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 June 30, 1995
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 Berkeley Street, Boston, MA 02117
(Address of Principal Executive Office) (Zip Code)
(800) 722-5457
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal
year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days:
YES X NO
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 June 30, 1995 and
December 31, 1994 3
Statements of Operations for the Three and
Six Months Ended June 30, 1995 and 1994 4
Statements of Partners' Equity for the
Six Months Ended June 30, 1995 and
for the Year Ended December 31, 1994 5
Statements of Cash Flows for the Six
Months Ended June 30, 1995 and 1994 6
Notes to Financial Statements 7-12
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-18
PART II: OTHER INFORMATION 19
2
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
BALANCE SHEETS
(Unaudited)
ASSETS
June 30, December 31,
1995 1994
---- ----
Current assets:
Cash and cash equivalents $3,120,210 $2,637,722
Restricted cash 56,079 55,657
Accounts receivable 176,062 154,155
------------ -----------
3,352,351 2,847,534
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 3,404,538 2,989,706
------------ -----------
29,948,537 30,363,369
Investment in joint venture 8,019,940 7,946,957
Long-term restricted cash 44,574 48,246
Deferred expenses, net of accumulated
amortization of $625,383 in 1995 and
$529,212 in 1994 785,562 866,981
Other assets 6,690 6,340
------------ -----------
Total assets $42,157,654 $42,079,427
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $390,635 $229,440
Accounts payable to affiliates 51,035 30,053
------------ -----------
Total current liabilities 441,670 259,493
Partners' equity/(deficit):
General Partner's (60,222) (78,720)
Limited Partners' 41,776,206 41,898,654
------------ -----------
Total partners' equity 41,715,984 41,819,934
------------ -----------
Total liabilities and partners' equity $42,157,654 $42,079,427
=========== ===========
See Notes to Financial Statements
3
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1995 1994 1995 1994
---- ---- ---- ----
Income:
Rental income $861,157 $857,651 $1,716,316 $1,757,404
Income/(loss) from joint venture 174,984 44,756 363,195 (86,872)
Interest income 41,461 21,880 79,173 43,425
---------- ---------- ---------- ----------
Total income 1,077,602 924,287 2,158,684 1,713,957
Expenses:
Depreciation 207,416 207,416 414,832 414,832
Property operating expenses 49,221 46,794 113,427 109,435
General and administrative 58,568 45,459 112,796 85,409
Amortization of deferred expenses 49,317 46,982 96,171 94,398
---------- ---------- ---------- ----------
Total expenses 364,522 346,651 737,226 704,074
---------- ---------- ---------- ----------
Net income $713,080 $577,636 $1,421,458 $1,009,883
========== ========== ========== ==========
Allocation of net income:
General Partner $47,551 $39,219 $94,768 $71,185
John Hancock Limited Partner - - - -
Investors 665,529 538,417 1,326,690 938,698
---------- ---------- ---------- ----------
$713,080 $577,636 $1,421,458 $1,009,883
========== ========== ========== ==========
Net Income per Unit $0.28 $0.22 $0.55 $0.39
========== ========== ========== ==========
See Notes to Financial Statements
4
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
STATEMENTS OF PARTNERS' EQUITY
(Unaudited)
Six Months Ended June 30, 1995 and
Year Ended December 31, 1994
General Limited
Partner Partners Total
------- -------- -----
Partners' equity/(deficit) at January 1, 1994
(2,415,234 Units outstanding) ($101,572) $42,429,060 $42,327,488
Less: Cash distributions (152,541) (2,898,274) (3,050,815)
Add: Net income 175,393 2,367,868 2,543,261
-------- ----------- -----------
Partners' equity/(deficit) at December 31, 1994
(2,415,234 Units outstanding) (78,720) 41,898,654 41,819,934
Less: Cash distributions (76,270) (1,449,138) (1,525,408)
Add: Net income 94,768 1,326,690 1,421,458
-------- ----------- -----------
Partners' equity/(deficit) at June 30, 1995
(2,415,234 Units outstanding) ($60,222) $41,776,206 $41,715,984
======== =========== ===========
See Notes to Financial Statements
5
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
1995 1994
---- ----
Operating activities:
Net income $1,421,458 $1,009,883
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 414,832 414,832
Amortization of deferred expenses 96,171 94,398
Cash distributions over/(under) equity
in net income/(loss) from joint venture (72,983) 37,872
---------- ----------
1,859,478 1,556,985
Changes in operating assets and liabilities:
Decrease in restricted cash 3,250 4,163
Increase in accounts receivable (21,907) (14,829)
Increase in other assets (350) -
Increase in accounts payable and
accrued expenses 161,195 112,538
Increase in accounts payable
to affiliates 20,982 23,932
---------- ----------
Net cash provided by operating activities 2,022,648 1,682,789
Investing activities:
Increase in investment in joint venture - (1,104,902)
Acquisition of deferred expenses
and other assets (14,752) (2,497)
---------- ----------
Net cash used in investing activities (14,752) (1,107,399)
Financing activities:
Cash distributed to Partners (1,525,408) (1,525,408)
---------- ----------
Net cash used in financing activities (1,525,408) (1,525,408)
---------- ----------
Net increase/(decrease) in cash and
