-----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, MiKoLh/9gWymFK6MKFMl7Gc8wyErxu0mGwUb8biB6uP1YVgY5ORWGHN0deZBE5X6 obxjgZzTCjXiUqUfB7/MdA== 0000912057-02-042444.txt : 20021114 0000912057-02-042444.hdr.sgml : 20021114 20021114161113 ACCESSION NUMBER: 0000912057-02-042444 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021114 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: 02825237 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 a2093605z10-q.txt 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, 2002 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 Incorporation or Organization) (I.R.S. Employer 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 | | 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. Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001..................... 1 Consolidated Statements of Income for the Three Months Ended September 30, 2002 and September 30, 2001, and the Nine Months Ended September 30, 2002 and September 30, 2001.... 2 Consolidated Statement of Changes in Partners' Capital for the Nine Months Ended September 30, 2002 and September 30, 2001...................................................... 3 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2002 and September 30, 2001......................................................................... 4 Notes to Financial Statements.................................................................. 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 14 Item 3. Quantitative and Qualitative Disclosures About Market Risk..................................... 22 Item 4. Controls and Procedures........................................................................ 23 PART II - OTHER INFORMATION Item 1. Legal Proceedings.............................................................................. 24 Item 2. Changes in Securities and Use of Proceeds...................................................... 24 Item 3. Defaults Upon Senior Securities................................................................ 24 Item 4. Submission of Matters to a Vote of Security Holders............................................ 24 Item 5. Other Information.............................................................................. 24 Item 6. Exhibits and Reports on Form 8-K............................................................... 24
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31, 2002 2001 (Unaudited) -------------- -------------- ASSETS Rental Properties $ 80,543,183 $ 73,941,098 Cash and Cash Equivalents 16,736,662 16,690,943 Rents Receivable 582,107 513,181 Real Estate Tax Escrows 365,399 332,282 Prepaid Expenses and Other Assets 2,610,550 2,190,978 Investment in Partnership 1,474,087 1,944,060 Financing and Leasing Fees 779,519 816,414 -------------- -------------- TOTAL ASSETS $ 103,091,507 $ 96,428,956 ============== ============== LIABILITIES AND PARTNERS' CAPITAL Mortgages Payable $ 84,357,697 $ 79,613,051 Accounts Payable and Accrued Expenses 1,144,281 1,163,606 Advance Rental Payments and Security Deposits 3,258,444 3,171,127 -------------- -------------- Total Liabilities 88,760,422 83,947,784 Commitments and Contingent Liabilities (Note 9) Partners' Capital 173,252 units outstanding in 2002 and 2001 14,331,085 12,481,172 -------------- -------------- TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 103,091,507 $ 96,428,956 ============== ==============
See notes to consolidated financial statements 1 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 2002 2001 2002 2001 ------------ ------------ ------------ ------------ Revenues Rental income $ 7,375,399 $ 7,030,896 $ 22,038,367 $ 20,445,897 Laundry and sundry income 59,645 77,376 182,834 208,262 ------------ ------------ ------------ ------------ 7,435,044 7,108,272 22,221,201 20,654,159 ------------ ------------ ------------ ------------ Expenses Administrative 363,632 311,379 1,038,617 969,497 Depreciation and amortization 1,219,903 1,110,676 3,463,913 3,215,275 Interest 1,716,630 1,639,766 4,961,536 4,890,826 Management Fees 310,048 296,708 913,202 855,142 Operating 515,050 497,470 1,780,145 1,961,666 Renting 136,468 40,042 281,498 94,765 Repairs and maintenance 1,058,351 1,051,620 2,606,788 2,559,615 Taxes and insurance 756,161 655,195 2,266,006 1,865,882 ------------ ------------ ------------ ------------ 6,076,243 5,602,856 17,311,705 16,412,668 ------------ ------------ ------------ ------------ Income from Operations 1,358,801 1,505,416 4,909,496 4,241,491 ------------ ------------ ------------ ------------ Other Income (Loss) Interest income 72,300 140,247 209,939 507,192 (Loss) from investment in joint venture (30,837) 0 (40,470) 0 Gain on the sale of real estate 0 0 92,778 0 ------------ ------------ ------------ ------------ 41,463 140,247 262,247 507,192 ------------ ------------ ------------ ------------ Net Income $ 1,400,264 $ 1,645,663 $ 5,171,743 $ 4,748,683 ============ ============ ============ ============ Net Income per unit $ 8.08 $ 9.49 $ 29.85 $ 27.40 ============ ============ ============ ============ Net Income per Depositary Receipts $ .81 $ .95 $ 2.99 $ 2.74 ============ ============ ============ ============ 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 STATEMENT OF CHANGES IN PARTNERS' CAPITAL (UNAUDITED)
Limited ---------------------------- General Class A Class B Partnership Total ------------ ------------ ------------ ------------ Balance, January 1, 2001 $ 7,113,724 $ 1,692,964 $ 89,132 $ 8,895,820 Distribution to Partners (2,449,283) (581,705) (30,616) (3,061,604) Net Income 3,798,946 902,250 47,487 4,748,683 ------------ ------------ ------------ ------------ Balance, Sept. 30, 2001 $ 8,463,387 $ 2,013,509 $ 106,003 $ 10,582,899 ============ ============ ============ ============ Units authorized and Issued, net of 6,973 Treasury Units at Sept. 30, 2001 138,602 32,918 1,732 173,252 ============ ============ ============ ============ Balance, January 1, 2002 $ 9,982,006 $ 2,374,180 $ 124,986 $ 12,481,172 Distribution to Partners (2,657,464) (631,148) (33,218) (3,321,830) Net Income 4,137,394 982,631 51,718 5,171,743 ------------ ------------ ------------ ------------ Balance, Sept. 30, 2002 $ 11,461,936 $ 2,725,663 $ 143,486 $ 14,331,085 ============ ============ ============ ============ Units authorized and Issued, net of 6,973 Treasury Units at Sept. 30, 2002 138,602 32,918 1,732 173,252 ============ ============ ============ ============
