-----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, FitUXi1pm3u2LcatpqG378inN5brV+MQotYXF4h959ZNmP1kuqemnBjVY8kdPVsB hKk/e6NvLNaTjpfoPR8aeA== 0000912057-96-017709.txt : 19960816 0000912057-96-017709.hdr.sgml : 19960816 ACCESSION NUMBER: 0000912057-96-017709 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960814 SROS: NONE 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: 1934 Act SEC FILE NUMBER: 000-12138 FILM NUMBER: 96612344 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 June 30, 1996 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 (I.R.S. Employer Identification No.) of Incorporation or Organization) 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 LastReport) 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 - June 30, 1996 and June 30, 1995 3 Statements of Operations - Six Months Ended June 30,1996 and June 30, 1995 4 Statements of Cash Flows - Six Months Ended June 30, 1996 and June 30, 1995 5 Notes to Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 17 PART II - OTHER INFORMATION Item 5. Other Information 21 SIGNATURES 22 2 PART I - FINANCIAL INFORMATION CONSOLIDATED BALANCE SHEETS NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
June 30, December 31, 1996 1995 (Unaudited) ----------- ------------ ASSETS Rental Properties $ 51,142,114 $ 51,688,269 Cash and Cash Equivalents 3,247,474 2,706,124 Short-term Investments 50,214 48,877 Rents Receivable 753,890 684,409 Real Estate Tax Escrows 474,941 538,945 Prepaid Expenses and Other Assets 1,863,875 1,933,472 Investment in Joint Venture 117,476 129,989 Financing and Leasing Fees 1,839,132 2,020,885 ------------ ------------ TOTAL ASSETS $ 59,489,116 $ 59,750,970 ------------ ------------ ------------ ------------ LIABILITIES AND PARTNERS` CAPITAL Mortgages Payable $ 52,811,010 $ 53,072,037 Accounts Payable and Accrued Expenses 653,454 804,865 Advance Rental Payments and Security Deposits 1,566,302 1,550,666 ------------ ------------ Total Liabilities 55,030,766 55,427,568 Commitments and Contingent Liabilities (Notes 9 and 12) Partners' Capital: 177,152 units outstanding in 1996 and 1995 4,458,350 4,323,402 ------------ ------------ TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 59,489,116 $ 59,750,970 ------------ ------------ ------------ ------------ See notes to consolidated financial statements.
3 CONSOLIDATED STATEMENTS OF OPERATIONS NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
Three Months Ended Six Months Ended June 30, June 30, 1996 1995 1996 1995 (Unaudited) (Unaudited) -------------------------- -------------------------- Revenues: Rental income $ 4,139,699 $ 2,274,773 $ 8,314,114 $ 4,519,007 Laundry & sundry income 47,972 34,273 109,021 68,526 ----------- ----------- ----------- ----------- 4,187,671 2,309,046 8,423,135 4,587,533 ----------- ----------- ----------- ----------- Expenses: Administrative 229,642 171,080 399,785 314,689 Depreciation and amortization 682,821 431,826 1,373,787 853,114 Interest 1,212,447 580,526 2,379,609 1,060,782 Management fees 172,609 96,652 353,021 198,853 Operating 409,547 191,010 1,061,129 470,807 Renting 47,276 42,240 62,209 72,189 Repairs & maintenance 685,896 422,013 1,232,609 745,012 Taxes & insurance 464,732 283,342 924,551 540,319 ----------- ----------- ----------- ----------- 3,904,970 2,218,689 7,786,700 4,255,765 ----------- ----------- ----------- ----------- Income from Operations 282,701 90,357 636,435 331,768 ----------- ----------- ----------- ----------- Other income(loss): Interest income 35,294 13,775 88,344 25,023 Income(loss) from investment in the joint venture 5,228 (748) 11,535 8,852 40,522 13,027 99,879 33,875 ----------- ----------- ----------- ----------- Net Income $ 323,223 $ 103,384 $ 736,314 $ 365,643 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Net Income per Unit $ 1.82 $ .58 $ 4.16 $ 2.06 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Weighted Average Number of Units Outstanding 177,152 177,152 177,152 177,152 ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
See notes to consolidated financial statements. 4 CONSOLIDATED STATEMENTS OF CASH FLOWS NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
Six Months Ended June 30, (Unaudited) 1996 1995* ------------- ------------- Cash Flows from Operating Activities: Net income $ 736,314 $ 365,643 ------------- ------------- Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 1,373,787 853,114 (Income) on investments in partnerships and joint venture (11,535) (8,852) Decrease(Increase) in rents receivable (69,481) 55,041 (Increase) in financing and leasing fees (26,255) (518,108) (Decrease) in accounts payable and accrued expenses (151,411) (239,889) Decrease(Increase) in real estate tax escrows 64,004 (129,710) Decrease(Increase)in prepaid expenses and other assets 69,597 (1,308,356) Increase in advance rental payments and security deposits 15,636 29,970 ------------- ------------- Total Adjustments 1,264,342 (1,266,790) ------------- ------------- Net cash provided by (used in) operating activities 2,000,656 (901,147) ------------- ------------- Cash Flows from Investing Activities: Distribution from the joint venture 24,048 32,773 Payment for purchase and improvement of rental properties (619,624) (30,372,784) Purchase of short-term investments (1,337) (1,844) ------------- ------------- Net cash (used in) investing activities (596,913) (30,341,855) ------------- -------------