cash equivalents 482,488 (950,018)
Cash and cash equivalents at beginning
of year 2,637,722 3,270,201
---------- ----------
Cash and cash equivalents at end
of period $3,120,210 $2,320,183
========== ==========
See Notes to Financial Statements
6
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 June 30, 1995, 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 2,702
Unitholders (the "Investors"). The Assignor Limited Partner holds
five Investor Limited Partnership Interests for its own account and
2,415,229 Assignee Units ("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 in the business of acquiring, operating,
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
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 six month period
ended June 30, 1995 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1995. For
further information, refer to the financial statements and
footnotes thereto included in the Partnership's Annual Report on
Form 10-K for the year ended December 31, 1994.
Cash equivalents are highly liquid investments with maturities of
three months or less when purchased. These investments are
recorded at cost plus accrued interest, which approximates market
value. Restricted cash represents funds restricted for tenant
security deposits and has been designated as current or long-term
based upon the term of the related lease agreement.
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. Remaining 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 the 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 six months ended June 30, 1995 and
1994 was calculated by dividing the Investors' share of net income
by the number of Units outstanding at the end of such periods.
8
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
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 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.
Notwithstanding the foregoing, any such profits or losses or other
items which were based upon the Partnership's operations prior to
the first day of the month in which the initial closing date
occurred were allocated 1% to the General Partner and 99% to the
John Hancock Limited Partner.
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 six months ended June 30, 1995
and 1994, and to which the General Partner or its affiliates are
entitled to reimbursement from the Partnership were $85,646 and
$59,372, 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.
9
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:
June 30, December 31,
1995 1994
---- ----
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
=========== ===========
The net realizable value of a real estate investment held for long-
term investment purposes is measured by the recoverability of the
investment through its expected future cash flows on an
undiscounted basis, which may exceed the property's current market
value.
6. Investment in Joint Venture
---------------------------
On December 28, 1988, the Partnership invested $75,000 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 has held a 50% interest in the Affiliated
Joint Venture since that time.
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. As a result, the
Affiliated Joint Venture held 97.55% of the invested capital in
QOCC-1 Associates at June 30, 1995. The Affiliated Joint Venture
continues to hold a 75% interest in QOCC-1 Associates.
10
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
6. Investment in Joint Venture (continued)
---------------------------
Net cash flow from QOCC-1 Associates is distributed in the
following order of priority: first, to the payment of all debts
and liabilities of QOCC-1 Associates and to fund reserves deemed
reasonably necessary; second, to the partners in proportion to
their invested capital until they have 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.
7. Deferred Expenses
-----------------
Deferred expenses consist of the following:
Unamortized Unamortized
Balance at Balance at
Description June 30, 1995 December 31, 1994
------------ ------------- ------------------
$152,880 of acquisition fees for
investment in the Affiliated Joint
Venture. This amount is being amortized
over a period of 31.5 years. $121,535 $123,962
$62,375 of tenant improvements. These
amounts are being amortized over the terms
of the leases to which they relate. 14,465 13,332
$122,069 of lease commissions. These
amounts are being amortized over the terms
of the leases to which they relate. 74,409 77,846
$1,073,621 of acquisition fees paid to the
General Partner. This amount
is being amortized over a
period of eighty-four months. 575,153 651,841
--------- ---------
$785,562 $866,981
========= =========
11
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:
Six Months Ended June 30,
1995 1994
---- ----
Net income per Statements of Operations $1,421,458 $1,009,883
Add: Book depreciation
over tax depreciation 71,010 71,010
Book amortization
over/(under) tax amortization 38,310 (36,385)
Other income (142,935) -
---------- -----------
Net income for federal income tax purposes $1,387,843 $1,044,508
========== ===========
12
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 that 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. A descriptive list of these
investments is set forth in Notes 5 and 6 to the Financial Statements
included in Item 1 of this Report.
