-----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, PPMH/wfP2P/nf4xHGr9QQSARDlMMKXQilBausIOyebNmIvZ5UzhSkpdsN1AlJxFh pcpJWPnljrv4t1/a1jHBxg== 0000912057-96-026058.txt : 19961115 0000912057-96-026058.hdr.sgml : 19961115 ACCESSION NUMBER: 0000912057-96-026058 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961113 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: 96661835 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 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, 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 of (I.R.S. Employer Incorporation or Organization) Identification No. 39 Brighton Avenue, Allston, Massachusetts 02134 (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code (617) 783-0039 Not Applicable (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) Indicate by check X whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ___ INDEX PART I - FINANCIAL INFORMATION Page No. Item 1. Financial Statements. Balance Sheets - September 30, 1996 and September 30, 1995 3 Statements of Operations - Three and Nine Months Ended September 30, 1996 and September 30, 1995 4 Statements of Cash Flows - Nine Months Ended September 30, 1996 and September 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 6. Exhibits and Reports on Form 8-K __ SIGNATURES 22 EXHIBIT 27 Financial Data Schedule 2 CONSOLIDATED BALANCE SHEETS NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES September 30, December 31, 1996 1995 (Unaudited) ------------ ------------ ASSETS Rental Properties $ 51,437,551 $ 51,688,269 Cash and Cash Equivalents 2,614,550 2,706,124 Short-term Investments 50,874 48,877 Rents Receivable 719,044 684,409 Real Estate Tax Escrows 484,903 538,945 Prepaid Expenses and Other Assets 1,851,926 1,933,472 Investment in Joint Venture 109,384 129,989 Financing and Leasing Fees 1,738,012 2,020,885 ------------ ------------ TOTAL ASSETS $ 59,006,244 $ 59,750,970 ------------ ------------ ------------ ------------ LIABILITIES AND PARTNERS' CAPITAL Mortgages Payable $ 52,676,231 $ 53,072,037 Accounts Payable and Accrued Expenses 651,967 804,865 Advance Rental Payments and Security Deposits 1,575,470 1,550,666 ------------ ------------ Total Liabilities 54,903,668 55,427,568 Commitments and Contingent Liabilities (Notes 9 and 12) Partners' Capital: 176,452 units outstanding in 1996 and 177,152 in 1995 4,102,576 4,323,402 ------------ ------------ TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 59,006,244 $ 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 Nine Months Ended September 30, September 30, 1996 1995 1996 1995 (Unaudited) (Unaudited) ----------------------- ------------------------ Revenues: Rental income $4,056,357 $3,816,626 $12,370,471 $8,335,633 Laundry & sundry income 45,373 45,227 154,394 113,753 ---------- ---------- ----------- ---------- 4,101,730 3,861,853 12,524,865 8,449,386 ---------- ---------- ----------- ---------- Expenses: Administrative 232,979 164,961 632,764 479,650 Depreciation and amortization 697,471 659,008 2,071,258 1,512,122 Interest 1,162,115 1,069,833 3,541,724 2,130,615 Management fees 171,193 172,759 524,214 371,612 Operating 356,004 327,862 1,417,133 798,669 Renting 108,365 193,041 170,574 265,230 Repairs & maintenance 687,992 757,377 1,920,601 1,502,389 Taxes & insurance 437,867 434,684 1,362,418 975,003 ---------- ---------- ----------- ---------- 3,853,986 3,779,525 11,640,686 8,035,290 ---------- ---------- ----------- ---------- Income from Operations 247,744 82,328 884,179 414,096 ---------- ---------- ----------- ---------- Other income: Interest income 36,594 7,166 124,938 32,189 Income from investment in the joint venture 5,531 6,914 17,066 15,766 Gain on the sale of property - 69,064 - 69,064 ---------- ---------- ----------- ---------- 42,125 83,144 142,004 117,019 ---------- ---------- ----------- ---------- Net Income $ 289,869 $ 165,472 $ 1,026,183 $ 531,115 ---------- ---------- ----------- ---------- ---------- ---------- ----------- ---------- Net Income per Unit $ 1.64 $ .93 $ 5.80 $ 3.00 ---------- ---------- ----------- ---------- ---------- ---------- ----------- ---------- Weighted Average Number of Units Outstanding 176,475 177,152 176,925 177,152 ---------- ---------- ----------- ---------- ---------- ---------- ----------- ---------- See notes to consolidated financial statements. 4 CONSOLIDATED STATEMENTS OF CASH FLOWS NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES Nine Months Ended September 30, (Unaudited) 1996 1995* ----------- ----------- Cash Flows from Operating Activities: Net income $ 1,026,183 $ 531,115 ----------- ----------- Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 2,071,258 1,512,122 (Income) on investments in partnerships and joint venture (17,066) (15,766) (Gain) on the sale of property - (69,064) (Increase) in rents receivable (34,635) (144,185) (Increase) in financing and leasing fees (35,680) (1,344,556) (Decrease) Increase in accounts payable and accrued expenses (152,898) 124,281 Decrease(Increase) in real estate tax escrows 54,042 (416,584) Decrease(Increase)in prepaid expenses and other assets 81,546 (2,032,053) Increase in advance rental payments and security deposits 24,804 1,084,988 ----------- ----------- Total Adjustments 1,991,371 ( 1,300,817) ----------- ----------- Net cash provided by (used in) operating activities 3,017,554 (769,702) ----------- ----------- Cash Flows from Investing Activities: Distribution from the joint venture 37,671 41,866 