-----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, I3DtkkPRJ7r3pjLmQ2xXgBGKJPOhcPUQ0B5Y5n48Eb8XmvF0C99ozXjJ+5tAeia0 RiHYLA109fhzYXu25P3oTQ== 0000912057-99-005806.txt : 19991117 0000912057-99-005806.hdr.sgml : 19991117 ACCESSION NUMBER: 0000912057-99-005806 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP CENTRAL INDEX KEY: 0000746514 STANDARD INDUSTRIAL CLASSIFICATION: OPERATORS OF APARTMENT BUILDINGS [6513] IRS NUMBER: 042619298 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-12138 FILM NUMBER: 99753076 BUSINESS ADDRESS: STREET 1: 39 BRIGHTON AVE CITY: ALLSTON STATE: MA ZIP: 02134 BUSINESS PHONE: 6177830039 MAIL ADDRESS: STREET 1: 39 BRIGHTON AVE CITY: ALLSTON STATE: MA ZIP: 02134 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 -------------- FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 - --- For the quarterly period ended September 30, 1999 OR ___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________________ to _______________________ Commission file number 0-12138 New England Realty Associates Limited Partnership (Exact Name of Registrant as Specified in Its Charter) Massachusetts 04-2619298 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 39 Brighton Avenue, Allston, Massachusetts 02134 (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code (617) 783-0039 Not Applicable (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) Indicate by check X 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 No. Item 1. Financial Statements. Balance Sheets - September 30, 1999 and September 30, 1998 1 Statements of Operations - Nine Months Ended September 30, 1999 and September 30, 1998 2 Statements of Cash Flows - Nine Months Ended September 30, 1999 and 3 September 30, 1998 Notes to Financial Statements 5-11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12-18 PART II - OTHER INFORMATION Item 5. Other Information SIGNATURES 19
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31, 1999 1998 (Unaudited) ------------------ -------------------- ASSETS Rental Properties $58,100,391 $50,868,382 Cash and Cash Equivalents 439,459 623,078 Short-term Investments 5,153,303 3,060,373 Rents Receivable 552,783 509,914 Real Estate Tax Escrows 513,004 538,852 Prepaid Expenses and Other Assets 2,579,686 1,710,537 Investment in Joint Venture 38,083 58,910 Financing and Leasing Fees 1,041,887 1,036,058 Mortgage Notes Receivable 480,872 -- ----------- ----------- TOTAL ASSETS $68,899,468 $58,406,104 =========== =========== LIABILITIES AND PARTNERS' CAPITAL Mortgages Payable $60,976,398 $51,322,552 Accounts Payable and Accrued Expenses 942,941 868,425 Advance Rental Payments and Security Deposits 2,203,628 1,943,247 ----------- ----------- Total Liabilities 64,122,967 54,134,224 Commitments and Contingent Liabilities (Note 8) Partners' Capital 173,252 units outstanding in 1999 and in 1998 4,776,501 4,271,880 ----------- ----------- TOTAL LIABILITIES AND PARTNERS' CAPITAL $68,899,468 $58,406,104 =========== ===========
See notes to consolidated financial statements NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, (UNAUDITED) (UNAUDITED) 1999 1998 1999 1998 ------------- ------------ ------------ ------------ REVENUES: Rental income $ 5,079,121 $ 4,566,164 $ 14,681,709 $ 13,647,899 Laundry and sundry income 59,418 49,829 131,465 135,232 ------------ ------------ ------------ ------------ 5,138,539 4,615,993 14,813,174 13,783,131 ------------ ------------ ------------ ------------ Expenses: Administrative 246,677 212,641 782,867 815,689 Depreciation and amortization 903,154 845,081 2,634,460 2,442,817 Interest 1,262,990 1,149,919 3,623,619 3,460,287 Management Fees 200,598 193,018 613,967 581,149 Operating 393,671 384,595 1,399,765 1,431,306 Renting 107,541 116,463 235,808 237,655 Repairs and Maintenance 752,519 739,200 1,974,780 1,962,495 Taxes and Insurance 519,343 464,605 1,505,323 1,424,870 ------------ ------------ ------------ ------------ 4,386,493 4,105,522 12,770,589 12,356,268 ------------ ------------ ------------ ------------ Income from Operations 752,046 510,471 2,042,585 1,426,863 ------------ ------------ ------------ ------------ Other Income (Loss) Interest income 100,421 48,258 276,490 124,918 Income from investment in partnership and joint venture 7,510 7,148 9,096 21,740 Unrealized appreciation (depreciation) in investment (83,567) 85,631 84,455 (353,196) Gain on the sale of real estate 124,108 -- 800,232 -- ------------ ------------ ------------ ------------ 148,472 141,037 745,266 218,469 ------------ ------------ ------------ ------------ Net Income $ 900,518 $ 651,508 $ 2,787,851 $ 1,645,332 ============ ============ ============ ============ Net Income per Unit $ 5.20 $ 3.76 $ 16.09 $ 9.50 ============ ============ ============ ============ Weighted Average Number of Units Outstanding 173,252 173,252 173,252 173,252 ============ ============ ============ ============
See notes to consolidated financial statements 2 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, (UNAUDITED) 1999 1998 ---------------- --------------- Cash Flows from Operating Activities Net Income $ 2,787,851 $ 1,645,332 ---------- ---------- Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 2,634,460 2,442,817 (Income) loss from investments in partnerships and joint venture (21,740) (9,096) Gain on the sale of rental property (800,232) -- Unrealized depreciation (appreciation) on short-term investments 353,196 (84,455) Decrease (Increase) in rents receivable (42,869) 101,969 (Increase) in financing and leasing fees (68,368) (14,016) Increase (Decrease) in accounts payable 74,516 8,428 Decrease in real estate tax escrow 25,848 40,714 (Increase) in prepaid expenses and other assets (869,149) (212,953) Increase in advance rental payments and security deposits 260,381 103,721 Increase in notes receivable (480,872) -- ---------- ---------- Total Adjustments 1,065,171 