Liquidity and Capital Resources
-------------------------------
At June 30, 1995, the Partnership had $3,120,210 in cash and cash
equivalents, $56,079 in restricted cash and $44,574 in long-term restricted
cash.
The Partnership has a working capital reserve with a current balance of
approximately 4.5% of the offering proceeds. The General Partner
anticipates that such amount should be sufficient to satisfy the
Partnership's general liquidity requirements. Liquidity would, however, be
materially adversely affected if there were a significant reduction in
revenues or significant unanticipated operating costs or unanticipated
capital expenditures. If any or all of these events were to occur, to the
extent that working capital reserves would be insufficient to satisfy the
cash requirements of the Partnership, it is anticipated that additional
funds would be obtained through a 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 fourth quarter of 1994, one of the anchor tenants at the Palms
of Carrollwood Shopping Center that occupied 22% of the rentable space at
the property, under a lease scheduled to expire in February 2005, informed
the General Partner that it was seeking to sublease its space and vacate
the property. As a result, the General Partner commenced efforts to find a
replacement tenant for the space and negotiate for such anchor tenant to
buyout its lease obligations. The anchor tenant vacated the property
during June 1995. During July 1995, the General Partner secured a new
anchor tenant to occupy this space. The former anchor tenant's lease
obligations were terminated as of July 31, 1995 in consideration of the
tenant not subleasing its space at the property. The new anchor tenant's
lease is for a ten-year term scheduled to commence, subject to certain
conditions, on November 1, 1995. The Partnership expects to incur
approximately $800,000 in leasing costs in connection with this lease.
Two tenants at the Palms of Carrollwood Shopping Center property, one
occupying approximately 38,000 square feet, or 24% of the property, and the
other occupying approximately 10,500 square feet, or 6% of the property,
have options in their leases that allow for a 25% reduction in rental
payments in the event the former anchor tenant described above ceases
operations at the property and an acceptable replacement tenant, in
accordance with the terms of each of these two tenant's leases, is not
secured for such space. In addition, the tenant occupying approximately
10,500 square feet has an option in its lease that entitles the tenant to
cancel its lease if the original anchor tenant ceases to operate at the
property for ninety consecutive days. The leases held by each of these two
tenant's have approximately nine years remaining until their expiration.
The General Partner is working with these two tenants to determine if such
options will be exercised.
13
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 does not believe that the replacement of the original
anchor tenant, any reduction in rental payments for the two tenants
described above or the possible cancellation of the second tenant's lease
will have a material adverse effect on the Partnership's liquidity.
Another tenant at the Palms of Carrollwood Shopping Center that had
occupied approximately 10,500 square feet, or 6% of the property under a
lease scheduled to expire in February 1997, vacated the property in January
1993. This former tenant has made all required rental payments and expense
reimbursements due through August 1995. However, this tenant's lease also
contains an option that allows the tenant to terminate its lease should the
former anchor tenant described above cease operations at the property and
no similar replacement tenant, in accordance with the terms of the tenant's
lease, be secured for such space. During June 1995, this former tenant
notified the General Partner of its intention to exercise such option to
terminate its lease obligations on November 30, 1995. The General Partner
has been seeking a replacement tenant for this space.