See notes to consolidated financial statements. *Certain items have been re-classified for comparative purposes. 5 CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
Six Months Ended June 30, (Unaudited) 1996 1995 ------------- ------------- Cash Flows from Financing Activities: Principal payments and early repayment of mortgages payable (261,027) (3,256,125) Distributions to partners (601,366) (598,366) Proceeds from refinancing of Partnership properties - 13,450,000 Decrease in notes payable to related party - (1,175,000) Increase in mortgages payable - 22,627,000 ------------- ------------- Net cash (used in) provided by financing activities (862,393) 31,047,509 ------------- ------------- Net Increase(Decrease) in Cash and Cash Equivalents 541,350 (195,493) Cash and Cash Equivalents, Beginning 2,706,124 996,353 ------------- ------------- Cash and Cash Equivalents, Ending $3,247,474 $ 800,860 ------------- ------------- ------------- ------------- See notes to consolidated financial statements.
6 STATEMENTS OF CHANGES IN PARTNERS' CAPITAL NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES (Unaudited)
Partners' Capital ------------------------------------------------------------------------------ Limited General ------------------------------------- --------------- Class A Class B Class C Total ------------- ----------- --------------- ------------- Balance, January 1, 1995 $ 6,717,849 $ 1,598,946 $ 84,184 $ 8,400,979 Distributions to Partners (478,693) (113,690) (5,983) (598,366) Net Income 292,514 69,472 3,657 365,643 ------------- ----------- --------------- ------------- Balance, June 30, 1995 $ 6,531,670 $ 1,554,728 $ 81,858 $ 8,168,258 ------------- ----------- --------------- ------------- ------------- ----------- --------------- ------------- Units authorized and issued, net of 3,073 Treasury Units, at June 30, 1995 141,722 33,659 1,265 177,152 ------------- ----------- --------------- ------------- ------------- ----------- --------------- ------------- Balance, January 1, 1996 $ 3,455,787 $ 824,206 $ 43,409 $ 4,323,402 Distributions to Partners (481,093) (114,260) (6,013) (601,366) Net Income 589,051 139,900 7,363 736,314 ------------- ----------- --------------- ------------- Balance, June 30, 1996 $ 3,563,745 $ 849,846 $ 44,759 $ 4,458,350 ------------- ----------- --------------- ------------- ------------- ----------- --------------- ------------- Units authorized and issued, net of 3,073 Treasury Units at June 30, 1996 141,722 33,659 1,771 177,152 ------------- ----------- --------------- ------------- ------------- ----------- --------------- -------------
See notes to consolidated financial statements. 7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES 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 subsidiary partnerships 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 new mortgages referred to in Note 5, a substantial number of NERA's properties were restructured into separate subsidiary limited partnerships. The financial statements for prior periods are unchanged. 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 the 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. Revenue Recognition: 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. This policy was adopted in 1995. Previously, impairment was considered on a case by case basis. See Note 2 for the effect of this accounting change. 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. 8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES NOTE 1--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Income Taxes: The financial statements have been prepared under the basis that NERA and its subsidiary limited partnerships are entitled to tax treatment as partnerships. Accordingly, no provision for income taxes on income has been recorded. Cash Equivalents: The Partnerships consider all highly liquid instruments purchased with a maturity of three months or less to be cash equivalents. Short-Term Investments: The Partnerships consider short-term investments to be any 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. Concentration of Credit Risks and 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 1996 or 1995. 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 June 30, 1996, approximately $2,798,000 of cash and cash equivalents exceeded federally insured amounts of which approximately $2,540,000 was invested in a money market fund invested in U.S. Goverment securities. NOTE 2--RENTAL PROPERTIES Rental properties consist of the following:
June 30, December 31, Useful 1996 1995 Life ------------- ------------- ------------- Land $ 9,554,732 $ 9,554,732 -- Buildings 42,988,784 42,988,784 25-31 years Building improvements 9,820,052 9,437,144 15-31 years Kitchen cabinets 1,195,768 1,089,407 5-10 years Carpets 1,109,094 1,028,473 5-10 years Air conditioning 90,021 87,745 7-10 years Land improvements 434,382 422,646 10-31 years Laundry equipment 51,234 46,994 5-7 years Elevators 16,842 16,842 20 years Swimming pools 42,450 42,450 10 years Equipment 184,515 166,132 5-7 years Motor vehicles 46,704 46,704 5 years Fences 22,229 22,229 5-10 years Furniture and fixtures 106,997 95,793 5-7 years Smoke alarms 6,224 6,224 5-7 years ------------- ------------- 65,670,028 65,052,299 Less accumulated depreciation 14,527,914 13,364,030 ------------- ------------- $ 51,142,114 $ 51,688,269 ------------- ------------- ------------- -------------
9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES NOTE 2--RENTAL PROPERTIES (CONTINUED) On June 30, 1995, the Partnerships purchased for $30,198,000 five properties containing an aggregate of 809 residential apartments and 18,400 square feet of commercial space. The purchase was paid for in part with the proceeds of the refinancing of thirteen of the Partnerships' properties and the issuance of new mortgage notes payable aggregating $22,627,000 and maturing in ten years. The properties were acquired from a trust owned nominally by the majority shareholder of NERA's general partner. In substance, the properties were owned by the trust's secured lender under a previous restructuring agreement whereby the lender received all of the operating income from the properties as well as the proceeds from the sale to NERA. The Partnerships have recorded the purchase at the amount paid for the properties and have allocated the amounts to the individual properties acquired. An entity owned by the majority shareholder of the Partnership's general partner received a fee of $300,000 from the trust's secured lender. Included in rental properties at June 30, 1996 is a building in Newton, Massachusetts acquired by the Partnership on January 25, 1995. The building consists of 21,223 square feet of commercial space, 9 residential units and 29 parking spaces for a total purchase price of $1,925,000. This building was acquired from an entity in which the majority shareholder of NERA's general partner had a substantial ownership interest. The Partnership's management company received a fee of approximately $11,000 from the seller in this transaction. To facilitate this acquisition, the Partnership's management company, an entity owned by the majority shareholder of NERA's general partner, loaned the Partnership $1,175,000 in December 1994. In May 1995, the Partnership refinanced this property and obtained a $1,329,000 mortgage payable in 10 years with interest at 9.25%, and paid off the existing loan of $1,175,000 to the management company. Total interest paid on this loan was $38,073. In 1995, the Partnership sold two condominiums located in Stoneham and Boston Massachusetts. The gain of $152,463 is included in net income for the year ended December 31, 1995. In the fourth quarter of 1995, the Partnerships recorded a special charge of $3,250,000 relating to the early adoption of Statement of Financial Accounting Standards No. 121 (FAS 121) on accounting for the impairment of long-lived assets effective for fiscal years beginning after December 15, 1995. This statement requires that long-lived assets held and used by the entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. During 1995, the Lewiston Mall with a carrying value of approximately $8,200,000 was remortgaged for $2,933,000. As part of this refinancing, the lender obtained an appraisal of $5,000,000. A further analysis of estimated future cash flows as required by FAS 121 indicated an impairment. The carrying value of the Lewiston Mall has been reduced to the net present value of expected future cash flows, which approximates the aforementioned appraisal. Similiar analysis of the other properties did not result in impairment. 10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES NOTE 3--RELATED PARTY TRANSACTIONS The Partnerships' properties are managed by an entity which is owned by the majority shareholder of the General Partner (see Note 12). The management fee is equal to 4% of rental revenue and laundry income. Total fees paid were $353,021, and $198,853 for the six months ended June 30, 1996 and 1995, 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 1996 and 1995. The Partnership Agreement also permits the General Partner or management company to charge the costs of professional services (such as counsel, accountants, contractors) to NERA. During the six months ended June 30, 1996 and 1995 approximately $142,000, and $42,000 was charged to NERA for legal, maintenance, and architectural services, and supervision of capital improvements. Approximately $40,000 was