2,377,129 ---------- ---------- Net cash provided by operating activities 3,853,022 4,022,461 Cash Flows from Investing Activities Distribution from joint venture 42,567 16,548 Purchase and improvement of rental properties (9,504,028) (1,660,564) Maturity of short-term investments 4,501,074 -- Purchase of short-term investments (7,419,653) (616,169) Proceeds from the sale of rental property 948,947 -- ---------- ---------- Net cash (used in) investing activities (11,431,093) (2,260,185) ---------- ---------- Cash Flows from Financing Activities Principal payments and early repayment of mortgages payable (873,292) (470,516) Distributions to partners (2,283,230) (1,418,369) Proceeds from the refinancing 5,283,025 -- Proceeds from notes payable 5,267,949 -- ---------- ---------- Net cash provided by (used in) financing activities 7,394,452 (1,888,885) ---------- ---------- Net Increase (Decrease) in Cash and Cash Equivalents (183,619) (126,609) Cash and Cash Equivalents, Beginning 623,078 456,277 ---------- ---------- Cash and Cash Equivalents, Ending $ 439,459 $ 329,688 ========== ==========
See notes to consolidated financial statements 3 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' CAPITAL
Units - ------------------------------------------------------------------------------------------------------------------------------------ Limited General -------------------------------- Partnership Class A Class B Class C Total ------------ ------------- -------------- ------------- Balance, January 1, 1998 $ 2,769,251 $ 661,152 $ 34,827 $ 3,465,230 Distribution to Partners (1,134,695) (269,490) (14,184) (1,418,369) Net Income 1,316,266 312,613 16,453 1,645,332 ---------- ---------- ---------- ---------- Balance, Sept. 30, 1998 $ 2,950,822 $ 704,275 $ 37,096 $ 3,692,193 ========== ========== ========== ========== Units authorized and issued, net of 6,973 Treasury Units at September 30, 1998 138,499 33,014 1,739 173,252 ========== ========== ========== ========== Balance, January 1, 1999 $ 3,414,571 $ 814,416 $ 42,893 $ 4,271,880 Distribution to Partners (1,826,584) (433,814) (22,832) (2,283,230) Net Income 2,230,281 529,692 27,878 2,787,851 ---------- ---------- ---------- ---------- Balance, September 30, 1999 $ 3,818,268 $ 910,294 $ 47,939 $ 4,776,501 ========== ========== ========== ========== Units authorized and issued, net of 6,973 Treasury Units at September 30, 1999 138,499 33,014 1,739 173,252 ========== ========== ========== ==========
See notes to consolidated financial statements 4 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1--SIGNIFICANT ACCOUNTING POLICIES LINE OF BUSINESS: New England Realty Associates Limited Partnership ("NERA" or the "Partnership") was organized in Massachusetts during 1977. NERA and its subsidiaries own and operate various residential apartment buildings, condominium units, and commercial properties located in Massachusetts, Connecticut, New Hampshire, and Maine. NERA has also made investments in other real estate partnerships and has participated in other real estate-related activities, primarily located in Massachusetts. In connection with the mortgages referred to in Note 5, a substantial number of NERA's properties were restructured into separate subsidiary limited partnerships without any change in the historical cost basis. PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of NERA and its subsidiary limited partnerships. NERA has a 99.67% ownership interest in each of such subsidiary limited partnerships. The consolidated group is referred to as the "Partnerships." Minority interests are not recorded since they are insignificant. All significant intercompany accounts and transactions are eliminated in consolidation. The Partnership accounts for its investment in a joint venture on the equity method. ACCOUNTING ESTIMATES: The preparation of the financial statements is in accordance with generally accepted accounting principles (GAAP) requiring management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities, at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Accordingly, actual results could differ from those estimates. REVENUE RECOGNITION: Rental income from residential and commercial properties is recognized over the term of the related lease. Amounts sixty days in arrears are charged against income. Certain leases of the commercial properties provide for increasing stepped minimum rents, which are accounted for on a straight-line basis over the term of the lease. RENTAL PROPERTIES: Rental properties are stated at cost less accumulated depreciation. Maintenance and repairs are charged to expense as incurred; improvements and additions are capitalized. When assets are retired or otherwise disposed of, the cost of the asset and related accumulated depreciation is eliminated from the accounts, and any gain or loss on such disposition is included in income. Rental properties are depreciated on the straight-line method over their estimated useful lives. In the event that facts and circumstances indicate that the carrying value of rental properties may be impaired, an analysis of recoverability is performed. The estimated future undiscounted cash flows are compared to the asset's carrying value to determine if a write-down to fair value or discounted cash flow value is required. FINANCING AND LEASING FEES: Financing fees are capitalized and amortized, using the interest method, over the life of the related mortgages. Leasing fees are capitalized and amortized on a straight-line basis over the life of the related lease. INCOME TAXES: The financial statements have been prepared on the basis that NERA and its subsidiaries are entitled to tax treatment as partnerships. Accordingly, no provision for income taxes on income has been recorded. CASH EQUIVALENTS: The Partnerships consider cash equivalents to be all highly liquid instruments purchased with a maturity