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, 1994
0-17664
Commission File
Number..........................................................................
JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP
................................................................................
(Exact name of registrant as specified in its charter)
Massachusetts 04-2969061
................................................................................
(State or other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
200 Berkeley Street, Boston, MA 02117
................................................................................
(Address of Principal Executive Office) (Zip Code)
(800) 722-5457
................................................................................
(Registrant's telephone number, including area code)
Not Applicable
................................................................................
(Former name, former address and former fiscal
year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
YES X NO __
-
INDEX
PART I: FINANCIAL INFORMATION PAGE
Item 1 - Financial Statements:
Balance Sheets at September 30, 1994 and December 31, 1993 3
Statements of Operations for the Three and Nine Months Ended
September 30, 1994 and 1993 4
Statements of Partners' Equity for the Nine Months Ended September
30, 1994 and for the Year Ended December 31, 1993 5
Statements of Cash Flows for the Nine Months Ended
September 30, 1994 and 1993 6
Notes to Financial Statements 7-11
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 12-15
PART II: OTHER INFORMATION 16
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
BALANCE SHEETS
(Unaudited)
ASSETS
September 30, December 31,
1994 1993
---- ----
Current assets:
Cash and cash equivalents $2,547,936 $ 3,742,273
Restricted cash 23,928 26,099
Other current assets 162,502 93,875
----------- -----------
Total current assets 2,734,366 3,862,247
Real estate loans 6,912,786 7,200,000
Investment in property:
Land 5,560,000 5,560,000
Buildings and improvements 18,836,994 18,836,994
---------- -----------
24,396,994 24,396,994
Less: accumulated depreciation 3,739,435 3,268,285
----------- ------------
20,657,559 21,128,709
Investment in joint venture 7,635,325 6,749,008
Long-term restricted cash 105,978 45,628
Deferred expenses, net of accumulated
amortization of $915,305 in 1994
and $706,622 in 1993 1,412,539 1,573,982
------------ -------------
Total assets $39,458,553 $40,559,574
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 525,715 $ 828,655
Accounts payable to affiliates 31,717 10,539
------------- ---------------
Total current liabilities 557,432 839,194
Partners' equity/(deficit):
General Partner's deficit (152,768) (146,449)
Limited Partners' equity 39,053,889 39,866,829
------------ ------------
Total partners' equity 38,901,121 39,720,380
------------ ------------
Total liabilities and
partners' equity $39,458,553 $40,559,574
============ ============
See Notes to Financial Statements
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1994 1993 1994 1993
---- ---- ---- ----
Income:
Rental income $573,736 $587,389 $1,588,307 $1,746,051
Interest income 208,884 215,924 633,370 655,477
Income/(loss) from joint venture 139,528 104,669 52,656 319,013
--------- --------- ----------- -----------
Total income 922,148 907,982 2,274,333 2,720,541
Expenses:
Depreciation 157,050 157,050 471,150 471,150
Property operating expenses 155,068 81,642 364,089 273,326
General and administrative 50,723 47,227 159,525 159,354
Amortization of deferred expenses 68,752 74,545 208,683 172,410
---------- ---------- ----------- -----------
Total expenses 431,593 360,464 1,203,447 1,076,240
--------- --------- ---------- ----------
Net income $490,555 $547,518 $ 1,070,886 $1,644,301
======== ======== =========== ==========
Allocation of net income:
General Partner $ 4,906 $ 5,475 $ 10,709 $ 16,443
John Hancock Limited Partner - - - -
Investors 485,649 542,043 1,060,177 1,627,858
--------- --------- ----------- ----------
$490,555 $547,518 $1,070,886 $1,644,301
======== ======== ========== ==========
Net income per Unit $ 0.19 $ 0.21 $ 0.41 $ 0.63
========== =========== ========== ==========
See Notes to Financial Statements
STATEMENTS OF PARTNERS' EQUITY
(Unaudited)
Nine Months Ended September 30, 1994 and
Year Ended December 31, 1993
General Limited
Partner Partners Total
------- -------- -----
Partners' equity/(deficit) at
January 1, 1993 (2,601,552
Units outstanding) ($137,690) $42,307,351 $42,169,661
Less: Cash distributions (28,118) (4,357,080) (4,385,198)
Add: Net income 19,359 1,916,558 1,935,917
----------- ------------- -----------
Partners' equity/(deficit) at