capitalized in leasehold improvements, approximately $73,000 is included in administrative expenses, and approximately $27,000 is included in repairs and maintenance expense during the six months ended June 30, 1996. Additionally in 1995, the Partnership paid to the management company $30,000 for accounting services 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 1996 or 1995. Included in prepaid expenses and other assets were amounts due from related parties of $357,604 at June 30, 1996 and $366,258 at December 31, 1995, 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). Also included in prepaid expenses and other assets is an insurance reserve account funded by the Partnerships and held by the management company. The insurance reserve includes funds from other properties which are also owned by the related parties. The balance in the reserve was $124,211 at June 30, 1996 and $105,924 at December 31, 1995. See Note 10 for rental arrangements with the Timpany Plaza joint venture. As described in Note 4, the Partnership has interests in certain entities in which the majority shareholder of the General Partner is also involved. See Note 2 for fees paid to related parties by the sellers of the Partnerships' 1995 acquisitions. 11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES NOTE 4--OTHER ASSETS The short term investment totalling $50,214 at June 30, 1996 and $48,877 at December 31, 1995 is carried at cost which approximates fair value. Such investment at June 30, 1996 is a 5.07% certificate of deposit maturing in February 1997. The issuer and amount of this investment is as follows: June 30, December 31, 1996 1995 ----------- ----------- Citizens Bank - Certificate of deposit 50,214 48,877 ----------- ----------- $ 50,214 $ 48,877 ----------- ----------- ----------- ----------- The carrying value of the Partnership's 50% interest in the Timpany Plaza Joint Venture, at equity, is $117,476 at June 30, 1996 and $129,989 at December 31, 1995. The Partnership owns a 10% ownership interest in three real estate partnerships accounted for by the equity method and reduced to a carrying value of zero. Losses in excess of cost in limited partnerships have not been recorded as the Partnership is not liable for such amounts. During the fourth quarter of 1995 the real estate owned by another partnership in which NERA had a 10% ownership interest was sold for less than the mortgage debt. Accordingly, NERA did not receive proceeds from this sale. The majority shareholder of the General Partner is also the majority owner of these partnerships (see Note 12). There can be no assurance that any of NERA's partnership investments will be realizable in the future in excess of their carrying value. NOTE 5--MORTGAGES PAYABLE At June 30, 1996 and December 31, 1995 the mortgages payable consisted of various loans, substantially all of which were secured by first mortgages on properties referred to in Note 2, with interest ranging from 8.25% to 10.99%, payable in monthly installments currently aggregating approximately $431,000, including interest, to various dates through 2005. Although the 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. 12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES NOTE 5--MORTGAGES PAYABLE (CONTINUED) The Partnerships have pledged tenant leases as additional collateral for certain of their mortgages. Approximate annual maturities are as follows: 1997 - current maturities $ 550,200 1998 606,803 1999 661,687 2000 721,575 2001 786,928 Thereafter 49,483,817 ----------- $52,811,010 ----------- ----------- NOTE 6--ADVANCE RENTAL PAYMENTS AND SECURITY DEPOSITS The lease agreements for certain properties require tenants to maintain a one- month advance rental payment and security deposits. The funds are held in escrow by another entity owned by the majority shareholder of the General Partner (See Notes 3 and 12). NOTE 7--PARTNERS' CAPITAL The Partnership has two categories of limited partners (Classes 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. The Partnership declared distributions of $3.40 unit in the first quarters of 1996 and 1995. The Partnership has entered into a deposit agreement with a bank to facilitate public trading of limited partners' interests in Class A units. 