See notes to consolidated financial statements 3 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, (Unaudited) ---------------------------- 2002 2001 ------------ ------------ Cash Flows from Operating Activities Net income $ 5,171,743 $ 4,748,683 ------------ ------------ Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 3,463,913 3,215,275 Gain on the sale of rental property (92,778) 0 Loss from investments in partnership and joint venture 40,470 0 Change in assets and liabilities (Increase) in rents receivable (68,926) (45,784) (Increase) in financing and leasing fees (62,793) (138,099) (Decrease) in accounts payable (19,325) (45,196) Decrease (increase)in real estate tax escrow (33,117) 43,321 (Increase) in prepaid expenses and other assets (419,572) (630,497) Increase in advance rental payments and security deposits 87,317 221,737 ------------ ------------ Total Adjustments 2,895,189 2,620,757 ------------ ------------ Net cash provided by operating activities 8,066,932 7,369,440 ------------ ------------ Cash Flows from Investing Activities Distribution from Partnership 429,503 0 Purchase and improvement of rental properties (4,608,000) (2,192,248) Net proceeds from the sale of rental property 104,494 0 ------------ ------------ Net cash (used in) investing activities (4,074,003) (2,192,248) ------------ ------------ Cash Flows from Financing Activities Principal payments of mortgages payable (625,380) (563,331) Distributions to partners (3,321,830) (3,061,604) ------------ ------------ Net cash (used in) provided by financing activities (3,947,210) (3,624,935) ------------ ------------ Net Increase in Cash and Cash Equivalents 45,719 1,552,257 Cash and Cash Equivalents, Beginning 16,690,943 14,478,972 ------------ ------------ Cash and Cash Equivalents, Ending $ 16,736,662 $ 16,031,229 ============ ============
See notes to consolidated financial statements 4 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 (Unaudited) 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 and New Hampshire. 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 are owned by separate subsidiaries without any change in the historical cost basis. PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of NERA and its subsidiaries. NERA has a 99.67% to 100% ownership interest in each subsidiary except for the limited liability company formed in November 2001, in which the Partnership has a 50% interest. 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 its 50% owned limited liability company using the equity method. ACCOUNTING ESTIMATES: The preparation of the financial statements, in conformity with accounting principles generally accepted in the United State of America, requires 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 60 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 under 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. SEGMENT REPORTING: Operating segments are revenue-producing components of the Partnership for which separate financial information is produced internally for management. Under the definition, NERA operated, for all periods presented, as a single segment. 5 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 2002 (Unaudited) NOTE 1--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) COMPREHENSIVE INCOME: Comprehensive income is defined as changes in partners' equity, exclusive of transactions with owners (such as capital contributions and dividends). NERA did not have any comprehensive income items in 2002 or 2001, other than net income as reported. INCOME PER UNIT: Net income per unit has been calculated based upon the weighted average number of units outstanding during each year presented. The Partnership has no dilutive units and, therefore, basic net income is the same as diluted net income per unit. (See note 7) CONCENTRATION OF CREDIT RISKS AND FINANCIAL INSTRUMENTS: The Partnerships' properties 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 2002 or 2001. The Partnerships make their temporary cash investments with high-credit-quality financial institutions or purchase money market accounts invested in U.S. Government securities or mutual funds invested in government bonds. At September 30, 2002, substantially all of the Partnerships cash and cash equivalents were held in interest-bearing accounts at financial institutions, earning interest at rates from 1.44% to 1.86%. At September 30, 2002 and 2001 approximately $16,300,000 and $15,800,000 of cash and cash equivalents exceeded federally insured amounts. ADVERTISING EXPENSE: Advertising is expensed as incurred. Advertising expense was $59,457 and $50,578 for the nine months ended September 30, 2002 and 2001, respectively. NOTE 2--RENTAL PROPERTIES As of September 30, 2002, the Partnership and its Subsidiary Partnerships owned 2,192 residential apartment units in 21 residential and mixed-use complexes (collectively, the "Apartment Complexes"). The Partnership also owns 19 condominium units in a residential condominium complex, all of which are leased to residential tenants (collectively referred to as the "Condominium Units"). The Apartment Complexes and Condominium Units are located primarily in the greater metropolitan Boston, Massachusetts area. Additionally, as of September 30, 2002, the Subsidiary Partnerships owned commercial shopping centers in East Hampton, Connecticut and Framingham, Massachusetts. These properties are referred to collectively as the "Commercial Properties." On June 17, 2002, the Partnership purchased a 69-unit residential apartment complex located in Norwood, Massachusetts for $7,200,000. The Partnership assumed a first mortgage of approximately $3,650,000 with an interest rate of 7.08%, amortizing over 25 years and maturing in 2007. The seller financed $1,726,898 at an interest rate of 6%, interest only, for 5 years. This seller-financed note is collateralized by a mortgage on the previously unencumbered 19 condominium units described above. The balance of approximately $1,800,000 was funded from cash reserves. On June 28, 2002, the Partnership sold a condominium unit located in Brockton, Massachusetts for $113,000. The net gain of the sale is $92,778 after deducting basis, a 3% sales commission to the management company (see Note 3), and other closing costs. The net cash flow to the Partnership was $104,494. 6 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 2002 (Unaudited) NOTE 2 - RENTAL PROPERTIES (CONTINUED) Rental properties consist of the following:
September 30, December 31, USEFUL 2002 2001 LIFE ------------- ------------ ------------- Land, improvements, and parking lots $ 17,483,514 $ 16,185,485 10-31 years Buildings and improvements 85,374,196 78,671,755 15-31 years Kitchen cabinets 1,859,248 1,646,814 5-10 years Carpets 1,876,788 1,578,655 5-10 years Air conditioning 218,193 184,735 7-10 years Laundry equipment 49,577 43,802 5-7 years Elevators 204,822 175,557 20 years Swimming pools 86,048 80,198 10 years Equipment 2,043,487 1,082,807 5-7 years Motor vehicles 90,544 90,543 5 years Fences 57,229 39,654 5-10 years Furniture and fixtures 698,135 584,046 5-7 years Smoke alarms 76,148 54,338 5-7 years Deferred construction costs 238,148 0 ------------- ------------ 110,356,077 100,418,389 Less accumulated depreciation 29,812,894 26,477,291 ------------- ------------ $ 80,543,183 $ 73,941,098 ============= ============