December 31, 1993 (2,601,552
Units outstanding) (146,449) 39,866,829 39,720,380
Less: Cash distributions (17,028) (1,873,117) (1,890,145)
Add: Net income 10,709 1,060,177 1,070,886
--------- ------------ -------------
Partners' equity/(deficit) at
September 30, 1994 (2,601,552
Units outstanding) ($152,768) $39,053,889 $38,901,121
========= =========== ===========
See Notes to Financial Statements
STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30,
1994 1993
---- ----
Operating activities:
Net income $1,070,886 $ 1,644,301
Adjustments to reconcile net income to net
cash provided by operating
activities:
Depreciation 471,150 471,150
Amortization of deferred expenses 208,683 172,410
Excess cash distributions over equity
in net income/(loss) of joint venture 218,585 97,487
--------- ---------
1,969,304 2,385,348
Changes in operating assets and liabilities:
(Increase)/decrease in restricted cash (58,179) 3,312
Decrease/(increase) in other current assets(68,627) 31,750
Increase/(decrease) in accounts payable
and accrued expenses (302,940) 298,799
Increase in accounts payable to
affiliates 21,178 2,459
Net cash provided by --------- ---------
operating activities 1,560,736 2,721,668
Investing activities:
Increase in investment in joint venture (1,104,902) (143,508)
Principal payments on real estate loans 287,214 -
Increase in deferred expenses and
other assets (47,240) (94,572)
-------- --------
Net cash used in investing activities (864,928) (238,080)
Financing activities:
Cash distributed to Partners (1,890,145) (3,770,409)
----------- ---------
Net cash used in financing activities(1,890,145) (3,770,409)
---------- ----------
Net decrease in cash and cash
equivalents (1,194,337) (1,286,821)
Cash and cash equivalents at beginning
of year 3,742,273 4,713,396
----------- ----------
Cash and cash equivalents at end
of period $2,457,936 $3,426,575
========== ==========
See Notes to Financial Statements
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. Organization of Partnership
---------------------------
John Hancock Realty Income Fund-II Limited Partnership (the "Partnership")
was formed under the Massachusetts Uniform Limited Partnership Act on
June 30, 1987. As of September 30, 1994, the partners in the
Partnership consisted of John Hancock Realty Equities, Inc. (the
"General Partner"), a wholly-owned, indirect subsidiary of John
Hancock Mutual Life Insurance Company; John Hancock Realty Funding,
Inc. (the "John Hancock Limited Partner"); John Hancock Income Fund-II
Assignor, Inc. (the "Assignor Limited Partner"); and 4,620 Unitholders
(the "Investors"). The Assignor Limited Partner holds 2,601,552
Assignee Units (the "Units"), representing economic and certain other
rights attributable to Investor Limited Partnership Interests in the
Partnership, for the benefit of the Investors. The John Hancock
Limited Partner, the Assignor Limited Partner and the Investors are
collectively referred to as the Limited Partners. The General Partner
and the Limited Partners are collectively referred to as the Partners.
The initial capital of the Partnership was $2,000, representing
capital contributions of $1,000 from the General Partner and $1,000
from the John Hancock Limited Partner. The Amended Agreement of
Limited Partnership of the Partnership (the "Amended Agreement of
Limited Partnership") authorized the issuance of up to 5,000,000
Assignee Units at $20 per Unit. During the offering period, which
terminated on January 2, 1989, 2,601,552 Units were sold and the John
Hancock Limited Partner made additional capital contributions of
$4,161,483. There were no changes in the number of Units outstanding
subsequent to the termination of the offering period. The Partnership
is engaged solely in the business of (i) acquiring, improving, holding
for investment and disposing of existing income-producing retail,
industrial and office properties on an all cash basis, free and clear
of mortgage indebtedness, and (ii) making mortgage loans consisting of
conventional first mortgage loans and participating mortgage loans
secured by income-producing retail, industrial and office properties.
Although the Partnership's properties were acquired and are held free
and clear of mortgage indebtedness, the Partnership may incur mortgage
indebtedness on its properties under certain circumstances.
The latest date on which the Partnership is due to terminate is December
31, 2017, unless it is sooner terminated in accordance with the terms
of the Amended Agreement of Limited Partnership. It is expected that,
in the ordinary course of the Partnership's business, the investments
of the Partnership will be disposed of, and the Partnership
terminated, before December 31, 2017.