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES NOTE 7--PARTNERS' CAPITAL (CONTINUED) 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 of the net income per Depositary Receipt: Six Months Ended June 30, 1996 1995 ---- ---- Net Income Per Depositary Receipt $.42 $.21 ---- ---- ---- ---- NOTE 8--STOCK REPURCHASE PLAN During the second quarter of 1996, the Partnership announced a plan to repurchase up to $500,000 of its Depositary Receipts from existing holders of securities. The repurchase of Depositary Receipts may take place over a period of a year or more. The purchase price would be equal to the price at which such securities are traded on the Nasdaq Stock Market at the time of the repurchase. At June 30, 1996, no Depositary Receipts had been repurchased, however, on July 3, 1996, the Partnership repurchased 7,000 depositary receipts for a total cost of approximatley $47,000. NOTE 9--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. NOTE 10--RENTAL INCOME In 1996, approximately 83% of rental income is related to residential apartment and condominium units with leases of one year or less. The remaining 17% is related to commercial properties which have minimum future rental income on noncancellable operating leases as follows: Commercial Property Leases Land Leases Total ------------ ------------ ------------ 1997 $ 1,650,600 $ 146,667 $ 1,797,267 1998 1,512,219 146,667 1,658,886 1999 1,203,527 146,667 1,350,194 2000 875,871 146,667 1,022,538 2001 596,985 146,667 743,652 Thereafter 1,981,932 1,173,336 3,155,268 ------------ ------------ ------------ $ 7,821,134 $1,906,671 $ 9,727,805 ------------ ------------ ------------ ------------ ------------ ------------ 14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES NOTE 10--RENTAL INCOME (CONTINUED) In August 1988, the Partnership entered into a land lease agreement with an existing tenant of the Timpany Plaza Shopping Center in Gardner, Massachusetts. As part of this lease, the tenant, at its cost, demolished approximately one-third of the mall and replaced it with a new store of comparable size. The minimum fixed term of this lease is for 20 years which commenced with the opening of the new store in December 1989. 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 June 30, 1996 and December 31, 1995 is $171,750 and $158,000 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 six extension periods of five years each at increased rents. The minimum rents pertaining to this agreement are reflected in the foregoing table. The ownership of this new building addition transfers to the Partnership at the termination of the lease. Accordingly, the Partnership included in property assets approximately $1,400,000 of book value of the demolished building allocable to the Partnership leasehold interest and is depreciating this amount on a straight-line basis over a twenty-year period. 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 was approximately $11,500 and $8,900, for the six months ended June 30, 1996 and 1995 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 $486,000, and $401,000 for the six months ended June 30, 1996 and 1995 respectively. NOTE 11--CASH FLOW INFORMATION During the six months ended June 30, 1996 and 1995, cash paid for interest on debt was $2,327,771, and $1,114,582 respectively. 15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES NOTE 12--BANKRUPTCY OF RELATED PARTIES As described in Notes 3, 4 and 6, the Partnerships had transactions with and have interests in certain entities in which the majority shareholder of the General Partner is involved. Such shareholder had guaranteed certain notes receivable and had agreed to indemnify the Partnerships for losses incurred from certain partnerships in which NERA is a General Partner. During March 1991, this shareholder, the Partnerships' management company, and other related entities filed for protection from their creditors under Chapter 11 of the Federal Bankruptcy Code. In September 1992, the U.S. Bankruptcy Court confirmed a reorganization plan pursuant to which this shareholder was discharged of all liabilities including all guarantees and indemnifications. The management of the Partnership believes that the proceedings described above will not adversely affect the Partnerships' properties or operations. 16 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation Results of Operations Income from operations for the second quarter of 1996 was approximately $283,000, compared to approximately $90,000 for the same period in 1995, an increase of approximately $193,000. For the six months ended June 30, 1996, income from operations was approximately $636,000 compared to approximately $332,000 for the same period in 1995, an increase of approximately $304,000. Net cash provided by operations during the six months ended June 30, 1996 was approximately $2,001,000 compared to cash used in operations approximately $901,000 during the same period in 1995, a fluctuation of approximately $2,902,000. This significant increase in the source of funds is due to an increase in net income during the six months ended June 30, 1996 as well as the acquisition of six properties during the six months ended June 30, 1995. In connection with these 1995 acquisitions, the bank required that the Partnership fund real estate tax escrow accounts and insurance reserves for the newly acquired properties. In addition, nine properties were refinanced during the second quarter of 1995 and the prepaid financing fees, related to the refinancing also affected the Partnerships cash flow. Rental income during the second quarter of 1996 was approximately $4,140,000 compared with approximately $2,275,000, for the same period in 1995, an increase of approximately $1,865,000. Rental income from the properties acquired in June 1995 represent approximately $1,836,000 of this increase. For the six months ended June 30, 1996, rental income was approximately $8,314,000 compared with approximately $4,519,000 for the same period in 1995, an increase of approximately $3,795,000. Rental income from the properties acquired in June 1995 represent approximately $3,625,000 of this increase. Rental income from the Partnership's existing residential and commercial properties remained relatively stable. Expenses for the second quarter of 1996 were approximately $3,905,000 compared to approximately $2,219,000 for the same period in 1995, an increase of approximately $1,686,000. This increase reflects an increase in interest expense of approximately $632,000 due to the higher level of debt from the new acquisitions and the refinancing of Partnership properties; an increase of approximately $263,000 in repairs and maintenance expenses to the new properties; an increase of approximately $219,000 in operating expenses due to additional heat, rubbish removal, water, sewer and other 17 expenses associated with the acquisition of new properties; an increase in depreciation and amortization of approximately $251,000 due to the property acquisitions made in June 1995 which doubled the size of the Partnerships real estate holdings; an increase in taxes and insurance of approximately $181,000 due to the additional real estate taxes and insurance associated with the new acquisitions. The management fee has also increased approximately $76,000 which is directly related to the increase in rental income. Expenses for the first six months of 1996 were approximately $7,787,000 compared with approximately $4,256,000 for the same period in 1995, an increase of approximately $3,531,000. This represents an increase in interest expense of approximately $1,319,000; an increase in repairs and maintenance expenses of approximately $488,000; an increase in depreciation and amortization of approximately $521,000; an increase in the management fee of approximately $154,000; and an increase in operating expenses of approximately $590,000. The reason for these increases are discussed in the preceding paragraph. Interest income for the three months ended June 30, 1996 was approximately $35,000, compared to approximately $14,000 for the same period in 1995, an increase of approximately $21,000. Interest income for the six months ended June 30, 1996 was approximately $88,000, compared to approximately $25,000 for the same period in 1995, an increase of approximately $63,000. These increases are due to the increase in cash available for investment as well as a slight increase in the interest rates. During the year ended December 31, 1995, the Partnership sold two condominium units for a total gain of approximately $152,000. 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 parties have agreed to relet the space and divide the net income or loss after paying to the Partnership an annual minimum rent of approximately $84,000. The Partnership's investment in the Timpany Plaza joint venture represents less than 1% of NERA's assets. The Partnership's share of income in the joint venture at the Timpany Plaza Shopping Center was approximately $5,000 for the second quarter of 1996 compared to a loss of approximately $1,000 for the second quarter of 1995, a fluctuation of approximately $6,000. For the six months ended June 30, 1996, the Partnership's share of income from the joint venture at Timpany Plaza Shopping Center was 18 approximately $11,500 compared to approximately $8,900 for the same period in 1995, an increase of approximately $2,000. This represents an increase in rental income, primarily the common area maintenance charges in connection with the joint venture. In March 1996, a major tenant in the Timpany Plaza Shopping Center filed for bankruptcy under Chapter 11. This tenant paid approximately $347,000 of rent in 1995 and was current through August 1996. The tenant is considering keeping the space in the mall thru the end of the year. As a result of the changes discussed above, net income for the three months ended June 30, 1996 was $323,223 compared to $103,384 for the same period in 1995, an increase of $219,839. Liquidity and Capital Resources The Partnership's principal source of cash during 1996 and 1995 has been the collection of rents and the refinancing of Partnership properties. The majority of cash and cash equivalents of $3,247,474 at June 30, 1996 and $2,706,124 at December 31, 1995 is invested in commercial paper and certificates of deposit maturing in less than 90 days. Additionally, the Partnership purchased a short term investment valued at $50,214 at June 30, 1996 and $48,877 at December 31, 1995. This investment is a certificate of deposit maturing in February 1997. The Partnership believes it strengthened its portfolio