In addition, two former tenants at the Palms of Carrollwood Shopping Center
with leases representing an aggregate of approximately 12,000 square feet,
or 7% of the rentable space at the property, have vacated the property
prior to the expiration of their lease obligations. One of these former
tenants whose lease is scheduled to expire in May 1996, has not met its
rental obligations since February 1994. The second, whose lease is
scheduled to expire in July 2001, has been delinquent with its rental
obligations since July 1994. The General Partner has filed complaints
demanding payment from both of these tenants for delinquent rental amounts
as well as all future obligations due under their respective lease
agreements. The Partnership has obtained judgments against both tenants in
the aggregate amount of approximately $105,000. As of the date hereof, the
Partnership has not received payment from these tenants and the General
Partner continues to pursue collection of the judgment amounts. However,
one of these tenants subsequently declared bankruptcy and, consequently, it
is unlikely that the Partnership will be able to collect the amount owed by
this tenant. The General Partner secured a replacement tenant to take
occupancy of approximately 8,600 square feet of such vacated space under a
lease that commenced in March 1995. The General Partner continues to seek
new tenants for the remaining vacant space at the property.
During the second quarter of 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. The Partnership will incur approximately $176,500 in leasing
costs in connection with this renewal during 1995. The current balance in
the working capital reserve should be sufficient to pay these costs.
During the six months ended June 30, 1995, cash in the agregate amount of
$14,752 was used to fund leasing costs incurred at the Palms of Carrollwood
Shopping Center and Business Center at Pureland properties. As discussed
above, leasing costs in the aggregate amount of approximately $976,500 will
be incurred at the Palms of Carrollwood Shopping Center and the Business
Center at Pureland properties during the remainder of 1995. The General
Partner estimates that the Partnership will incur approximately $43,000 of
additional leasing costs at the Palms of Carrollwood Shopping Center during
the remainder of 1995. The current balance in the working capital reserve
should be sufficient to pay these costs.
14
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 six months ended June 30, 1995, the Partnership incurred
approximately $900 in non-recurring repair and maintenance costs. The
General Partner estimates that the Partnership will incur additional non-
recurring repair and maintenance costs of approximately $132,000 at its
properties during the remainder of 1995. These costs are expected to 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 $1,525,408, generated from the Partnership's
operations, was distributed to the General Partner and the Investors during
the six months ended June 30, 1995. The General Partner anticipates that
the Partnership will make comparable distributions during the remaining six
months of 1995.
The General Partner had the Business Center at Pureland property
independently appraised during the first quarter of 1995. Based upon the
appraiser's investigation and analysis, the property's market value was
estimated to be approximately $4,500,000, as compared to the Partnership's
cumulative investment in the property of approximately $5,142,000. The net
book value of the Business Center at Pureland property of approximately
$4,699,000 at June 30, 1995 was evaluated in comparison to the estimated
future undiscounted cash flows and the recent independent appraisal and,
based upon such evaluation, the General Partner determined that no
permanent impairment in value exists and that a write-down in value was not
required.
The General Partner evaluated the carrying value of each of the
Partnership's properties and its joint venture investment as of December
31, 1994 by comparing such carrying value to the related property's future
undiscounted cash flows and the then most recent internal or independent
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, 1994.
The General Partner will continue to conduct periodic property and
investment valuations, using internal or independent appraisals, in order
to determine whether future write-downs, if any, are required.
Results of Operations
---------------------
Net income for the six months ended June 30, 1995 was $1,421,458, as
compared to net income of $1,009,883 for the same period in 1994,
representing an increase in the Partnership's net income of $411,575, or
41%. This increase is primarily due to an increase in the Partnership's
share of income from the joint venture investment, which increase was
partially offset by a decline in the performance of the Palms of
Carrollwood Shopping Center property.
15
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)
---------------------
Average occupancy for the Partnership's investments for the six months
ended June 30, 1995 was as follows:
Palms of Carrollwood Shopping Center 80%
Quince Orchard Corporate Center (Affiliated Joint Venture) 100%
Yokohama Tire Warehouse 100%
Purina Mills Distribution Building 100%
Allmetal Distribution Building 100%
Stone Container Building 100%
Business Center at Pureland 100%
Rental income for the six months ended June 30, 1995 decreased by $41,088,
or 2%, as compared to the same period in 1994. This decrease is primarily
due to a 4% decline in average occupancy at the Palms of Carrollwood
Shopping Center between periods. In addition, the six month period ended
June 30, 1995 showed a decrease in comparison to the same period in 1994
because rental income at the Palms of Carrollwood for the first six months
of 1994 included amounts relating to the payment of rental obligations that
had been delinquent since 1993. This decrease in rental income was
partially offset by increases in rental income at the Purina Mills
Distribution Building and the Stone Container Building due to increases in
rental rates, in accordance with the terms of the leases on these two
properties. Rental income from the Yokohama Tire Warehouse, Allmetal
Distribution Building, and the Business Center at Pureland was consistent
between periods.