Payment for purchase and improvement of rental properties (1,501,987) (30,808,861) Purchase of short-term investments (1,997) (1,560) ----------- ----------- Net cash (used in) investing activities (1,466,313) (30,768,555) ----------- ----------- 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 Nine Months Ended September 30, (Unaudited) 1996 1995 ----------- ----------- Cash Flows from Financing Activities: Principal payments and early repayment of mortgages payable (395,806) (8,299,631) Distributions to partners (1,199,757) (1,202,734) Proceeds from refinancing of Partnership properties - 20,214,000 Decrease in notes payable to related party - (1,175,000) Increase in mortgages payable - 22,627,000 (Payments on) proceeds from stock buyback (47,252) 7,920 Proceeds from the sale of property - 98,127 ----------- ----------- Net cash (used in) provided by financing activities (1,642,815) 32,269,682 ----------- ----------- Net (Decrease)Increase in Cash and Cash Equivalents (91,574) 731,425 Cash and Cash Equivalents, Beginning 2,706,124 996,353 ----------- ----------- Cash and Cash Equivalents, Ending $2,614,550 $1,727,778 ----------- ----------- ----------- ----------- 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 (962,188) (228,519) (12,027) (1,202,734) Net Income 424,892 100,912 5,311 531,115 Stock buyback - 7,920 - 7,920 ---------- ---------- -------- ----------- Balance, Sept. 30, 1995 $6,180,553 $1,479,259 $ 77,468 $ 7,737,280 ---------- ---------- -------- ----------- ---------- ---------- -------- ----------- Units authorized and issued, net of 3,073 Treasury Units, at September 30, 1995 141,722 33,659 1,771 177,152 ------- ------ ----- ------- ------- ------ ----- ------- Balance, January 1, 1996 $3,455,787 $ 824,206 $ 43,409 $ 4,323,402 Distributions to Partners (959,806) (227,954) (11,997) (1,199,757) Net Income 820,946 194,975 10,262 1,026,183 Stock buyback (47,252) - - (47,252) ---------- ---------- -------- ----------- Balance, Sept. 30, 1996 $3,269,675 $ 791,227 $ 41,674 $ 4,102,576 ---------- ---------- -------- ----------- ---------- ---------- -------- ----------- Units authorized and issued, net of 3,073 Treasury Units at September 30, 1996 141,022 33,659 1,771 176,452 ------- ------ ----- ------- ------- ------ ----- ------- 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 mortages. 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 September 30, 1996, approximately $2,250,000 of cash and cash equivalents exceeded federally insured amounts of which approximately $1,972,000 was invested in a money market fund invested in U.S. Government securities. NOTE 2--RENTAL PROPERTIES Rental properties consist of the following: September 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 10,534,778 9,437,144 15-31 years Kitchen cabinets 1,256,652 1,089,407 5-10 years Carpets 1,171,893 1,028,473 5-10 years Air conditioning 99,591 87,745 7-10 years Land improvements 434,382 422,646 10-31 years Laundry equipment 57,840 46,994 5-7 years Elevators 16,842 16,842 20 years Swimming pools 42,450 42,450 10 years Equipment 190,140 166,132 5-7 years Motor vehicles 46,704 46,704 5 years Fences 25,778 22,229 5-10 years Furniture and fixtures 125,602 95,793 5-7 years Smoke alarms 6,224 6,224 5-7 years ------------ ------------ 66,552,392 65,052,299 Less accumulated depreciation 15,114,841 13,364,030 ------------ ------------ $ 51,437,551 $ 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 September 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 $524,214, and $371,612 for the nine months ended September 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 nine months ended September 30, 1996 and 1995 approximately $221,000, and $145,000 was charged to NERA for legal, maintenance, and architectural services, and supervision of capital improvements. Approximately $57,000 was capitalized in leasehold improvements, approximately $111,000 is included in administrative expenses, and approximately $53,000 is included in repairs and maintenance expense during the nine months ended September 30, 1996. In addition, the Partnership paid the management company $30,000 during the year ended December 31, 1995 and and have accrued $37,500 for the nine months ended September 30, 1996 for accounting services previously provided by an outside 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%. No such commissions were paid in 1996 or 1995. Included in prepaid expenses and other assets were amounts due from related parties of $399,047 at September 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 $129,378 at September 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 $50,874 at September 30, 1996 and $48,877 at December 31, 1995 is carried at cost which approximates fair value. Such investment at September 30, 1996 is a 5.07% certificate of deposit maturing in February 1997. The issuer and amount of this investment is as follows: September 30, December 31, 1996 1995 ---------- ---------- Citizens Bank - Certificate of deposit $ 50,874 $ 48,877 ---------- ---------- ---------- ---------- The carrying value of the Partnership's 50% interest in the Timpany Plaza Joint Venture, at equity, is $109,384 at September 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 September 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 $ 569,200 1998 620,700 1999 676,800 2000 738,100 2001 805,000 Thereafter 49,266,400 ----------- $52,676,200 ----------- ----------- 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 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 and third quarters of 1996 and 1995 for a total distribution of $6.80 for the nine months ended September 30, 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. 