2. Significant Accounting Policies
-------------------------------
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions for Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair representation have been included.
Operating results for the three and nine month periods ended September
30, 1994 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1994. 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, 1993.
Cash equivalents are highly liquid investments with maturities of three
months or less when purchased. These investments are recorded at cost
plus accrued interest, which approximates market value. Restricted
cash represents funds restricted for tenant security deposits and has
been designated as short or long-term based on the term of the related
lease agreement.
Real estate loans are recorded at amortized cost unless it is determined by
the General Partner that in economic substance the loan represents an
investment in property or a joint venture. In such instances, these
investments are accounted for using the equity method.
Investments in property are recorded at cost. Cost includes the
initial purchase price of the property plus acquisition and legal
fees, other miscellaneous acquisition costs and the cost of
significant improvements.
NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
2. Significant Accounting Policies (continued)
-------------------------------------------
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 the joint venture is recorded using the equity method.
Fees paid to the General Partner for the acquisition of joint venture and
mortgage loan investments have been deferred and are being amortized
over the life of the investments to which they apply. During 1993, the
Partnership reduced the period over which its remaining deferred
acquisition fees are amortized from thirty years, the estimated useful
life of the buildings owned by the Partnership, to eight and one-half
years, the estimated remaining life of the Partnership. Capitalized
tenant improvements and lease commissions are being amortized on a
straight-line basis over the various lease terms.
The net income per Unit for the three and nine months ended September 30,
1994 and 1993 was calculated by dividing the Investors' share of net
income by the number of Units outstanding at the end of such period.
No provision for income taxes has been made in the Financial Statements
since such taxes are the responsibility of the individual Partners and
not of the Partnership.
3. The Partnership Agreement
-------------------------
Distributable Cash from Operations, as defined in the Amended
Agreement of Limited Partnership, is distributed 1% to the General
Partner and the remaining 99% in the following order of priority:
first, to the Investors until they receive a 7% non-cumulative,
non-compounded annual cash return on their Invested Capital, as
defined in the Amended Agreement of Limited Partnership; second, to
the General Partner to pay the Subordinated Allocation, as defined in
the Amended Agreement of Limited Partnership, equal to 3 1/2% of
Distributable Cash from Operations for managing the Partnership's
activities; third, to the John Hancock Limited Partner until it
receives a 7% non-cumulative, non-compounded annual cash return on its
Invested Capital; fourth, to the Investors and the John Hancock
Limited Partner in proportion to their respective Capital
Contributions, as defined in the Amended Agreement of Limited
Partnership, until they have received a 10% non-cumulative,
non-compounded annual cash return on their Invested Capital; fifth, to
the General Partner to pay the Incentive Allocation, as defined in the
Amended Agreement of Limited Partnership, equal to 2 1/2% of
Distributable Cash from Operations; and sixth, to the Investors and
the John Hancock Limited Partner in proportion to their respective
Capital Contributions. However, any Distributable Cash from
Operations, which is available as a result of reduction of working
capital reserves funded by Capital Contributions of the Investors,
will be distributed 100% to the Investors.
Profits for tax purposes from the normal operations of the Partnership
for each fiscal year are allocated to the Partners in the same amounts
as Distributable Cash from Operations for that year. If such profits
are less than Distributable Cash from Operations for any year, they
will be allocated in proportion to the amounts of Distributable Cash
from Operations allocated for that year. If such profits are greater
than Distributable Cash from Operations for any year, they will be
allocated 1% to the General Partner and 99% to the John Hancock
Limited Partner and the Investors, with the allocation made between
the John Hancock Limited Partner and the Investors in proportion to
their respective Capital Contributions. Losses for tax purposes from
the normal operations of the Partnership will be 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 will be allocated 1% to the General
Partner and 99% to the John Hancock Limited Partner and not to the
Investors. Depreciation deductions will be 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.
NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
3. The Partnership Agreement (continued)
-------------------------------------
Upon the occurrence of a Sale, Financing or Repayment of a Partnership
Investment, as defined in the Amended Agreement of Limited
Partnership, the General Partner will first apply the proceeds to the
payment of all debts and liabilities of the Partnership then due and
then fund any reserves for contingent liabilities which it deems
appropriate. Cash from Sales, Financings or Repayments, as defined in
the Amended Agreement of Limited Partnership, are distributed and paid
in the following order of priority: first, to the Investors and the
John Hancock Limited Partner, with the distribution made between the
Investors and the John Hancock Limited Partner in proportion to their
respective Capital Contributions, until the Investors and the John
Hancock Limited Partner have received an amount equal to their
Invested Capital; second, to the Investors until they have received,
after giving effect to all previous distributions of Distributable
Cash from Operations and any previous distributions of Cash from
Sales, Financings or Repayments after the return of their Invested
Capital, the Cumulative Return on Investment, as defined in the
Amended Agreement of Limited Partnership; third, to the John Hancock
Limited Partner until it has received, after giving effect to all
previous distributions of Distributable Cash from Operations and any
previous distributions of Cash from Sales, Financings or Repayments
after the return of its Invested Capital, the Cumulative Return on
Investment; fourth, to the General Partner to pay any Subordinated
Disposition Fees, as defined in the Amended Agreement of Limited
Partnership, then payable pursuant to Section 6.4(c) thereof; and
fifth, 99% to the Investors and the John Hancock Limited Partner and
1% to the General Partner, with the distribution made between the
Investors and the John Hancock Limited Partner in proportion to their
respective Capital Contributions.
4. Transactions with the General Partner and Affiliates
----------------------------------------------------
Fees, commissions and other costs incurred or paid by the General Partner or
its affiliates and to which the General Partner or its affiliates are
entitled to reimbursement from the Partnership were as follows:
Nine Months Ended September 30,
1994 1993
---- ----
Reimbursement for operating expenses $105,455 $98,501
-------- -------
$105,455 $98,501
======== =======
The expenses above are included in expenses on the Statements of
Operations.
Accounts payable to affiliates represent amounts due to the General
Partner and its affiliates for various services provided to the
Partnership.
The General Partner serves in a similar capacity for four other
affiliated real estate limited partnerships.
5. Investment in Property
----------------------
Investment in property at cost consists of managed, fully-operating,
commercial real estate as follows:
September 30, December 31,
1994 1993
---- ----
Park Square Shopping Center $12,886,230 $12,886,230
Fulton Business Park 5,138,786 5,138,786
Miami International Distribution Center 6,371,978 6,371,978
----------- -----------
$24,396,994 $24,396,994
=========== ===========
The net realizable value of a property held for long-term investment
purposes is measured by the recoverability of the investment through
expected future cash flows on an undiscounted basis. The net book
value of the property in the financial statements may be in excess of
its current fair market value.
NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
6. Real Estate Loans
-----------------
On March 10, 1988, the Partnership made a $1,700,000 participating
non-recourse mortgage loan to a non-affiliated borrower, secured by a
first mortgage on commercial real estate known as 205 Newbury Street,
located in Boston, Massachusetts. Under the terms of this loan
agreement, the borrower is required to pay interest only monthly at an
annual rate of 9.5% with the entire principal balance due on April 1,
1998. In addition to these amounts, the borrower is also obligated to
pay the Partnership 25% of the net cash flow derived from the
operations of the property during the term of this loan and a
specified portion of the net sales price or mutually agreed upon fair
market value of the property upon its sale or refinancing.
On June 30, 1989, the Partnership made a $5,500,000 mortgage loan to
a non-affiliated borrower, secured by a first mortgage on commercial
real estate known as General Camera, located in New York, New York.
Under the terms of this loan agreement, the borrower was required to
pay interest only monthly at an annual rate of 11%. Effective June 1,
1994 the loan agreement was amended and the borrower was required to
pay $250,000 to reduce the outstanding balance of the loan. Also, in
addition to interest at a rate of 11%, all future monthly payments
must include amounts to amortize the loan balance. Payments of $60,416
per month are required on the first day of the month commencing on
July 1, 1994 and ending on June 1, 1995. Payments of $85,416 per month
are required on the first day of the month commencing on July 1, 1995
and ending on June 30, 1996. The entire unamortized principal balance
and all accrued but unpaid interest are due on July 1, 1996.
Real estate loans are evaluated for collectibility on an on-going
basis.