Included in rental properties is approximately $1,700,000 book value of the East Hampton Mall for which there is a sales agreement. (See Note 14). NOTE 3--RELATED PARTY TRANSACTIONS The Partnerships' properties are managed by an entity that 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 approximately $913,000 and approximately $855,000 for the nine months ended September 30, 2002 and 2001, respectively. 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 was no mortgage servicing fee paid in the year ended December 31, 2001 or the nine months ended September 30, 2002. The Partnership Agreement also permits the General Partner or management company to charge the costs of professional services (such as counsel, accountants, and contractors) to NERA. During the nine months ended September 30, 2002 and 2001, approximately $548,000 and $470,000 was charged to NERA for legal, construction, maintenance, rental and architectural services and supervision of capital improvements. Of the 2002 expenses referred to above, approximately $181,000 consisted of repairs and maintenance, $147,000 of administrative expense and approximately $220,000 of architectural services and supervision of capital projects was capitalized in rental properties. Of the 2001 expenses referred to above, approximately $140,000 is recorded in repairs and maintenance, $136,000 in administrative expense, approximately $62,000 in renting expense and approximately $132,000 of architectural services and supervision of capital projects was capitalized in rental properties. Additionally in each of the nine months ended September 30, 2001 and 2000, the Partnership paid to the management company $60,000 for in-house accounting services, which were previously provided by an outside 7 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 2002 (Unaudited) NOTE 3--RELATED PARTY TRANSACTIONS (CONTINUED) company. The Partnership Agreement entitles the General Partner or the management company to receive certain commissions upon the sale of Partnership property only to the extent that total commissions do not exceed 3%. During the nine months ended September 30, 2002 the Partnership paid a commission of $3,390 to the management company on the sale of the condominium in Brockton (See Note 2). No commissions were paid during the year ended December 31, 2001. In 1996, prior to becoming an employee and President of the management company, the current President performed asset management consulting services to the Partnership. This individual continues to perform this service and to receive an asset management fee from the Partnership, receiving $37,500 during the nine months ended September 30, 2002 and $50,000 during the year ended December 31, 2001. Included in prepaid expenses and other assets were amounts due from related parties of approximately $1,051,000 at September 30, 2002 and $1,038,000 at December 31, 2001 representing Massachusetts tenant security deposits which are held for the Partnerships by another entity also owned by one of the shareholders of the General Partner (see Note 6). On November 8, 2001, the Partnership, the majority shareholder of the General Partner and the President of the management company formed a limited liability company to purchase a 40-unit apartment building in Cambridge, Massachusetts. The ownership percentages are 50%, 47 1/2% and 2 1/2%, respectively. As part of this transaction, the Partnership advanced funds in excess of its 50% interest and received interest on this excess at 8%. A mortgage of approximately $8,000,000 was taken out on this property on December 27, 2001, and the funds in excess of the required equity were returned to the members in proportion to their ownership interest so their respective capital contributions are currently proportionate to their ownership interest. The interest income paid to the Partnership in 2001 was $30,003. NOTE 4--OTHER ASSETS Included in prepaid expenses and other assets at September 30, 2002 and December 31, 2001 is approximately $786,000 and $552,000 respectively, held in escrow to pay future capital improvements. Financing and leasing fees of $779,519 and $816,414 are net of accumulated amortization of $1,257,289 and $1,157,600 at September 30, 2002 and December 31, 2001, respectively. NOTE 5--MORTGAGES PAYABLE At September 30, 2002 and December 31, 2001, 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, 2002 the interest rate on these loans ranged from 6.0% to 8.78%, payable in monthly installments aggregating approximately $632,000 including interest, to various dates through 2016. Although the majority of loans mature within ten years, pursuant to the applicable loan documents they are being amortized on a basis between 25 and 27.5 years and require "balloon" payments at the end of the ten-year maturity period. The majority of the mortgages are subject to prepayment penalties. See Note 12 for fair value information. 8 NEW ENGLAND REALTY ASSOCIATED LIMITED PARTNERSHIP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 2002 (Unaudited) NOTE 5--MORTGAGES PAYABLE (CONTINUED) The Partnerships have pledged tenant leases as additional collateral for certain of these mortgages. Approximate annual maturities at September 30, 2002 are as follows: 2003--current maturities $ 918,000 2004 988,000 2005 12,019,000 2006 1,992,000 2007 2,612,000 Thereafter 65,829,000 ------------- $ 84,358,000 =============
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. Security deposits are held 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 February 2002, the Partnership voted to change its policy from semi-annual to a quarterly dividend and declared quarterly dividends of $6.40 per unit, payable on March 31, 2002, June 30, 2002 and September 30, 2002. The Partnership declared distributions of $17.70 per unit in 2001. 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 10 Depositary Receipts. The following is information on the net income per Depositary Receipt:
Nine Months Ended September 30, ------------------------ 2002 2001 ----------- --------- Net Income per Depositary Receipt $ 2.99 $ 2.74 =========== =========
In the third quarter of 2002, 216 units were exchanged for 2,160 depositary receipts. 9 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 2002 (Unaudited) NOTE 8--TREASURY UNITS Treasury units at September 30, 2002 are as follows: Class A 5,681 Class B 1,228 General Partnership 64 ------ 6,973 ======
NOTE 9--COMMITMENTS AND CONTINGENCIES From time to time, the Partnerships are involved in various ordinary routine litigation incidental to their business. The Partnership either has insurance coverage or has provided for any uninsured claims which in the aggregate are not significant. The Partnerships are not involved in any material pending legal proceedings. The Partnership made commitments to construct 20 additional residential units at the Westgate Apartments in Woburn, Massachusetts. The Partnership had estimated the total cost of these units to be approximately $3,500,000, and was initially to be funded from cash reserves. At September 30, 2002, management has decided to defer the project due to vacancies at the Westgate Apartments. The total costs incurred to date are approximately $238,000 and are included in rental properties as deferred construction costs. NOTE 10--RENTAL INCOME During the nine months ended September 30, 2002, approximately 91% of rental income was related to residential apartments and condominium units with leases of one year or less. The remaining 9% was related to commercial properties which have minimum future rental income on noncancellable operating leases as follows:
COMMERCIAL PROPERTY LEASES ------------- 2003 $ 2,085,000 2004 2,039,000 2005 1,628,000 2006 1,361,000 2007 1,296,000 Thereafter 7,598,000 ------------- $ 16,007,000 =============
The aggregate minimum future rental income does not include contingent rentals that may be received under various leases in connection with percentage rents, common area charges, and real estate taxes. Aggregate contingent rentals were approximately $483,000 and $461,000, for the nine months ended September 30, 2002 and the year ended December 31, 2001, respectively. Rents receivable are net of allowances for doubtful accounts of $222,616 and $77,752 at September 30, 2002 and December 31, 2001, respectively. The allowance was $355,331 at September 30, 2001. 10 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 2002 (Unaudited) NOTE 11--CASH FLOW INFORMATION During the nine months ended September 30, 2002 and 2001 cash paid for interest was approximately $4,894,000 and $4,835,000, respectively. Non-cash investing and financing activities were as follows:
9 Months Ended September 30, 2002 ------------------ 1st Mortgage assumed on Norwood acquisition $ 3,643,128 Mortgage issued to seller of Norwood property 1,726,898 ------------ Total non cash investing and financing activity $ 5,370,026 ============
NOTE 12--FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Partnership in estimating the fair value of its financial instruments: Cash and cash equivalents, other assets, investment in partnerships, accounts payable, and advance rents and security deposits: Fair value approximates the carrying value of such assets and liabilities. Mortgage notes payable: Fair value is generally based on estimated future cash flows discounted using the quoted market rate for an independent source of similar obligations. Refer to the table below for the carrying amount and estimated fair value of such instruments.
At September 30, 2002 At December 30, 2001 ----------------------------- ------------------------------ Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value Mortgage note payable $ 84,357,697 $ 88,223,847 $ 79,613,051 $ 83,864,053
NOTE 13--TAXABLE INCOME AND TAX BASIS Taxable income reportable by the Partnership is different than financial statement income because of accelerated depreciation, different tax lives, and timing differences related to prepaid rents and allowances. Taxable income is approximately $325,000 greater than statement income for the nine months ended September 30, 2002 and approximately $500,000 greater than statement income for the year ended December 31, 2001 because of depreciation differences, non-deductible allowances and an increase in tenants' prepaid rental deposits. The cumulative tax basis of the Partnership's real estate at September 30, 2002 is approximately $2,500,000 greater than the statement basis. 11 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 2002 (Unaudited) NOTE 14--SUBSEQUENT EVENT - SALE OF EAST HAMPTON LP SHOPPING MALL The Partnership has executed a purchase and sale agreement for the sale of the East Hampton LP shopping mall located in East Hampton, Connecticut for $3,025,000. The gain on the sale will be approximately $1,200,000 after deducting basis, a 3% sales commission to the management company (Note 3), and other estimated expenses of the sale. The net cash flow to the Partnership will be approximately $1,600,000 after payment of the existing mortgage and estimated selling expenses. For the years ended December 31, 2001, this property contributed approximately 2% of rental income and less than 1% of cash flow from operations. The closing is scheduled for early December 2002 but may be extended until January 2003 at the buyer's option. Rental income was approximately $130,000 and $388,000 for the three months and nine months ended September 30, 2002, respectively. Income from operations was approximately $36,000 and $88,000 for the three months and nine months ended September 30, 2002, respectively. NOTE 15- NEW ACCOUNTING PRONOUNCEMENTS The Partnership adopted Financial Accounting Standards Board's (FASB) Statement of Financial Accounting Standard ("FAS") 144, "Accounting for the Impairment or Disposal of Long-lived Assets" on January 1, 2002. FAS 144 supersedes FAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The primary objectives of FAS 144 are to develop one accounting model based on the framework established in FAS 121 for long-lived assets to be disposed of by sale, and to address significant implementation issues regarding impairment of long-lived assets held for use. FAS 144 requires discontinued operations presentation for an operating property considered held for sale beginning on January 1, 2002. In accordance with FAS 144, the Partnership classifies real estate assets as held for sale in the period in which all of the following criteria are met: (a) management, having the authority to approve the action, commits to a plan to sell the asset; (b) the asset is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets; (c) an active program to locate a buyer and other actions required to complete the plan to sell the asset have been initiated; (d) the sale of the asset is probable and the transfer of the asset is expected to qualify for recognition as a completed sale within one year; (e) the asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and (f) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. The Partnership's adoption of FAS 144 will result in: (i) the presentation of net operating results of properties sold during 2002, as income from discontinued operations for all periods presented and (ii) the presentation of the gain on the sale of operating properties sold, net of sale costs, as income from discontinued operations for the year 2002. Implementation of FAS 144 will only impact the income statement classification but will have no effect on the results of operations. In June 2001, the FASB issued FAS 143, "Accounting for Asset Retirement Obligations." Under FAS 143, the fair value of a liability for an asset retirement obligation must be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part the carrying amount of the long-lived asset. FAS 143 is effective for fiscal years beginning after June 15, 2002. The Partnership does not believe that FAS 143 will have a material impact on the Partnership financial position or results of operations. 12 NEW ENGLAND REALTY ASSOCIATED LIMITED PARTNERSHIP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 2002 (Unaudited) NOTE 15--NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED) In April 2002, the FASB issued FAS 145 "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FAS Statement No. 13, and Technical Correction." FAS 145 eliminates extraordinary accounting treatment for or loss on debt extinguishment, and amends other existing authoritative pronouncements to make various technical corrections, clarifies meanings, or describes their applicability under changed conditions. The provisions of FAS 145 are effective for the Partnership with the beginning of fiscal year 2003; however early application of FAS 145 is encouraged. Debt extinguishments reported as extraordinary items prior to scheduled or early adoptions of FAS 145 would be reclassified in most cases following adoption. The Partnership does not anticipate a significant impact on their results of operations from adopting FAS 145. In July 2002, the FASB issued FAS 146, "Accounting For Costs Associated With Exit or Disposal Activities." FAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities. Under FAS 146, a commitment to an exit or disposal plan no longer will be a sufficient basis for recording a liability for those activities. The Company does not anticipate a significant impact on their results of operations from adopting FAS 146. 