of three months or less. 5 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) SHORT-TERM INVESTMENTS: The Partnership accounts for short-term investments in accordance with Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities". The Partnerships consider short term investments to be mutual funds and bank certificates of deposit, Treasury obligations, or commercial paper with initial maturities between three and twelve months. These investments are considered to be trading account securities and are carried at fair value with unrealized holding gains or losses reflected in earnings. CONCENTRATION OF CREDIT RISKS; FINANCIAL INSTRUMENTS: The Partnerships' tenants are located in New England, and the Partnerships are subject to the general economic risks related thereto. No single tenant accounted for more than 5% of the Partnerships' revenues in 1999 or 1998. The Partnerships make their temporary cash investments with high credit quality financial institutions or purchase money market accounts invested in U.S. Government securities. At September 30, 1999 approximately $238,000 of cash and cash equivalents exceeded federally insured amounts. The mutual fund investment is subject to price volatility associated with any interest-bearing investment. Fluctuations in actual interest rates affect the value of these investments. ADVERTISING EXPENSE: Advertising is expensed as incurred. Advertising expense was $51,076 and $67,752 for the nine months ended September 30, 1999, and 1998, respectively. NOTE 2--RENTAL PROPERTIES Rental properties consist of the following:
SEPTEMBER 30, DECEMBER 31, USEFUL 1999 1998 LIFE ------------- ------------- -------------- Land $12,968,325 $ 9,710,733 -- Buildings 48,441,894 43,627,173 25-31 years Building improvements 13,355,095 12,610,196 15-31 years Kitchen cabinets 1,269,534 1,138,588 5-10 years Carpets 1,304,931 1,176,261 5-10 years Air conditioning 281,776 281,776 7-10 years Land improvements 823,540 684,850 10-31 years Laundry equipment 58,791 58,081 5-7 years Elevators 156,641 57,952 20 years Swimming pools 42,450 42,450 10 years Equipment 776,338 649,370 5-7 years Motor vehicles 65,926 65,926 5 years Fences 36,950 18,624 5-10 years Furniture and fixtures 422,927 390,209 5-7 years Smoke alarms 28,916 17,817 5-7 years ----------- ----------- 80,034,034 70,530,006 Less accumulated depreciation 21,933,643 19,661,624 ----------- ----------- $58,100,391 $50,868,382 =========== ===========
6 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2--RENTAL PROPERTIES (CONTINUED) On May 27, 1999 the Partnership purchased a 39,600 square foot commercial property known as Staples Plaza, located in Framingham, Massachusetts. The purchase price was $8,200,000. The Partnership assumed an 8% mortgage on the property of $5,267,949, which matures in June 2017. On April 30, 1999, the Partnership sold the Willard Street apartments located in Quincy, Massachusetts for $850,000. The purchaser paid $85,000 in cash, assumed the existing mortgage of approximately $285,000 and gave to the Partnership a mortgage note for the remaining $480,000. This 7.5% mortgage note is collateralized by other real estate owned by the purchaser and matures at the earlier of the refinancing of the purchased property or July 31, 2005, the maturity date of the assumed mortgage. On August 5, 1999, the Partnership sold a condominium located at 566 Commonwealth Avenue in Boston, Massachusetts. The sale price was $168,000, and the gain of $124,108 is included in other income. NOTE 3--RELATED PARTY TRANSACTIONS The Partnerships' properties are managed by an entity which, is owned by the majority shareholder of the General Partner. The management fee is equal to 4 % of rental revenue and laundry income. Total fees paid were $613,967 and $581,149 for the nine months ended September 30, 1999 and 1998, respectively. Advance rental payments and security deposits are held in escrow by the management company (see Note 6). The management company also receives a mortgage servicing fee equal to an annual rate of 1/2% of the monthly outstanding balance of mortgages receivable resulting from the sale of property. There were no mortgage servicing fees paid in the nine months ended September 30, 1999 and the year ended December 31, 1998. The Partnership Agreement also permits the General Partner or management company to charge the costs of in-house professional services (such as counsel, accountants, and contractors that otherwise would be charged by third party vendors) to NERA. During the nine months ended September 30, 1999 and 1998, approximately $364,000 and $336,000 was charged to NERA for legal, maintenance, architectural services and supervision of capital improvements. Approximately $113,000 and $128,000 was capitalized during the nine months ended September 30, 1999 and 1998 in leasehold improvements. Included in the 1999 expenses referred to above, approximately $142,000 is recorded in repairs and maintenance, and $109,000 in administrative expense. Included in the 1998 expenses referred to above, approximately $104,000 is recorded in repairs and maintenance, and approximately $104,000 is included in administrative expenses. Additionally in each of the nine months ended September 30, 1999 and 1998 the Partnership paid to the management company $48,750 and $45,000 respectively for in-house accounting services, at a cost savings, which were previously provided by an outside company. The Partnership Agreement entitles the General Partner or a management company to receive certain commissions upon the sale of Partnership property only to the extent that total commissions do not exceed 3%. No such commissions were paid in 1999 or 1998. In 1996, an individual employed by the management company performed asset management consulting services for NERA and the management company and subsequently was appointed President of the management company. This individual continues to receive asset management fees from NERA, receiving $22,650 during the nine months ended September 30, 1999 and $31,200 during the year ended December 31, 1998. Included in prepaid expenses and other assets were amounts due from related parties of $705,702 at September 30, 1999 and $534,357 at December 31, 1998 representing Massachusetts tenant security and prepaid rent deposits which are held for the Partnerships by another entity also owned by one of the shareholders of the General Partner (see Note 6). 