7. Investment in Joint Venture
---------------------------
On December 28, 1988, the Partnership invested $14,726,079 to
acquire a 99.5% interest in JH Quince Orchard Partners (the
"Affiliated Joint Venture"), a joint venture between the Partnership
and John Hancock Realty Income Fund-III Limited Partnership ("Income
Fund-III"). Pursuant to the partnership agreement of the Affiliated
Joint Venture, the Partnership had an initial 99.5% interest and
Income Fund-III had an initial 0.5% interest in the Affiliated Joint
Venture, and Income Fund-III had the option, exercisable prior to
December 31, 1990, to increase its investment and interest in the
Affiliated Joint Venture to 50%. During the second quarter of 1989,
Income Fund-III exercised its option and the Partnership transferred a
49.5% interest in the Affiliated Joint Venture to Income Fund-III for
cash amounting to $7,325,672. At September 30, 1994, the Partnership
had a 50% interest in the Affiliated Joint Venture.
On December 28, 1988, the Affiliated Joint Venture acquired a 98%
interest in QOCC-1 Associates, an existing partnership which owns and
operates a three-story office building and related land and
improvements, the Quince Orchard Corporate Center, in Gaithersburg,
Maryland. During 1993 and the first nine months of 1994, the partners
in QOCC-1 Associates were required to make additional capital
contributions. In accordance with the terms of the partnership
agreement of QOCC-1 Associates, the Affiliated Joint Venture
contributed 95% of such additional capital. As a result, the
Affiliated Joint Venture held a 97.6% interest in QOCC-1 Associates at
September 30, 1994.
NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
8. Deferred Expenses
-----------------
Deferred expenses consist of the following:
Unamortized Unamortized
Balance at Balance at
Description September 30, December 31, 1993
---------- ----------
$35,072 acquisition fee for 205 Newbury St.
loan. This amount is amortized over the
term of the loan. $13,270 $16,114
$113,468 acquisition fee for General Camera
mortgage loan. This amount is amortized
over the term of the loan. 28,367 40,524
$152,880 acquisition fee for the joint venture
investment. This amount is amortized
over a period of 31.5 years. 125,176 128,816
$1,203,097 acquisition fees paid to the
General Partner. Prior to June 30, 1993,
this amount was amortized over a period
of 30 years. Subsequent to June 30, 1993,
the unamortized balance is amortized over
a period of 8.5 years. 879,091 970,031
$271,422 of tenant improvements. These amounts
are amortized over the terms of the leases to
which they relate. 104,354 115,823
$551,905 of lease commissions. These amounts
are amortized over the terms of the leases to
which they relate. 262,281 302,674
---------- ----------
$1,412,539 $1,573,982
========== ==========
9. Federal Income Taxes
--------------------
A reconciliation of the net income reported in the Statements of
Operations to the net income reported for federal income tax purposes
is as follows:
Nine Months Ended September 30,
1994 1993
---------- ----------
Net income per Statements of Operations $1,099,626 $1,644,301
Add/(deduct): Excess of book depreciation
over tax depreciation 80,031 80,009
Excess of book amortization
over tax amortization 37,209 28,747
---------- ----------
Net income for federal income tax purposes $1,142,448 $1,753,057
========== ==========
Item 2: Management's Discussion and Analysis of Financial Condition and
- - ------------------------------------------------------------------------
Results of Operations
- - ---------------------
General
During the offering period, from October 2, 1987 to January 2, 1989, the
Partnership sold 2,601,552 Units representing gross proceeds (exclusive of the
John Hancock Limited Partners' contribution, which was used to pay sales
commissions) of $52,031,040. The proceeds of the offering were used to acquire
investments, fund reserves, and pay acquisition fees and organizational and
offering expenses. These investments are described more fully in Notes 5, 6 and
7 to the Financial Statements included in Item 1 of this Report.
Liquidity and Capital Resources
- - -------------------------------
At September 30, 1994 the Partnership had $2,547,936 in cash and cash
equivalents, $23,928 in restricted cash and $105,978 in long-term restricted
cash. Cash and cash equivalents decreased by $1,194,337 from December 31, 1993
to September 30, 1994, primarily as a result of contributions to the
Partnership's joint venture investment.