by making significant acquisitions of rental and mixed-use properties in 1995. During 1995, the Partnership acquired six properties for a total purchase price of approximately $32,123,000. The acquisitions were financed by $23,956,000 of new mortgages on the acquired properties. Additional funds of $22,446,000 were provided by obtaining 13 mortgages on refinanced or debt-free properties. Approximately $10,900,000 of this amount was used to repay existing mortgages and approximately $11,546,000 was used in the acquisition of the above properties. In connection with these mortgages, the lender required that separate escrow accounts totaling approximately $870,000 be established to fund capital improvements at the properties. The Partnership is also required by the lender to make additional monthly payments of approximately $34,000 to fund these escrow accounts. The monthly payments to these escrow accounts are in addition to the monthly mortgage payments. In connection with these new mortgages, a substantial number of the Partnership's properties were restructured into separate subsidiary Partnerships. 19 During the second quarter of 1996, the Partnership announced a plan under which it may repurchase up to $500,000 of its Depositary Receipts from existing holders of securities. The repurchase plan may take place over a period of one year or more. The purchase price will be equal to the price at which such securities are traded on the Nasdaq Stock Market at the time of the repurchase. On July 3, 1996, the Partnership repurchased 7,000 shares for a total purchase price of approximately $47,000. Any funds pursuant to this program will come from cash reserves. Management believes this repurchase plan of up to $500,000 will not have a negative impact on liquidity and cash reserves and management believes that it will have adequate liquidity for reasonable anticipated needs. During the second quarter of 1996, the Partnership completed approximately $412,000 of capital improvements to its properties. These improvements were funded from cash reserves and escrow accounts. The most significant improvements were made at the Westgate Woburn Apartments in Woburn, Massachusetts for a total cost of approximately $83,000, as well as improvements of approximately $73,000 at the Redwood Hills Apartments in Worcester, Massachusetts; approximately $72,000 at the Courtyard On North Beacon Apartments in Brighton, Massachusetts; and approximately $32,000 at the Apartments at 1144 Commonwealth Avenue in Brighton, Massachusetts. The Partnership plans to invest an additional $800,000 in capital improvements in the residential and commercial properties this year. These improvements will be funded from cash reserves and escrow accounts. The Partnership anticipates that available cash and interest-bearing investments, collection of rents, and proceeds from the sale and refinancing of Partnership properties will be sufficient to finance current improvements to its properties. As a result of the sale of properties, unanticipated increases in expenses, or a loss of a significant tenant, the Partnership's net income and cash flow may fluctuate dramatically from year to year. 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 either insufficient funds exist from cash reserves to repay existing mortgages or if funds required for future acquisitions are not available. The Partnership paid a distribution of $3.40 per Partnership unit ($0.34 per depositary receipt) during each of the six months ended June 30, 1996 and 1995. 20 PART II - OTHER INFORMATION ITEM 5. Other Information. On May 20, 1996, the Partnership authorized a plan to repurchase up to $500,000 of its Depository Receipts from existing holders of securities. The repurchase of such Depository Receipts may take place over a period of a year or more. The purchase price for each such Depository Receipt will be equal to the price at which such securities are traded on the Nasdaq Stock Market at the time of the repurchase. On July 3, 1996, the Partnership had recorded repurchases of 7,000 Depository Receipts for a total cost of approximately $47,000. Conditions of the Partnership's repurchase of Depository Receipts include the timing of purchases, volume of purchases, price, and use of a single broker. 21 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: August 14, 1996 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP By: NEWREAL, INC., its General Partner* By: /s/ Ronald Brown --------------------------------- Ronald Brown, President *Functional equivalent of Chief Executive Officer, Principal Financial Officer and Principal Accounting Officer. 22 EX-27 2 EXHIBIT 27 FINANCIAL DATA SCHEDULE
5 6-MOS DEC-31-1996 JUN-30-1996 3,247,474 50,214 753,890 0 0 6,390,394 65,670,028 14,527,914 59,489,116 2,219,758 0 0 0 0 4,458,350 59,489,116 8,314,114 8,423,135 0 0 5,407,091 0 2,379,609 736,314 0 736,314 0 0 0 736,314 4.16 4.16
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