7 NEW ENGLAND REALTY ASSOCIATESLIMITED PARTNERSHIP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3--RELATED PARTY TRANSACTIONS (CONTINUED) See Note 9 for rental arrangements with Timpany Plaza joint venture. As described in Note 4, the Partnership had interests in certain entities in which the majority shareholder of the General Partner is also involved. NOTE 4--OTHER ASSETS Short-term investments are considered to be trading securities per FAS 115 and are carried on the balance sheet at their fair value. At September 30, 1999 mutual funds with a cost of $5,506,499 was recorded at its market value of $5,153,303. At September 30, 1998 a mutual fund with a cost of $2,671,598 was recorded at its market value of $2,756,053. The unrealized (loss) gain of ($353,196) and $84,455 is included in other (loss) income at September 30, 1999 and 1998 respectively. Included in prepaid expenses and other assets at September 30, 1999, and December 31, 1998 is approximately $906,000 and $567,000 respectively held in escrow to pay future capital improvements (See Note 5). The carrying value of the Partnership's 50% interest in the Timpany Plaza joint venture, at equity, is $38,083 and $58,910 at September 30, 1999 and December 31, 1998 respectively. In 1998, the Partnership disposed of a 10% ownership interest in a real estate partnership accounted for by the equity method and reduced to a carrying value of zero. Losses in excess of cost in limited partnerships had not been recorded, as the Partnership is not liable for such amounts. This sale did not result in any proceeds to the Partnership. The majority shareholder of the General Partner was also the majority owner of this partnership. NOTE 5--MORTGAGES PAYABLE At September 30, 1999 and December 31, 1998, the mortgages payable consisted of various loans, substantially all of which were secured by first mortgages on properties referred to in Note 2. At September 30, 1999 the interest rate on these loans ranged from 7.07% to 9.25% payable in monthly installments aggregating approximately $495,000 including interest, to various dates through 2017. Although the majority of loans mature within ten years, they are being amortized on a basis between 25 and 27.5 years. The carrying amounts of the Partnerships' mortgages payable approximate their fair value. The Partnerships have pledged tenant leases as additional collateral for certain of these mortgages. Approximate annual maturities are as follows: 2000--current maturities 1,005,000 2001 1,090,000 2002 1,182,000 2003 1,282,000 2004 1,390,000 Thereafter 55,027,000 ---------- 60,976,000 ========== 8 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 5--MORTGAGES PAYABLE (CONTINUED) On March 24, 1999, the Partnership refinanced the outstanding mortgage on the Westgate Apartments located in Woburn, Massachusetts. The new loan is $12,000,000 with an interest rate of 7.07%, and a term of 15 years, amortized over 25 years. The net cash of approximately $5,000,000 from this refinancing will be used for future acquisitions and redevelopment of the Westgate Apartments. NOTE 6--ADVANCE RENTAL PAYMENTS AND SECURITY DEPOSITS The lease agreements for certain properties require tenants to maintain a one-month advance rental payment, plus security deposits. The funds are held in escrow by another entity owned by the majority shareholder of the General Partner (see Note 3). NOTE 7--PARTNERS' CAPITAL The Partnership has two categories of limited partners (Class A and B) and one category of General Partner (General Partner). Under the terms of the Partnership Agreement, Class B units and General Partnership units must represent 19% and 1% respectively of the total units outstanding. All classes have equal profit sharing and distribution rights in proportion to their ownership interests. In September 1999, the Partnership declared a semi-annual dividend of $ 5.10 per unit. In February 1999, the Partnership declared a regular semi-annual dividend of $4.60 and a special dividend of $3.50 per unit. Total dividends paid in 1999 were $13.20 per unit. Total dividends paid in 1998 were $8.20 per unit. The Partnership has entered into a deposit agreement with an agent to facilitate public trading of limited partners' interests in Class A units. Under the terms of this agreement, the holders of Class A units have the right to exchange each Class A unit for ten Depositary Receipts. The following is information on the net income per Depositary Receipt:
NINE MONTHS ENDED SEPTEMBER 30, ------------------------------- 1999 1998 ---- ---- Net Income per Depositary Receipt $ 1.60 $.95 ===== ====
NOTE 8--COMMITMENTS AND CONTINGENCIES From time to time, the Partnerships are involved in various ordinary routine litigation incidental to their business. The Partnerships are not involved in any material pending legal proceedings. 9 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 9--RENTAL INCOME During the nine months ended September 30, 1999, approximately 86 % of rental income was related to residential apartments and condominium units with leases of one year or less. The remaining 14% was related to commercial properties which have minimum future rental income on noncancellable operating leases as follows:
COMMERCIAL PROPERTY LEASES LAND LEASES TOTAL -------------------- -------------------- ------------- 2000 2,463,000 145,000 2,608,000 2001 2,135,000 150,000 2,285,000 2002 1,997,000 150,000 2,147,000 2003 1,841,000 150,000 1,991,000 2004 1,662,000 150,000 1,812,000 Thereafter 9,451,000 838,000 10,288,000 ---------- ---------- ----------- 19,549,000 1,583,000 21,131,000 ========== ========== ===========
In August 1988, the Partnership entered into a land lease agreement with an existing tenant of the Timpany Plaza Shopping Center in Gardner, Massachusetts. The minimum annual rents are $110,000 per year for the first five years increasing each subsequent five-year period, with the average being $137,500 per year for the minimum twenty-year term. Included in rents receivable at September 30, 1999 and December 31, 1998 is $201,875 and $167,500 respectively, representing the deferred rental income from this lease. There are also contingent rents based upon sales volume, common area maintenance, and other charges. This lease also provides for nine extension periods of five years each at increased rents. The minimum rents pertaining to this agreement are reflected in the foregoing table. Concurrently, the Partnership entered into a joint venture with this same tenant relating to the space formerly leased by the tenant. Under this arrangement, the two parties have agreed to relet the space and divide the net income or loss after paying to the Partnership an annual minimum rent of $84,546. The Partnership's share of income is $21,740 and $9,096 for the nine months ended September 30, 1999 and 1998 respectively. The aggregate minimum future rental income does not include contingent rentals, which may be received under various leases in connection with percentage rents, common area charges, and real estate taxes. Aggregate contingent rentals were approximately $755,775 and $694,807 for the nine months ended September 30, 1999 and 1998 respectively. Rents receivable are net of allowances for doubtful accounts of $110,453 at September 30, 1999 and $135,559 at December 31, 1998. 10 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10--CASH FLOW INFORMATION During the nine months ended September 30, 1999 and 1998, cash paid for interest was $3,571,412 and $3,412,683 respectively. NOTE 11--FAIR VALUE OF FINANCIAL INSTRUMENTS The Partnership considers the fair value of its financial instruments to approximate their carrying values because conditions pertaining to the historic carrying values approximate those in the current market. NOTE 12--SUBSEQUENT EVENT In October 1999, the Partnership entered into an agreement to purchase a 180 unit residential apartment complex referred to as Westside Colonial Apartments located in Brockton, Massachusetts. The purchase price is $8,900,000. The Partnership plans to assume a first mortgage of $5,265,000 with a rate of 6.52%. The mortgage note is for a 10 year term, and matures in September 2008. The note amortizes over 30 years. The balance of the purchase price $3,635,000, will be funded from cash reserves which the Partnership believes is adequate to support this acquisition. The Closing, subject to normal conditions, is scheduled for December 1, 1999. 11 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION RESULTS OF OPERATIONS New England Realty Associates Limited Partnership and its Subsidiary Partnerships earned income from operations of $752,046 during the three months ended September 30, 1999, compared to $510,471 for the three months ended September 30, 1998, an increase of $241,575. For the nine months ended September 30, 1999 income from operations was $2,042,585 compared to $1,426,863 for the same period in 1998, an increase of $615,722. The rental activity is summarized as follows:
OCCUPANCY DATE ------------------------------------------------------------------- AT SEPTEMBER 30, 1999 1998 --------------------------- --------------------------- Residential Units ...................... 1,632 1,668 Vacancies .................. 22 55 Vacancy rate ............... 1.3% 3.3% Commercial Total square feet........ 496,700 457,700 Vacancy.................. 81,000 93,000 Vacancy rate............. 16%(1) 20%
RENTAL INCOME -------------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30, 1999 1998 ------------------- ---------------------- Total rents....................... $ 14,682,000 $ 13,648,000 Residential percentage......... 86% 85% Commercial percentage........ 14% 15% Contingent rentals.............. $ 684,000 $ 695,000
(1) A significant percentage of this vacancy rate is representative of the vacancy created at the Timpany Plaza Shopping Center in Gardner, Massachusetts by a tenant which sought protection under the United States Bankruptcy Code. 12 Rental income for the three months ended September 30, 1999 was $5,079,121 compared to $4,566,164 for the three months ended September 30, 1998, an increase of $512,957 (11.2%) Rental income for the nine months ended September 30, 1999 was $14,681,709 compared to $13,647,899 for the nine months ended September 30, 1998, an increase of $1,033,810 (7.5%). Rental income at the Partnership's commercial properties increased approximately $331,000 for the nine months ended September 30, 1999. This increase is due to the acquisition of the Staples Plaza in May 1999. Rental income from the Staples Plaza since the acquisition through September 30, 1999 was $332,000. Rental income at the existing commercial properties remained relatively stable. Rental income at the residential properties increased approximately $660,000 for the nine months ended September 30, 1999 due to increases in rental rates as well as a decrease in vacancies. The demand for residential housing remains strong in the greater Boston area. Approximately eighty six percent (86%) of the Partnership's rental income is derived from its residential properties, a number of which properties are located in greater Boston and surrounding communities. While the demand