13 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION The following discussion should be read in conjunction with the financial statements and notes thereof appearing elsewhere in this report. This Report on Form 10-Q contains forward-looking statements within the meaning of the securities law. Actual results or developments could differ materially from those projected in such statements as a result of certain factors set forth in the section below entitled "Factors That May Affect Future Results" and elsewhere in this Report. The Partnership has retained The Hamilton Company ("Hamilton") to manage and administer the Partnership's properties. Hamilton is a full service real estate management company, which has legal, construction, maintenance, architectural and administrative departments. The Partnership's properties represent approximately 33% of the total properties and 67% of the residential properties managed by Hamilton. Substantially all of the other properties managed by Hamilton are owned wholly or partially, directly or indirectly, by Harold Brown. The Partnership's Second Amended and Restated Contract of Limited Partnership (the "Partnership Agreement") expressly provides that the general partner may employ a management company to manage the properties, and that such management company may be paid a fee of 4% of rental receipts for administrative and management services (the "Management Fee"). The Partnership annually pays Hamilton the full Management Fee, in monthly installments. Mr. Brown, his brother Ronald Brown and the President of Hamilton, Carl Valeri, collectively own approximately 16.8% of the depositary receipts representing the Partnership's Class A Units (including depositary receipts held by trusts for the benefit of such persons' family members). Harold Brown also owns 75% of the Partnership's Class B Units, 75% of the capital stock of NewReal, Inc. ("NewReal"), the Partnership's sole general partner, and all of the outstanding capital stock of Hamilton. Ronald Brown also owns 25% of the Partnership's Class B Units and 25% of NewReal's capital stock. In addition, Ronald Brown is the President and a director of NewReal, and Harold Brown is NewReal's Treasurer and also a director. Two of NewReal's other directors, Thomas Raffoul and Conrad DiGregorio, also own immaterial amounts of the Partnership's Class A Units. Beyond the Management Fee, the Partnership Agreement further provides for the employment of outside professionals to provide services to the Partnership, and allows NewReal to charge the Partnership for the cost of employing professionals to assist with the administration of the Partnership's properties. In addition to the Management Fee, from time to time the Partnership pays Hamilton for repair and maintenance services, legal services, construction services and accounting services. The costs charged by Hamilton for these services are at the same hourly rates charged to all entities managed by Hamilton, and management believes such rates are competitive in the market-place. Hamilton provided approximately 5% of the repair and maintenance expense paid for by the Partnership in 2001, and approximately 8% of such expense paid for by the Partnership during the first nine months of 2002. Hamilton's maintenance department includes plumbers, electricians and carpenters, and has equipment for snow removal and fork lifts where necessary. However, several of the larger Partnership properties have their own maintenance staff. Further, those properties that do not have their own maintenance staff but are located more than a reasonable distance from Hamilton's headquarters in Allston, Massachusetts are generally serviced by local independent companies. Hamilton's legal department handles most of the Partnership's eviction and collection matters. Additionally, it prepares most long-term commercial lease agreements and represents the Partnership in selected purchase and sale transactions. Overall, Hamilton provides approximately 67% of the legal services paid for by the Partnership in 2001, and approximately 62% of such services paid for by the Partnership during the first nine months of 2002. The Partnership requires that three bids be obtained for construction contracts in excess of $5,000. Hamilton may be one of the three bidders on a particular project, and may be awarded the contract if its bid and its ability to successfully complete the project are appropriate. For contracts that are not awarded to Hamilton, Hamilton charges the Partnership a construction supervision fee equal to 5% of the contract amount. Hamilton's architectural department also provides services to the Partnership on an as-needed basis. In 2001 and during the first nine months of 2002, Hamilton provided all of the construction services and architectural services paid for by the Partnership. Prior to 1991, the Partnership employed an outside, unaffiliated company to perform its bookkeeping and accounting functions. Since that time, such services have been provided by Hamilton's accounting staff, which consists of approximately 10 people. Hamilton currently charges the Partnership $80,000 per year for bookkeeping and accounting services. For more information on related party transactions, see note 3 to the Financial Statements. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Consolidation: See note 1 to the financial statements, Principles of Consolidation. The preparation of consolidated financial statements, in accordance with accounting principles generally accepted in the United States of America, requires the Partnership to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. The Partnership regularly and continually evaluates its estimates, including those related to acquiring, developing and assessing the carrying values of its real estate properties and its investments in and advances to joint ventures. The Partnership bases its estimates on historical experience, current market conditions, and on various other assumptions that are believed to be reasonable under the circumstances. Revenue Recognition: Revenues from rental property are recognized when due from tenants. Residential leases are generally for terms of one year and commercial leases are generally for five to ten years with renewal options at increased rents. Significant commercial leases with stepped increases over the term of the lease are recorded on the straight line basis. Real Estate and Depreciation: Real estate assets are stated at the lower of cost or fair value, as appropriate, less accumulated depreciation. Costs related to the acquisition, development, construction and improvement of properties are capitalized including interest, internal wages and benefits, real estate taxes and insurance. Capitalization usually begins with commencement of development activity and ends when the property is ready for leasing. Replacements and improvements, such as HVAC equipment, structural replacements, windows, appliances, flooring, carpeting and kitchen/bath replacements and renovations are capitalized and depreciated over their estimated useful lives as follows: Depreciation is computed on a straight-line basis over the estimated useful lives of the related assets. In assessing estimated useful lives, the Partnership makes assumptions based on historical experience acquired from both within and outside the Partnership. These assumptions have a direct impact on the Partnership's net income. Ordinary repairs and maintenance, such as unit cleaning and painting and appliance repairs are expensed. 