanticipated operating costs, unanticipated leasing costs or unanticipated
capital expenditures. If any or all of these events were to occur, to the
extent that the working capital reserve 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 nine months ended September 30, 1996, cash from working capital
reserves in the aggregate amount of $351,136 was used for the payment of
leasing costs incurred at the Business Center at Pureland, the Stone
Container Building and the Palms of Carrollwood Shopping Center ("Palms of
Carrollwood") properties. The General Partner anticipates that the
Partnership will incur an aggregate of approximately $143,000 of additional
leasing costs at the Palms of Carrollwood 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.
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 (continued)
Liquidity and Capital Resources (continued)
- ------------------------------------------
During the nine months ended September 30, 1996, approximately $45,600 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 $74,000 at the Palms of Carrollwood property during the
remainder of 1996. 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 $2,684,717, generated from the Partnership's
operations, was distributed to the General Partner, the John Hancock
Limited Partner and the Investors during the nine months ended September
30, 1996. These amounts were distributed in accordance with the
Partnership Agreement and were allocated as follows:
Investors $2,415,228
John Hancock Limited Partner 135,253
General Partner 134,236
----------
Total $2,684,717
==========
Effective with the May 15, 1996 quarterly distribution, the Partnership
increased cash distributions to Investors from approximately $725,000 to
approximately $845,000.
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)
- ------------------------------------------
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' leases at the Palms of Carrollwood contain clauses that make
reference to the situation in which the former anchor tenant ceases
operations at the property. 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
Square Feet Lease Expiration
Leased Date Lease Clause Relating to Termination of the Former Anchor Tenant
------ ---- ----------------------------------------------------------------
<S> <C> <C>
38,000 November 2004 Reduce rental payments by 25% if an
acceptable replacement tenant, in accordance with the terms of
the lease, is not secured.
10,500 January 2005 Reduce rental payments by 25% if the
replacement tenant is not a food store, in accordance with the
terms of the lease, or terminate lease obligations if former
anchor tenant ceases to operate for more than 90 days.
10,500 February 1997 Terminate lease obligations if a
similar replacement tenant is not secured.
</TABLE>
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 all 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 from May through
August 1996. Subsequently, the General Partner negotiated an agreement
pursuant to which all future rental payments will be made by the tenant at
100% of the contracted amount, but unpaid deficiencies in back rent from
May through August 1996, in the aggregate amount of approximately $6,500,
will be forgiven. In addition, the General Partner agreed that the tenant
could vacate an adjacent space of approximately 1,300 square feet without
further rental liability.
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 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 September 30, 1996, Palms of Carrollwood was 77% 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.
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 the remainder
of 1996.
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)
- ------------------------------------------
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 which commenced in January 1996. During the
nine months ended September 30, 1996, the Partnership paid approximately
$159,000 in leasing costs in connection with this renewal. The Partnership
expects to spend an additional $11,000 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 then 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
incurred approximately $124,000 in construction costs in connection with
this transaction during the third quarter of 1996.
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. The net book value of the Stone Container
Building property of approximately $1,847,000 at September 30, 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, with the
completion of the additional office space, the property's market value is
approximately $2,200,000.
The General Partner had the Allmetal Distribution Building property
independently appraised during the second quarter of 1996. Based upon the
appraiser's investigation and analysis, the property's market value is
estimated to be approximately $1,750,000. The net book value of the
Allmetal Distribution Building property of approximately $1,426,000 at
September 30, 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 $1,636,000.
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 Yokohama Tire Warehouse property independently
appraised during the third quarter of 1996. Based upon the appraiser's
investigation and analysis, the property's market value is estimated to be
approximately $10,000,000 as of September 30, 1996. The net book value of
the Yokohama Tire Warehouse property of approximately $7,857,000 at
September 30, 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 $9,352,000.
The General Partner evaluated the carrying value of each of the
Partnership's 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 nine months ended September 30, 1996 was $2,163,432, as
compared to net income of $2,091,693 for the same period in 1995.