for residential properties in greater Boston remains high, the Partnership cannot make any assurances that the current demand for its residential properties will continue in the future. Expenses for the third quarter of 1999 were $4,386,493 compared to $4,105,522 for the same period in 1998, an increase of $280,971 (7%). A significant portion of this increase can be attributed to the newly acquired Staples Plaza. The operating expenses of the Staples Plaza for the three months ended September 30, 1999 were $131,034. Excluding the acquisition of Staples Plaza, expenses would have increased $149,937(4%). Interest expense increased $113,071(10%) due to a higher level of debt. The refinancing of the Westgate Apartments and the acquisition of Staples Plaza resulted in additional debt for the Partnership of approximately $10,400,000. Depreciation and amortization increased $58,073 (7%) from $845,081 for the three months ended September 30, 1998 to $903,154 for the three months ended September 30, 1999. This is due to the acquisition of the Staples Plaza as well as ongoing capital improvements at the Partnership properties. Taxes and insurance increased $54,738 (12%) from $464,605 for the three months ended September 30, 1998 to $519,343 for the three months ended September 30, 1999 due to an increase in real estate taxes. Administrative expenses increased $34,036 (16%) from $212,641 for the three months ended September 30, 1998 to $246,677 for the three months ended September 30, 1999. This represents an increase in salaries and wages. Expenses for the first nine months of 1999 were $12,770,589 compared to $12,356,268 for the same period in 1998, an increase of $414,321 (3%). This represents an increase of $191,643 (8%) in depreciation and amortization expense from $2,442,817 for the nine months ended September 30, 1998 to $2,634,460 for the nine months ended September 30, 1999. Interest expense increased $163,332 (5%) from $3,460,287 for the nine months ended September 30, 1998 to $3,623,619 for the nine months ended September 30, 1999. Taxes and insurance increased $80,453 (6%) from $1,424,870 for the nine months ended September 30, 1998 to $1,505,323 for the nine months ended September 30, 1999. The reasons for these 13 increases are discussed in the preceding paragraph. The management fee increased $32,818 (6%) from $581,149 for the nine months ended September 30, 1998 to $613,967 for the nine months ended September 30, 1999. This increase is due to an increase in rental income. Administrative expenses decreased $32,822 (4%) from $815,689 for the nine months ended September 30, 1998 to $782,867 for the nine months ended September 30, 1999. This decrease is due to special projects which were contracted for during the early part of 1998 which were not recurring expenses in 1999. Operating expenses decreased $31,541(2%) from $1,431,306 for the nine months ended September 30, 1998 to $1,505,323 for the nine months ended September 30, 1999. This is due to a milder winter in 1999. Interest income was $100,421 for the three months ended September 30, 1999, compared to $48,258 for the three months ended September 30, 1998, an increase of $52,163. Interest income was $276,490 for the nine months ended September 30, 1999, compared to $124,918 for the same period in 1998, an increase of $151,572. This increase is due to an increase in the average cash balance available for investment in 1999 compared to 1998. The Partnership is a partner in a joint venture with a tenant at the Timpany Plaza Shopping Center in Gardner, Massachusetts. Under the terms of the agreement, the two parties have agreed to relet the space formerly leased by the tenant, and divide the net income or loss after paying to the Partnership an annual rent of approximately $84,000. The Partnership's investment in the Timpany Plaza joint venture represents less than 1% of the Partnership's assets. The Partnership's share of income in the joint venture at the Timpany Plaza Shopping Center was $7,510 for the three months ended September 30, 1999 compared to $7,148 for the same period in 1998, an increase of $362. For the nine months ended September 30, 1999, the Partnership's share of income from the joint venture was $21,740 compared to $9,096 for the same period in 1998, increase of $12,644. These increases in income in 1999 at the joint venture are due to increases in the percentage rents received from two major tenants. Included in other income during the three and nine months ended September 30, 1999 is a gain of $124,108 on the sale of a condominium unit at 566 Commonwealth Avenue. This unit was sold for $168,000 in August 1999. Also included in other income for the nine months ended September 30, 1999 is a gain of $676,124 on the sale of the Willard Street Apartments. This property was sold for $850,000 in April 1999. Also included in other income(loss) during the three months ended September 30, 1999 and September 30, 1998 is ($84,567) and $85,631 respectively in unrealized (depreciation) appreciation in the Partnership's short-term investments. For the nine months ended September 30, 1999 and September 30, 1998 the unrealized (depreciation) appreciation in the Partnership's investment was $(353,196) and $84,455 respectively. 