14 If there is an event or change in circumstances that indicates an impairment in the value of a property, our policy is to assess the impairment by making a comparison of the current and projected operating cash flows of the property over its remaining useful life, on an undiscounted basis, to the carrying amount of the property. If the carrying value is in excess of the estimated projected operating cash flows of the property, we would recognize an impairment loss equivalent to an amount required to adjust the carrying amount to its estimated fair value. The Partnership has not recognized an impairment loss since 1995. With respect to investments in and advances to joint ventures, the Partnership looks to the underlying properties to assess performance and the recoverability of carrying amounts for those investments in a manner similar to direct investments in real estate properties. An impairment charge is recorded if the carrying value of the investment exceeds its fair value. Legal Contingencies We are subject to various legal proceedings and claims that arise, from time to time, in the ordinary course of business. These matters are frequently covered by insurance. If it has been determined that a loss is likely to occur, the estimated amount of the loss is recorded in the financial statements. Both the amount of the loss and the point at which its occurrence is considered likely can be difficult to determine. Results of Operations The following is a comparison of the three months ended September 30, 2002 to the three months ended September 30, 2001. The Partnership and its Subsidiary Partnerships earned income from operations of $1,358,801 during the three months ended September 30, 2002 compared to $1,505,416 for the three months ended September 30, 2001, a decrease of $146,615 (10%). This decrease in operating income is largely due to an increase in operating expenses and a leveling off of rental income. Due to a softening residential rental market, vacancies have increased and rental rates at many of the properties remained unchanged in the three months ended September 30, 2002. 15 The rental activity is summarized as follows:
Occupancy Date ----------------------------------------------------------- November 11, July 31, March 4, September 30, 2002 2002 2002 2001 ----------------------------------------------------------- Residential Units..................... 2,211 2,211 2,143 2,143 Vacancies................ 71 42 23 30 Vacancy rate............ 3.2% 1.9% 1.1% 1.4% Commercial Total square feet........ 137,775 137,775 137,775 137,775 Vacancy.................. 0 0 0 0 Vacancy rate............. 0 0 0 0
RENTAL INCOME (IN THOUSANDS)
Three Months Ended September 30, 2002 2001 ---- ---- Total rents ................................ $7,375 $7,031 Residential percentage ..................... 91% 91% Commercial percentage ...................... 9% 9% Contingent rentals ......................... $ 126 $ 160
Rental income for the three months ended September 30, 2002 was $7,375,399 compared to $7,030,896 for the three months ended September 30, 2001, an increase of $344,503 (5%). The increase is due in large part to the acquisition of the Dean Street property in June 2002, which had rental income of approximately $220,000 for the three months ended September 30, 2002. The balance of the increase in rental income is due to higher rental rates in 2002 compared to the same period in 2001 partially offset by increased vacancies. The Partnership is offering incentives to prospective and renewing tenants to stay competitive in a relatively soft rental market. 16 Total expenses for the three months ended September 30, 2002 were $6,076,243 compared to $5,602,856 for the three months ended September 30, 2001, an increase of $473,387 (8%). Expenses related to the Dean Street acquisition represent approximately $210,000 of this increase. Unrelated to the acquisition of Dean Street, there was an increase in operating expenses of $265,491. The rental market has continued to weaken in the third quarter of 2002 resulting in higher tenant turnover and an increase in vacancies. In an effort to sustain occupancy levels, the Partnership's renting expenses increased $96,295 as a result of commissions paid to unaffiliated parties. During the first nine months of 2001, the rental real estate market was fairly strong and the Partnership paid less commissions than in 2002. Taxes and insurance increased $85,464 (13%) due to increases in real estate taxes from reassessments and increased insurance premiums. Depreciation and amortization increased $55,663 (5%) due to ongoing capital projects. Administrative expenses increased $31,245(11%) due to an increase in salaries and wages as well as professional fees. The Partnership has a 50% ownership interest in a limited liability Partnership that owns a 40 unit residential property in Cambridge, Massachusetts. For the three months ended September 30, 2002, the Partnership's share of loss on this investment is $30,837 due to an increase in operating expenses and a decrease in rental rates. Repairs and maintenance expenses increased due to tenant turnover, and rental commissions totaling $9,000 were paid in the third quarter of 2002. This investment was made in November 2001 so the Partnership had no income or loss for the three months ended September 30, 2001. The property has a 5% vacancy rate at November 5, 2002. Interest income decreased $67,947 (48%) due to a decline in interest rates in 2002. As a result of the changes discussed above, net income for the three months ended September 30, 2002 was $1,400,264 compared to $1,645,663 for the three months ended September 30, 2001, a decrease of $245,399(15%). As a result of the negative impact discussed above and decreasing occupancy rates, excluding Dean Street and the gain on the sale of a condo in the second quarter, the profit for the three months ended September 30, 2002 is approximately $170,000 less than the second quarter of 2002. Management anticipates that operating profits in the foreseeable future will approximate those of the third quarter of 2002. The following is a comparison of the nine months ended September 30, 2002 to the nine months ended September 30, 2001. For the nine months ended September 30, 2002, rental income was $22,038,367 compared to $20,445,897 for the nine months ended September 30, 2001, an increase of $1,592,470 (8%). The Dean Street acquisition made in June 2002 represents approximately $255,000 of this increase. The property located at 62 Boylston Street had an increase of approximately $237,000(8%) due to major construction at this property in 2001 resulting in rental rate increases. Increases of approximately $215,000 (10%) at 1144 Commonwealth Avenue and approximately $21,000 (10%) at Highland Street Apartments are due to rental rate increases which took effect in 17 the fourth quarter of 2001. The Partnership does not anticipate additional increases in the foreseeable future. The following is a summary of the Partnership's rental income for the nine months ended September 30, 2002 and 2001: RENTAL INCOME (IN THOUSANDS)