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: Nine Months Ended September 30, 1996 1995 ---- ---- Net Income Per Depositary Receipt $.58 $.30 ---- ---- ---- ---- 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES 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 Nasdaq at the time of the repurchase. During the third quarter of 1996, the Partnership repurchased 7,000 depositary receipts for a total cost of approximately $47,000. On October 17, 1996, the Partnership repurchased 3,670 shares for a total purchase price of $25,412. 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 $ 1,631,528 $ 146,667 $ 1,778,195 1998 1,478,740 146,667 1,625,407 1999 1,123,447 146,667 1,270,114 2000 834,477 146,667 981,144 2001 609,013 146,667 755,680 Thereafter 1,853,122 1,136,669 2,989,791 ----------- ---------- ----------- $ 7,530,327 $1,870,004 $ 9,400,331 ----------- ---------- ----------- ----------- ---------- ----------- 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. 14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES NOTE-10--RENTAL INCOME (CONTINUED) The minimum annual rents are $110,000 per year for the first five years, increasing each subsequent five-year period with the average being $137,500 per year for the minimum twenty-year term. Included in rents receivable at September 30, 1996 and December 31, 1995 is $186,125 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 $17,000 and $16,000, for the nine months ended September 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 $722,108, and $589,000 for the nine months ended September 30, 1996 and 1995 respectively. NOTE 11--CASH FLOW INFORMATION During the nine months ended September 30, 1996 and 1995, cash paid for interest on debt was $3,487,392, and $2,166,095 respectively. 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. 15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES NOTE 12--BANKRUPTCY OF RELATED PARTIES (CONTINUED) 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. In August 1996, the U.S. Bankruptcy Court approved a settlement resulting in the final implementation of that reorganization plan, which occurred in September 1996. 16 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation Results of Operations Income from operations for the third quarter of 1996 was approximately $248,000, compared to approximately $82,000 for the same period in 1995, an increase of approximately $166,000. For the nine months ended September 30, 1996, income from operations was approximately $884,000 compared to approximately $414,000 for the same period in 1995, an increase of approximately $470,000. These increases in income are due primarily to the properties acquired in June of 1995. Net cash provided by operations during the nine months ended September 30, 1996 was approximately $3,018,000 compared to cash used in operations of approximately $770,000 during the same period in 1995, a fluctuation of approximately $3,788,000. This increase in funds is due to an increase in net income during the nine months ended September 30, 1995 as well as the acquisition of six properties as of June 30, 1995. In connection with these 1995 acquisitions, the bank required that the Partnership fund real estate tax escrow accounts, insurance reserves, and reserves for capital improvements 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 third quarter of 1996 was approximately $4,056,000 compared with approximately $3,817,000, for the same period in 1995, an increase of approximately $239,000. Increased rental rates at three of the properties acquired in June 1995 represent approximately $227,000 of this increase. A reduction in the vacancy rate accompanied by an increase in rental rates at Westgate Woburn contributed to a rental income increase of approximately $36,000. These increases are offset by a $45,000 decrease in percentage rents at the Timpany Plaza Shopping Mall. The Partnership attributes this to a decline in sales at the retail locations. For the nine months ended September 30, 1996, rental income was approximately $12,370,000 compared with approximately $8,336,000 for the same period in 1995, an increase of approximately $4,034,000. Rental income from the properties acquired in June 1995 represent approximately $3,918,000 of this increase. Expenses for the third quarter of 1996 were approximately $3,854,000 compared to approximately $3,780,000 for the same period in 1995, an increase of approximately $74,000. The increases of approximately $68,000 in professional fees and $92,00 in interest expense result 17 from the acquisition and refinancing which occurred during June and July of 1995. These increases are offset by an $85,000 reduction in rental commissions due to reduced tenant turnover and a lower commission rate; and a $69,000 reduction in repairs and maintenance resulting from significant repairs and maintenance performed on acquired properties in 1995. Expenses for the first nine months of 1996 were approximately $11,641,000 compared with approximately $8,035,000 for the same period in 1995, an increase of approximately $3,606,000. The properties acquired in June 1995 accounted for $3,061,000 of the increase. The year-to-date 1995 operating results included only three months of the