The Partnership has a working capital reserve with a current balance of
approximately 3% of the offering proceeds. During the year ended December 31,
1993, a substantial portion of the Partnership's working capital reserves was
used to fund leasing costs at the Miami International Distribution Center, Park
Square Shopping Center, Fulton Business Park and Quince Orchard Corporate
Center. In addition, a substantial portion of the Partnership's working capital
reserves was used to fund leasing costs at the Quince Orchard Corporate Center
during the first nine months of 1994. Given the use of working capital reserves
as well as the projected level of future leasing costs and capital expenditures
expected to be incurred in connection with the Partnership's investments, the
General Partner reduced cash distributions to Investors commencing with the
third quarter of 1993, from an annualized rate of 6% to an annualized rate of
5%, in order to replenish working capital reserves and to satisfy the
Partnership's future general liquidity requirements. Cash distributions to
Investors during the third quarter of 1994 continued at the 5% annualized rate.
Liquidity would, however, be materially adversely affected by a significant
reduction in revenues, unanticipated operating costs or unanticipated capital
expenditures. If any or all of these events were to occur, to the extent that
working capital reserves would be insufficient to satisfy the cash requirements
of the Partnership, it is anticipated that additional funds would be obtained
through a further reduction of cash distributions to Investors, bank loans,
short-term loans from the General Partner or its affiliates, or the sale or
financing of Partnership investments.
The Quince Orchard Corporate Center, which is owned by the Affiliated Joint
Venture, is occupied by Boehringer Mannheim Pharmaceuticals, Inc., under a lease
which commenced on March 1, 1994. The facility had been vacant since October
1993 as a result of the former tenant not renewing its lease. The present
tenant's lease is for a ten year term with a base rent of $2,477,293 during the
first lease year. Pursuant to the lease, the tenant will receive free rent
during the first, second, eleventh and twelfth months of the lease. In addition,
the tenant has been granted two options, one, to terminate the lease at the end
of the seventy-sixth month of the lease, and, two, to extend the term of the
lease for an additional five year period. In connection with this lease, the
Partnership incurred leasing costs of $177,341 during 1993 and $1,104,902 during
the nine months ended September 30, 1994.
A tenant at the Miami International Distribution Center that had occupied
approximately 70,000 square feet, or 33% of the property, has been delinquent in
rental payments and expense reimbursements since July 1993 and vacated the
property in September 1993. The tenant's lease obligation is scheduled to expire
in December 1994. The General Partner is pursuing legal remedies to obtain full
collection from the tenant of these delinquent amounts as well as all other
obligations due under the lease agreement. The General Partner subsequently
secured two replacement tenants for such space. One tenant took occupancy of
approximately 28,000 square feet, or 13% of the property, under a lease
commencing June 1994 and the other tenant took occupancy of approximately 42,000
square feet, or 20% of the property, under a lease commencing during July 1994.
However, the tenant leasing the 28,000 square foot space has subsequently
vacated the space and is delinquent in rental payments and expense
reimbursements due as of November 1, 1994. The General Partner will use all
available remedies to obtain collection from this tenant of all obligations due
under its lease agreement, which is scheduled to expire in September 2004. The
General Partner is also seeking a replacement tenant for this space.
Cash in an aggregate amount of $47,240 was used during the first nine months of
1994 for the payment of leasing costs at the Park Square Shopping Center and the
Fulton Business Park. The General Partner anticipates that the Partnership will
incur approximately $60,000 of additional leasing costs at these two properties
during the remainder of 1994. The current balance in the working capital reserve
should be sufficient to pay such costs.
Item 2: Management's Discussion and Analysis of Financial Condition and
- - ------------------------------------------------------------------------
Results of Operations (continued)
- - ---------------------------------
Liquidity and Capital Resources (continued)
- - -------------------------------------------
Cash in the amount of $1,104,902 was contributed by the Partnership to the
Affiliated Joint Venture during the first nine months of 1994. This amount was
used by the Affiliated Joint Venture to fund leasing costs at the Quince Orchard
Corporate Center.
Cash of $1,890,145, generated from the Partnership's operations, was distributed
to the General Partner and the Investors during the first nine months of 1994.
The General Partner anticipates that the Partnership will make a distribution
during the fourth quarter of 1994 comparable to the distributions made during
each of the first three quarters of 1994.