Nine Months Ended September 30, 2002 2001 ---- ---- Total rents .............................. $22,038 $20,446 Residential percentage ................... 91% 92% Commercial percentage .................... 9% 8% Contingent rentals ....................... $ 363 $ 430
As indicated in the chart above, the Partnership has seen a slight shift in rental income with a decrease in revenue from residential properties due to increased vacancies. The average rental rates in 2002 are higher than 2001, however the Partnership anticipates that the average rental rates will remain unchanged for the foreseeable future. Expenses for the nine months ended September 30, 2002 were $17,311,705 compared to $16,412,668 for the nine months ended September 30, 2001, an increase of $899,037(5%). The Dean Street acquisition represents approximately $255,000 of this increase. Unrelated to the purchase of Dean Street, operating expenses increased approximately $644,000. The most significant increases include renting expense of $186,470, taxes and insurance of approximately $384,000 and depreciation and amortization of $186,724. The reason for these increases is discussed above in the related section comparing three-month periods. These increases were offset by a decrease in operating expenses of $216,052 due to a milder winter, and a decrease in interest expense of $34,334 on the existing properties due to a reduction in the principal balance. Interest income was $209,939 for the nine months ended September 30, 2002, compared to $507,192 for the nine months ended September 30, 2001, a decrease of $297,253. This decrease is due to a decline in the interest rates. Included in other income for the nine months ended September 30, 2002 is a gain of $92,778 on the sale of a condominium located in Brockton, Massachusetts and the loss on the investment in the joint venture was $40,470 for the nine months ended September 30, 2002. 18 As a result of the changes discussed above, net income for the nine months ended September 30, 2002 was $5,171,743 compared to $4,748,683 for the nine months ended September 30, 2001 an increase of $423,060 (9%). LIQUIDITY AND CAPITAL RESOURCES The Partnership's principal source of cash during 2002 and 2001 was the collection of rents. The majority of cash and cash equivalents of $16,736,662 at September 30, 2002 and $16,690,943 at December 31, 2001 was held in interest bearing accounts at credit worthy financial institutions. This increase of $45,719 at September 30, 2002 is summarized as follows:
Nine Months Ended September 30, 2002 2001 ---- ---- Cash provided by operating activities ........ $ 8,066,932 $ 7,369,440 Cash (used in) investing activities .......... (4,074,003) (2,192,248) Cash (used in) financing activities .......... (3,947,210) (3,624,935) ----------- ----------- Net increase in cash and cash equivalents .... $ 45,719 $ 1,552,257 =========== ===========
The increase in cash provided by operating activities is primarily due to the increase in operating income before depreciation expense. The decrease in cash from investing activities is due to a reduction in cash reserves available for investment as a result of the acquisition of the rental property in Norwood, Massachusetts in June 2002 (discussed below) as well as the capital improvements to certain of the Partnership's properties. The decrease in cash used in financing activities is due to the dividend distribution and reduction in mortgage debt. On June 17, 2002, the Partnership purchased a 69-unit residential apartment complex located in Norwood, Massachusetts for $7,200,000. The Partnership assumed a first mortgage of approximately $3,650,000 with an interest rate of 7.08%, amortizing over 25 years and maturing in 2007. The seller financed $1,726,898 at an interest rate of 6%, interest only, for 5 years, which is secured by a mortgage on 19 condominium units owned by the Partnership. The balance of approximately $1,800,000 was funded from cash reserves. On June 28, 2002, the Partnership sold a condominium located in Brockton, Massachusetts for $113,000. The net gain on the sale was $92,778 and the net cash flow to the Partnership was 19 $104,494. In February 2002, the Partnership voted to change its dividend policy from semi-annual to a quarterly distribution and declared a quarterly dividend of $6.40 per Unit($0.64 per depositary receipt), payable on March 31, 2002, June 30, 2002 and September 30, 2002. Total dividends paid in 2001 were $17.70 per unit ($1.77 per depositary receipt). On November 8, 2001, the Partnership, the major shareholder of the General Partner and the President of The Hamilton Company, the company which manages the Partnership's Properties, formed a limited liability Partnership to purchase a 40-unit residential property in Cambridge, Massachusetts. The ownership percentages are 50%, 47 1/2% and 2 1/2%, respectively. As part of this transaction, the Partnership initially advanced funds in excess of its 50% interest and received interest income on this excess, at 8%. This interest income totaled $30,003 in 2001. The excess amount was repaid to the Partnership upon the closing of the new financing for this property in 2001. During the nine months ended September 30, 2002, the Partnership and its Subsidiary Partnerships completed certain improvements to their properties at a total cost of approximately $2,700,000. The most significant improvements were made at the following properties: $1,603,947 at 62 Boylston Street in Boston, Massachusetts; $126,816 at Clovelly Apartments in Nashua, New Hampshire; $100,951 at 1144 Commonwealth Avenue Apartments in Allston, Massachusetts; $89,082 at North Beacon Street Apartments in Brighton, Massachusetts; $80,238 at Redwood Hills Apartments in Worcester, Massachusetts and $78,437 at the Hamilton Oaks Apartments in Brockton, Massachusetts. All such improvements were funded from the Partnership's cash reserves and escrow accounts established in connection with the refinancing of applicable properties. In addition to the improvements made to date in 2002, the Partnership and its Subsidiary Partnerships plan to invest an additional $800,000 in capital improvements during 2002, the majority of which will be spent at 62 Boylston Street, Hamilton Oaks, and Redwood Hills. These improvements will be funded from escrow accounts established in connection