-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PIdp1tzsDqka/CMALDHQqM0Q9Wox4EPCGdWeR1exbRisP+mhvulqVpjanYKvJphW jkeyHyxcyI4tOw2POfuuAg== 0000746262-96-000022.txt : 19961120 0000746262-96-000022.hdr.sgml : 19961120 ACCESSION NUMBER: 0000746262-96-000022 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961115 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HANCOCK JOHN REALTY INCOME FUND III LIMITED PARTNERSHIP CENTRAL INDEX KEY: 0000842741 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 043025607 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-18563 FILM NUMBER: 96667062 BUSINESS ADDRESS: STREET 1: 200 BERKELEY STREET CITY: BOSTON STATE: MA ZIP: 02117 BUSINESS PHONE: 8007225457 10-Q 1 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 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 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) PART I: FINANCIAL INFORMATION Item 1: Financial Statements BALANCE SHEETS (Unaudited) ASSETS
September 30, December 31, 1996 1995 ---- ---- 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 =========== ===========
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 Nine Months Ended September 30, September 30, 1996 1995 1996 1995 ---- ---- ---- ---- 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 ========== ========== ========== ==========
See Notes to Financial Statements 4 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
General Limited Partner Partners Total ------- -------- ----- 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 ========= =========== ===========
See Notes to Financial Statements 5 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended September 30, 1996 1995 ---- ---- 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 ========== ==========
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 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 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 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 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:
September 30, 1996 December 31, 1995 ------------------ ----------------- 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 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 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 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:
Unamortized Unamortized Balance at Balance at Description September 30, 1996 December 31, 1995 ----------- ------------------ ----------------- $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 ========== ==========
12 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:
Nine Months Ended September 30, 1996 1995 ---- ---- 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 =========== ===========
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 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 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 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:
Amount of Square Feet Lease Expiration Leased Date Lease Clause Relating to Termination of the Former Anchor Tenant ------ ---- ---------------------------------------------------------------- 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.
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 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.
Property Lessee Lease Expiration -------- ------ ---------------- 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
The General Partner anticipates that the warehouse properties should provide the Partnership with stable income performance during the remainder of 1996. 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) 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 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 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 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:
Nine Months Ended September 30, 1996 1995 ---- ---- 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 ========== ==========
(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 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 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 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) EX-27 2
5 0000842741 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP 9-MOS DEC-31-1996 SEP-30-1996 3,056,554 0 155,568 0 0 3,122,707 33,353,075 4,441,619 41,528,212 503,746 0 0 0 0 41,024,466 41,528,212 0 3,368,147 0 342,540 862,175 0 0 2,163,432 0 2,163,432 0 0 0 2,163,432 0.69 0.69
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