On June 1, 1994, General Camera Corporation ("GCC") sold substantially all of
its operating assets (but not the land and building securing the Partnership's
mortgage loan) to a non-affiliated buyer. In connection with this sale,
approximately 70% of the building was leased to the buyer of the assets. The
General Partner consented to the lease transaction in consideration of GCC
providing the Partnership with additional security for the mortgage loan besides
the Partnership's security interest in the property and the personal guaranty,
which it retains. Such security included, among other things, a one-time payment
of principal in the amount of $250,000 upon the sale of GCC's assets and a
requirement that all future monthly payments under the loan include additional
amounts to amortize a portion of the outstanding principal balance of the loan.
GCC remained current on the required debt service payments as of September 30,
1994 and as of the date hereof, and the General Partner has no reason to
believe, based upon current information and events, that the minimum required
debt service payments will not continue to be met or that the outstanding
principal balance of the loan will not be repaid upon maturity. Should the
borrower fail to meet the minimum required debt service payments, there would be
a material adverse affect upon the Partnerships' liquidity as well as a
permanent impairment in the book value of the mortgage investment.
205 Newbury Associates remained current on the required debt service payments as
of September 30, 1994 and as of the date hereof. The General Partner has no
reason to believe, based upon current information and events, that the minimum
required debt service payments will not continue to be met or that the principal
amount of the loan will not be repaid upon maturity. Should the borrower fail to
meet the minimum required debt service payments, there would be a material
adverse affect upon the Partnership's liquidity as well as a permanent
impairment in the book value of the mortgage investment.
During the third quarter of 1994, the General Partner had the Quince Orchard
Corporate Center property independently appraised. Based upon the appraiser's
investigation and analysis, the property's market value is estimated to be
approximately $16,000,000 as of September 30, 1994 and the value of the
Partnership's investment in the Affiliated Joint Venture is estimated to be
approximately $7,800,000 as of September 30, 1994. The appraised value of the
Partnership's investment exceeds the carrying value of the Partnership's
investment in joint venture of approximately $7,635,000 as of September 30, 1994
although it is less than the Partnership's cumulative investment in the joint
venture of approximately $8,697,000.
The General Partner evaluated the carrying value of each of the Partnership's
properties and its joint venture investment as of December 31, 1993 by comparing
each such carrying value to its respective future undiscounted cash flows and
recent independent or internal appraisals, in order to determine whether any
permanent impairment in values existed. In addition, the General Partner
evaluated the status of its mortgage investments and their ultimate
collectibility as of December 31, 1993. Based upon such evaluations, the General
Partner determined that no permanent impairment in values existed and,
therefore, no write-downs were recorded. The General Partner will continue to
conduct property and investment valuations, using internal or independent
appraisals, in order to determine whether a permanent impairment in values
exists on any of the Partnership's investments.
Item 2: Management's Discussion and Analysis of Financial Condition and
- - ------------------------------------------------------------------------
Results of Operations (continued)
- - ---------------------------------
Results of Operations
- - ---------------------
Net income for the nine months ended September 30, 1994 was $1,070,886, as
compared to net income of $1,644,301 for the same period in 1993, representing a
decline in the Partnership's net income of $573,415, or 35%.The decline in net
income is primarily attributable to a decline in income from the Partnership's
joint venture investment, the Quince Orchard Corporate Center, and declines in
the performance of the Miami International Distribution Center and the Park
Square Shopping Center.
Average occupancy for the Partnership's equity investments for the nine months
ended September 30, 1994 was as follows:
Park Square Shopping Center 85%
Fulton Business Park 85%
Miami International Distribution Center 68%
Quince Orchard Corporate Center 56%
Rental income at the Partnership's properties for the nine months ended
September 30, 1994 decreased by $157,744, or 9%, as compared to the nine months
ended September 30, 1993. This decrease is primarily due to declines in rental
income at the Miami International Distribution Center and the Park Square
Shopping Center which were partially offset by an increase in rental income at
the Fulton Business Park. A tenant occupying approximately 33% of the Miami
International Distribution Center has been delinquent in making rental payments
since July 1993, resulting in a 14% decline in rental income at the property
during the first nine months of 1994 as compared to the same period in 1993 (as
previously stated, the General Partner is pursuing all available remedies to
obtain collection of these delinquent amounts). Rental income at the Park Square
Shopping Center decreased by 8% during the first nine months of 1994 as compared
to same period in 1993 due to a decrease in average occupancy from 95% to 85%
between periods. Rental income at Fulton Business Park increased by 6% between
periods due to an increase in average occupancy from 81% to 86%.