with the refinancing of applicable properties, 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. The Partnership had plans to construct 20 additional residential units at the Westgate Apartments 20 in Woburn, Massachusetts. As of September 30, 2002, the Partnership has put that project on hold due to the general softening of the residential rental market resulting in a decrease in occupancy rates at Westgate. The pre-construction costs incurred to date of approximately $238,000 of a projected total of $3,500,000 have been capitalized and included in rental properties. At this point, management is unsure when the project will commence. In July 2002, the Partnership, through a subsidiary limited partnership, signed a purchase and sales agreement for the sale of the East Hampton shopping mall located in East Hampton, Connecticut for $3,025,000. The buyer has completed all inspections and the closing is scheduled for early December 2002 but may be deferred until January 2003 at the option of the buyer. The gain on the sale will be approximately $1,200,000 after deducting basis, a 3% commission to The Hamilton Company (see Note 3 to the Financial Statements), and other estimated expenses of the sale. The net cash to the Partnership will be approximately $1,600,000 after payment of the existing mortgage and estimated selling expenses. For the year ended December 31, 2001, this property contributed approximately 2% of rental income and less than 1% of cash flow from operations. Factors That May Affect Future Results Certain information contained herein includes forward-looking statements, which are made pursuant to the safe harbor provisions of the Private Securities Liquidation Reform Act of 1995 (the "Act"). While forward looking statements reflect management's good faith beliefs when those statements are made, caution should be exercised in interpreting and relying on such forward looking statements, the realization of which may be impacted by known and unknown risks and uncertainties, events that may occur subsequent to the forward-looking statements, and other factors which may be beyond the Partnership's control and which can materially affect the Partnership's actual results, performance or achievements for 2002 and beyond. Along with risks detailed from time to time in the Partnership's filings with the Securities and Exchange Commission, some factors that could cause the Partnership's actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements include but are not limited to the following: The Partnership depends on the real estate markets where its properties are located and these markets may be adversely affected by local economic market conditions, which are beyond the Partnership's control. In this vein, there has recently been news coverage regarding certain tenants rights groups advocating the reinstatement of rent control in the greater Boston area. The Partnership is subject to the general economic risks affecting the real estate industry, such as dependence on tenant's financial condition and the need to enter into new leases or renew leases on terms favorable to tenants in order to generate rental revenues. The Partnership is subject to increases in heating and utility costs that my arise as a result of economic and market conditions. 21 The Partnership may fail to identify, acquire, construct, or develop additional properties; may develop properties that do not produce a desired yield on invested capital; or may fail to effectively integrate acquisitions of properties or portfolios of properties. Financing or refinancing of Partnership properties may not be available to the extent necessary or desirable, or may not be available on favorable terms. Given the nature of the real estate business, the Partnership is subject to potential environmental liabilities, although management is not aware of any material environmental liabilities at this time. Market interest rates could adversely affect the market prices for Class A Partnership Units and Depositary Receipts as well as performance and cash flow. The foregoing factors should not be construed as exhaustive or as an admission regarding the adequacy of disclosures made by the Partnership prior to the date hereof or the effectiveness of said Act. The Partnership expressly disclaims any obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. The residential real estate market in the Greater Boston area has softened and the Partnership anticipates the climate will remain the same in the foreseeable future. This may result in increases in vacancy rates and or/a reduction in some rents. The Partnership believes its present cash reserves as well as anticipated rental revenue will be sufficient to fund its current operations, and to finance current planned improvements to its properties and continue dividend payments in the foreseeable future. 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 the Partnership's cash reserves are insufficient to repay existing mortgages or if the Partnership needs additional funds for future acquisitions. Item 3--QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As of September 30, 2002, the Partnership and its subsidiary Partnerships collectively have approximately $84,400,000 in long-term debt, all of which pays interest at fixed rates. Accordingly, the fair value of these debt instruments is affected by changes in market interest rates. For information regarding the fair value and maturity dates of these debt obligations, see Notes 5 and 12 to the Consolidated Financial Statements. For additional disclosures about market risk, see "Item 2--Management's Discussion and Analysis 22 of Financial Condition and Results of Operations--Factors that May Affect Future Results." Item 4--CONTROLS AND PROCEDURES The General Partner of the Partnership has within 90 days of the filing date of this quarterly report, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-14(C) and 15d-14(C) under the Securities and Exchange Act of 1934, as amended) and has determined that such disclosure controls and procedures are adequate. There has been no significant changes in internal controls or in other factors that could significantly affect our internal controls since the date of evaluation. We do not believe any significant deficiencies or material weaknesses exist in our internal controls. Accordingly, no corrective actions have been taken. 23 PART II - OTHER INFORMATION Item 1. Legal Proceedings None. Item 2. Changes in Securities None. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K None. 24 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 14, 2002 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 25 CERTIFICATION I, Ronald Brown, certify that: 1. I have reviewed this quarterly report on Form 10-Q of New England Realty Associates Limited Partnership; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. 4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to a the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Ronald Brown - ------------------------------------- Ronald Brown, President of NewReal Associates, Inc. General Partner of the Partnership 26 -----END PRIVACY-ENHANCED MESSAGE-----