During the six months ended June 30, 1995 the Partnership was allocated
income of $363,195 from its joint venture investment (the Affiliated Joint
Venture) as compared to a loss of $86,872 during the same period during
1994, representing an increase of $450,067. This increase is primarily due
to the termination of the former tenant's lease at the Quince Orchard
Corporate Center in September 1993 and the present tenant taking occupancy
of the property in March 1994. The new tenant's lease has a rental rate
greater than that which the former tenant paid.
Interest income for the six months ended June 30, 1995 increased by
$35,748, or 82%, as compared to the same period in 1994. This increase is
primarily due to an increase in the interest rates earned on the
Partnership's working capital reserves as well as an increase in the amount
of such reserves.
Property operating expenses for the six months ended June 30, 1995
increased by $3,992, or 4%, as compared to the same period in 1994. This
increase is primarily due to an increase in property operating expenses at
the Palms of Carrollwood property resulting from a decline in average
occupancy between periods and, therefore, a decrease in tenant
reimbursements. This increase is also due to the fact that a tenant at the
Palms of Carrollwood that had been delinquent on the payment of expense
reimbursements since August 1993 made full payment to the Partnership of
such reimbursements during the six months ended June 30, 1994, which
resulted in a decrease property operating expenses during that period.
Property operating expenses were consistent at the Partnership's
warehouse/distribution properties during the six months ended June 30,
1995.
16
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)
---------------------
General and administrative expenses for the six months ended June 30, 1995
increased by $27,387, or 32%, as compared to the same period in 1994. This
increase between periods was primarily due to an increase in the General
Partner's costs in connection with securing a new anchor tenant at the
Palms of Carrollwood Shopping Center and collecting delinquent rental
amounts from two former tenants at the Palms of Carrollwood.
The General Partner believes that inflation has had no significant impact
on the Partnership's income from operations during the six months ended
June 30, 1995, and the General Partner anticipates that it will not have a
significant impact during the remainder of 1995.
17
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:
Six Months Ended June 30,
1995 1994
---- ----
Net cash provided by operating
activities (a) $2,022,648 $1,682,789
Net change in operating assets
and liabilities (a) (163,170) (125,804)
---------- ----------
Net cash provided by operations (a) 1,859,478 1,556,985
Increase in working capital reserves (334,070) (31,577)
---------- ----------
Cash from operations (b) 1,525,408 1,525,408
Decrease in working capital reserves - -
---------- ----------
Distributable cash from operations (b) $1,525,408 $1,525,408
========== ==========
Allocation to General Partner $76,270 $76,270
Allocation to John Hancock Limited Partner - -
Allocation to Investors 1,449,138 1,449,138
---------- ----------
$1,525,408 $1,525,408
========== ==========
(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 an alternative to net income (i.e.
not an indicator of performance) or to reflect cash flows or
availability of discretionary funds.
During the third quarter of 1995, the Partnership will make a cash
distribution in the amount of $724,569 to the Investors, representing a 6%
annualized return to all Investors of record on June 30, 1995, based on
Distributable Cash from Operations for the quarter then ended. The General
Partner anticipates that the Partnership will make comparable cash
distributions during each of the two remaining quarters of 1995.
18
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
PART II: OTHER INFORMATION
Item 1.Legal Proceedings
There are no material pending legal proceedings, other than
ordinary routine litigation incidental to the business of the
Partnership, to which the Partnership is a party or to which any of
its properties is subject.
Item 2.Changes in Securities
There were no changes in securities during the second quarter of
1995.
Item 3.Defaults Upon Senior Securities
There were no defaults upon senior securities during the second
quarter of 1995.
Item 4.Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders of
the Partnership during the second quarter of 1995.
Item 5.Other information
Item 6.Exhibits and Reports on Form 8-K
(a) There are no exhibits to this report.
(b) There were no Reports on Form 8-K filed during the second
quarter of 1995.
19
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 August, 1995.
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)