14 As a result of the changes discussed above, net income for the three months ended September 30, 1999 was $900,518 compared to $651,508 for the three months ended September 30, 1998, an increase of $249,010. Net income for the nine months ended September 30, 1999 was $2,787,851 compared to $1,645,332 for the nine months ended September 30, 1998, an increase of $1,142,519. The significant increases in both of these periods is due primarily to the gain of $124,108 on the sale of 566 Commonwealth Avenue, and the gain of $676,124 on the sale of the Willard Street property. LIQUIDITY AND CAPITAL RESOURCES The Partnership's principal source of cash during 1999 was the collection of rents, sale of two Partnership properties and the refinancing of a Partnership property. The majority of cash and cash equivalents of $439,459 at September 30, 1999 and $623,078 at December 31, 1998 is held in an interest bearing account. The Partnership's short-term investments are $5,153,303 at September 30, 1999 of which $2,652,227 is invested in a Massachusetts Municipal Bond Fund and $2,501,076 is invested in a U.S. Treasury Fund. At December 31, 1998, the Partnership's short-term investments were $3,060,373, of which $1,921,123 was invested in a Massachusetts Municipal Bond Fund and approximately $1,139,250 was invested in a U.S. Treasury Fund. On August 5, 1999, the Partnership sold a condominium located at 566 Commonwealth Avenue located in Boston, Massachusetts. The sale price was $168,000. The net cash from the sale of this property was $157,643. On April 30, 1999, the Partnership sold the Willard Street Apartments located in Quincy, Massachusetts. The sale price was $850,000. The buyer assumed the first mortgage of approximately $285,000, and the Partnership took back a mortgage of approximately $480,000 at a rate of 7.5%. The net cash from the sale of this property was approximately $85,000. The mortgage matures at the earlier of the refinancing of the property or July 31, 2005. On March 24, 1999, the Partnership refinanced the Westgate Apartments located in Woburn, Massachusetts. The new loan is $12,000,000 with an interest rate of 7.07%, and a term of 15 years, amortized over 25 years. The net cash of approximately $5,000,000 from this refinancing will be used for future acquisitions and the redevelopment of the Westgate Apartments. On May 27, 1999, the Partnership purchased a 39,600 square foot commercial property known as Staples Plaza, located in Framingham, Massachusetts. The purchase price was $8,200,000. The Partnership assumed an 8% mortgage on the property of $5,267,949 which matures in 2017 and the balance of $2,932,051 was funded from the Partnership's cash reserves, which were adequate to support this purchase. 15 On October 1, 1999, the Partnership entered into an agreement to purchase a 180 unit residential apartment complex referred to as Westside Colonial Apartments located in Brockton, Massachusetts. The purchase price is $8,900,000. The Partnership plans to assume a first mortgage of $5,265,000 with a rate of 6.52%. The mortgage is a 10 year note, which matures in September 2008, however the note will be amortized over 30 years. The balance of $3,635,000 will be funded from cash reserves. The Partnership plans to close on the property on December 1, 1999. During the third quarter of 1999 the Partnership and its Subsidiary Partnerships completed certain improvements to their properties at a total cost of approximately $571,000. These improvements were funded from cash reserves which were adequate to support these improvements. The most significant improvements were made at 62 Boylston Street for a total cost of $216,247. These improvements were necessary in anticipation of new tenants who will occupy the building. The Partnership also made improvements of $79,751, $59,603, $39,184, and $32,442 to Timpany Plaza, Westgate Woburn, Redwood Hills, and 1144 Commonwealth Avenue. These improvements were funded from the escrow accounts previously established, as well as cash reserves. In addition to the improvements made to date in 1999, the Partnership and its Subsidiary Partnerships plan to invest an additional $800,000 in capital improvements prior to the end of 1999 primarily at the residential properties. These improvements will be funded from escrow accounts as well as from the Partnership's cash reserves. The Partnership anticipates that cash from operations and interest-bearing investments will be sufficient to fund its current operations and to finance current improvements to its properties. The Partnership's net income and cash flow may fluctuate dramatically from year to year as a result of the sale of properties, unanticipated increases in expenses, or the loss of significant tenants. Since the Partnership's long-term goals include the acquisition of additional properties, a portion of the proceeds from the refinancing and sale of properties is reserved for this purpose. The Partnership will consider refinancing existing properties if insufficient funds exist from cash reserves to repay existing mortgages or if funds for future acquisitions are not available. Factors That May Affect Future Results The discussions above contains information based upon management's belief and forward-looking statements that involve a number of risks, uncertainties, and assumptions. There can be no assurances that actual results will not differ materially as a result of various factors, including but not limited to the following: 16 A major tenant of the Lewiston Mall in Lewiston, Maine, which paid approximately $329,000 during the year ended December 31, 1998 and approximately $207,000 for the nine months ended September 30, 1999, can terminate its lease with nine months' notice. The Partnership is currently negotiating with this tenant to obtain a long term lease. The Partnership, at this time, cannot make any assurances that the tenant will renew its lease for this space. The Year 2000 problem arises because older or noncompliant computer systems are unable either to process data with accuracy, or to operate building systems correctly, by reason of the inability of either software or elements of hardware contained within such systems correctly to process dates after December 31, 1999. The Partnership has considered the Year 2000 problem as it relates to the business of the Partnership in three areas: partnership operations, problems with vendors, and problems with tenants. OPERATIONS. Partnership operations have been considered in two areas: financial operations and building operations. With respect to financial operations, all of the accounting and management functions of the Partnership are discharged for the Partnership by its contracted property manager, The Hamilton Company. The Partnership has been advised by The Hamilton Company that, as part of routine computer software and hardware updates which are presently in process, The Hamilton Company will be able to continue to perform the financial operations of the Partnership in the ordinary course. The costs of such compliance will be borne as operating costs by The Hamilton Company and will not be a charge to the earnings of the Partnership. The Partnership believes that the management fee paid by the Partnership to The Hamilton Company will be adequate to support The Hamilton Company's efforts in this regard, which understanding has been confirmed to the Partnership by the Hamilton Company. Specifically, The Hamilton Company has advised the Partnership as follows: that it has retained professional Year 2000 consulting services to provide advice concerning the installation of new hardware and software; that the newly installed systems are used as standard systems by many real estate management companies, and such systems are Year 2000 compliant; that of a total estimated cost of $150,000 associated with the replacement of hardware and software by The Hamilton Company, which replacement will address all Year 2000 compliance issues, approximately $140,000 has already been incurred; that such expenses include and will include the cost of training of employees and staff and all fees and expenses of consultants; that The Hamilton Company during the last calendar quarter of 1998 began validating the processes of its newly installed computer hardware and software systems to assure reliability and provide testing and verification; that as of July 31, 1999, the new computer systems are believed by the Partnership to be Year 2000 compliant and operational, however testing of such systems has not been but should be completed by September 30, 1999; and that the Partnership will obtain appropriate assurances in such regard from The Hamilton Company 17 The Partnership and its manager believe that its Year 2000 initiative will adequately prepare the Partnership with respect to Year 2000 issues; the Partnership has not developed any contingency plan for financial operations should the current initiative prove to be unsuccessful, and believes that there would be adequate time to effect a different and compliant systems installation if the September 30, 1999 testing date is not met. With respect to building operations, the Partnership has completed its review of all computerized systems which are operant in the Partnership's real estate holdings. VENDORS The Partnership further has reviewed its relationship with principal vendors. The Partnership is soliciting written assurance that its third party vendors which process the rents and deposits received from tenants, and its bank of deposit and account, are Year 2000 compliant. During 1999, the Partnership has been confirming such compliance, and believes that alternate servicing arrangements of a compliant nature would be available to the Partnership in the event any noncompliance is experienced. TENANTS Finally, the Partnership's entire income is derived from the payment of rents, and the impact of Year 2000 problems on the viability and credit worthiness of tenants could pose a significant economic threat to the income and profitability of the Partnership. However, approximately 86% of the Partnership's tenants are residential and are not subject to the same magnitude of risk that might be incurred in a tenant mix which was more commercially oriented. Further, no commercial tenant accounts for more than 2% of the gross rental income of the Partnership, and the Partnership therefore does not consider its gross income or profitability to be materially at risk by reason of possible impact of the Year 2000 problem on its tenant population. On or before September 30, 1999, the Partnership intends to seek written assurance of substantial compliance by its largest commercial tenants with Year 2000 issues, both on the part of such tenants and their respective essential third-party trading partners. RISKS SUMMARIZED Failure of the Partnership adequately to provide for Year 2000 compliance with respect to its financial operations could result in an inability to collect, credit or track rental income. Failure to bring computerized operational systems within its real estate holdings into compliance might cause liability on the part of the Partnership for economic or physical loss to its tenants and the invitees of those tenants in excess of applicable insurance coverages (typically) expressly exclude damages caused by Year 2000 issues. The failure of third-party vendors to provide adequate financial support to the rental collection and crediting function could have a significant negative impact on the gross income and net profit of the Partnership, and the inability of the Partnership's tenants to sustain financial health would, in turn, result in a reduction of gross rentals received by the Partnership. 18 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. Date: November 15, 1999 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP By: NEW REAL, INC., its General Partner* By: /s/ Ronald Brown ------------------------------------- Ronald Brown, President * Functional equivalent of Chief Executive Officer, Principal Financial Officer and Principal Accounting Officer. 19 EX-27 2 EXHIBIT 27
5 12-MOS DEC-31-1999 SEP-30-1999 $ 439,459 5,153,303 552,783 0 0 9,238,235 80,034,034 21,933,643 68,899,468 3,146,569 0 0 0 0 4,776,501 68,899,468 14,681,709 14,813,174 0 0 9,146,970 0 3,623,619 2,787,851 0 0 0 0 0 2,787,851 16.09 16.09
-----END PRIVACY-ENHANCED MESSAGE-----