Income/(loss) from joint venture for the nine months ended September 30, 1994
decreased by $266,357, or 83%, as compared to the same period in 1993. This
decrease is primarily due to the termination of the former tenant's lease at the
Quince Orchard Corporate Center in September 1993 and the resulting vacancy of
the space. The present tenant at the property took occupancy in March 1994 and
commenced paying rent, in accordance with the terms of the lease, during May
1994. As such, the property's average occupancy for the nine months ended
September 30, 1994 is reflected as 56%.
Property operating expenses for the nine months ended September 30, 1994
increased by $90,063, or 33%, as compared to the same period in 1993. Included
in the results for the nine months ended September 30, 1993 is a refund of taxes
from a prior year on the Siete Square property, which was sold in December 1992.
In addition, average occupancy at the Park Square Shopping Center decreased
between periods resulting in decreased expense reimbursements and an increase in
property operating expenses. Property operating expenses decreased slightly at
the Fulton Business Park due to an increase in average occupancy between periods
and, therefore, higher expense reimbursements. Property operating expenses at
the Miami International Distribution Center were consistent between periods,
however, included in the results for the nine months ended September 30, 1994
are leasing costs of approximately $24,000 relating to the 28,000 square foot
tenant who took occupancy during the second quarter of 1994 and subsequently
vacated the property. Cleanup costs incurred as a result of damage caused by
Hurricane Andrew are included in property operation expenses at the Miami
International Distribution Center for the nine months ended September 30, 1994.
Amortization of deferred expenses increased by $36,273, or 21%, during the nine
months ended September 30, 1994 as compared to the nine months ended September
30, 1993, primarily due to the Partnership's reducing the period over which
deferred expenses relating to acquisition fees are amortized. During the third
quarter of 1993, the Partnership reduced the amortization period for such
deferred acquisition fees from thirty years, the estimated useful life of the
buildings owned by the Partnership, to eight and one-half years, the estimated
remaining life of the Partnership, thereby resulting in increased amortization.
The General Partner believes that inflation has had no significant impact on the
Partnership during the nine months ended September 30, 1994, and the General
Partner anticipates that inflation will not have a significant impact during the
remainder of 1994.
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 Amended Agreement of Limited Partnership:
Nine Months Ended September 30,
1994 1993
Net cash provided by operating ---- ----
activities (a) $1,560,736 $2,721,668
Net change in operating assets and liabilities (a) 408,568 (336,320)
------------- -----------
Net cash provided by operations (a) 1,969,304 2,385,348
Increase in working capital reserves (77,266) (361,920)
------------- -----------
Cash from operations (b) 1,892,038 2,023,428
Decrease in working capital reserves - -
------------- -----------
Distributable cash from operations (b)
$1,892,038 $2,023,428
============= ==========
Allocation to General Partner $ 18,920 $ 20,234
Allocation to Investors 1,873,118 2,003,194
Allocation to John Hancock Limited Partner - -
------------- ----------
$1,892,038 $2,023,428
============= ==========
(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 Amended Agreement of Limited Partnership. Distributable
Cash from Operations should not be considered as an alternative to net income
(i.e. not an indicator of performance) or to reflect cash flows or availability
of discretionary funds.
During the fourth quarter of 1994, the Partnership expects to make a cash
distribution of $624,372, representing a 5% annualized return to all Investors
of record at September 30, 1994, based on Distributable Cash from Operations for
the quarter then ended.
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
There are no material pending legal proceedings, other than ordinary
routine litigation incidental to the business of the Partnership, to
which the Partnership is a party or to which any of its properties is
subject.
Item 2. Changes in Securities
There were no changes in securities during the third quarter of 1994.
Item 3. Defaults upon Senior Securities
There were no defaults upon senior securities during the third quarter of
1994.
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 1994.
Item 5. Other information
Item 6. Exhibits and Reports on form 8-K
(a) There are no exhibits to this report
(b) There were no reports on Form 8-K filed during the third quarter of
1994.
JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized, on the 14th day of November, 1994.
John Hancock Realty Income Fund-II
Limited Partnership
By: John Hancock Realty Equities, Inc.,
Its General Partner
By:------------------------
William M. Fitzgerald
President
By:------------------------
Richard E. Frank
Treasurer (Chief Accounting Officer)