Average occupancy for the Partnership's investments was as follows:
Nine Months Ended September 30,
1996 1995
---- ----
Palms of Carrollwood Shopping Center 80% 76%
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)
- ---------------------
Rental income for the nine months ended September 30, 1996 increased by
$149,161, or 6%, as compared to the same period during 1995. This increase
is primarily due to increases in rental income at the Palms of Carrollwood,
Yokohama Tire Warehouse, Stone Container Building and Business Center at
Pureland properties. Rental income increased at the Palms of Carrollwood
property primarily due to the fact that a new anchor tenant at the property
pays a rental rate greater than that which a former anchor tenant paid. An
increase in average occupancy at the property between periods also
contributed to the increase in rental income. This increase in rental
income at the Palms of Carrollwood was partially offset by another anchor
tenant at the property reducing its rental payments, as described above.
Increases in the rental rates paid by the sole tenant at the Yokohama Tire
Warehouse and Stone Container Building properties and by one of the tenants
at the Business Center at Pureland property, in accordance with the terms
of their leases, resulted in increased rental income from these properties
during 1996 as compared to 1995.
Interest income for the nine months ended September 30, 1996 decreased by
$16,168, 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 as well as a decrease in the amount
of the Partnerships working capital reserves.
Amortization of deferred expenses for the nine months ended September 30,
1996 increased by $93,830, or 64%, 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 nine months ended
September 30, 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:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1996 1995
---- ----
<S> <C> <C>
Net cash provided by operating
activities (a) $3,554,826 $3,407,816
Net change in operating assets
and liabilities (a) (343,619) (560,961)
---------- ----------
Net cash provided by operations (a) 3,211,207 2,846,855
Increase in working capital reserves (328,187) (558,743)
---------- ----------
Cash from operations (b) 2,883,020 2,288,112
Decrease in working capital reserves - -
---------- ----------
Distributable cash from operations (b) $2,883,020 $2,288,112
========== ==========
Allocation to General Partner $144,151 $114,406
Allocation to John Hancock Limited Partner 202,879 -
Allocation to Investors 2,535,990 2,173,706
---------- ----------
$2,883,020 $2,288,112
========== ==========
</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.
21
<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 (continued)
- ---------
During the fourth quarter of 1996, the Partnership will make a cash
distribution in the amount of $980,583 to the Investors and the John
Hancock Limited Partner, in accordance with the terms of the Partnership
Agreement. The Investors will receive cash in the amount of $845,330,
representing a 7% annualized return to all Investors of record on September
30, 1996, based on Distributable Cash from Operations for the quarter then
ended. The John Hancock Limited Partner will receive cash in the amount of
$135,253, representing a 7% annualized return based on Distributable Cash
from Operations for the nine months ended September 30, 1996.
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 the fourth of 1996 will be comparable to that
generated during each of the first three quarters of 1996.
22
<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 third quarter of
1996.
Item 3. Defaults Upon Senior Securities
There were no defaults upon senior securities during the third
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 third quarter of 1996.
Item 5. Other information
On September 30, 1996 the Partnership filed Form 10-K/A to amend
the Report on Form 10-K dated December 31, 1995. This amendment
included the audited financial statements for the year ended
December 31, 1995, of QOCC-1 Associates, the entity in which the
Partnership holds its joint venture investment.
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 1996.
23
<PAGE>
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 14th day of November, 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 3,056,554
<SECURITIES> 0
<RECEIVABLES> 155,568
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,122,707
<PP&E> 33,353,075
<DEPRECIATION> 4,441,619
<TOTAL-ASSETS> 41,528,212
<CURRENT-LIABILITIES> 503,746
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 41,024,466
<TOTAL-LIABILITY-AND-EQUITY> 41,528,212
<SALES> 0
<TOTAL-REVENUES> 3,368,147
<CGS> 0
<TOTAL-COSTS> 342,540
<OTHER-EXPENSES> 862,175
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,163,432
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,163,432
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,163,432
<EPS-PRIMARY> 0.69
<EPS-DILUTED> 0.69
</TABLE>