acquired properties operating activity and nine months in 1996. Other increases related to the acquisition include an increase of approximately $463,000 in interest expense due to the refinancing of existing Partnership properties. Expense increases unrelated to the acquired properties include an $83,000 increase in repairs and maintenance, and a $45,000 increase in professional fees. The increases are offset by a $95,000 reduction in rental commissions due to reduced tenant turnover and a lower commission rate. Interest income for the three months ended September 30, 1996 was approximately $37,000, compared to approximately $7,000 for the same period in 1995, an increase of approximately $30,000. Interest income for the nine months ended September 30, 1996 was approximately $125,000, compared to approximately $32,000 for the same period in 1995, an increase of approximately $93,000. These increases are due to the increase in cash available for investment as well as a slight increase in the interest rate. 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 $6,000 for the third quarter of 1996 compared to approximately $7,000 for the third quarter of 1995, a decrease of approximately $1,000. For the nine months ended September 30, 1996, the Partnership's share of income from the joint venture at Timpany Plaza Shopping Center was approximately $17,000 compared to approximately $16,000 18 for the same period in 1995, an increase of approximately $1,000. The income and expenses of the joint venture have remained relatively stable during the year. 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 October 1996. The Partnership has no reason to believe that the tenant will stop making rental payments in the future. Although the tenant is current as of October 1996, the Partnership cannot guarantee that rental payments will continue in the future in light of the tenant's bankruptcy. As a result of the changes discussed above, net income for the three months ended September 30, 1996 was $289,869 compared to $165,472 for the same period in 1995, an increase of $124,397; and net income for the nine months ended September 30, 1996 was $1,026,183 compared to $531,115 for the same period in 1995, an increase of $495,068. 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 $2,614,550 at September 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 $50,874 at September 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 Nasdaq at the time of the repurchase. During the third quarter of 1996, the Partnership repurchased 7,000 shares for a total purchase price of approximately $47,000. In addition, on October 17, 1996, the Partnership repurchased 3,670 shares for a total purchase price of $25,412. The funds pursuant to this program have and will continue to come from cash reserves. Management believes this repurchase plan of up to $500,000 will not have a negative impact on cash reserves. Management believes it has adequate cash reserves to meet the Partnership's needs. During the third quarter of 1996, the Partnership completed approximately $885,000 of capital improvements to its properties. Many of these improvements were anticipated in connection with the acquisitions made in June 1995 and were funded from the previously established escrow accounts, as well as cash reserves. The most significant improvements were made at the Westgate Woburn Apartments in Woburn, Massachusetts for a total cost of approximately $133,000 as well as improvements of approximately $125,000 at the Lincoln Street Apartments in Newton, Massachusetts; approximately $100,000 at the apartments at 1144 Commonwealth Avenue in Brighton, Massachusetts; approximately $87,000 at the Redwood Hills Apartments in Worcester, Massachusetts; approximately $82,000 at the apartments at 62 Boylston Street in Boston, Massachusetts; approximately $56,000 at the Executive apartments in Framingham, Massachusetts; approximately $54,000 at the Clovelly apartments in Nashua, New Hampshire; and approximately $54,000 at the apartments at 1137 Commonwealth Avenue in Brighton, Massachusetts. The Partnership plans to invest an additional $500,000 in capital improvements in the residential and commercial properties during the fourth quarter of 1996. These improvements will be funded from cash reserves and escrow accounts previously established. 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. 20 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 distributions totalling $6.80 per Partnership unit ($0.68 per depositary receipt) during each of the nine months ended September 30, 1996 and 1995. Statements made in this Quarterly Report may contain information about the Partnership's future business prospects. Some of these statements may be considered "forward looking". These statements are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by such forward-looking statements. For further information regarding cautionary statements and factors affecting future operating results, please refer to the Partnership's annual report on 10-K dated December 31, 1995. 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: November 13, 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 9-MOS DEC-31-1996 SEP-30-1996 2,614,550 50,874 719,044 0 0 5,721,297 66,552,392 15,114,841 59,006,244 2,227,437 0 0 0 0 4,102,576 59,006,244 12,370,471 12,524,865 0 0 8,098,962 0 3,541,724 1,026,183 0 1,026,183 0 0 0 1,026,183 5.80 5.80
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