-----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, EdqYh1PA8pKKSdKYfNpjlBjrBMXvnlKrn4oBn9x6HNsUiqDJ6uZQqgSAuw5ASFi4 3GhN63VxgM9UNvWfjMtyDQ== 0001005477-97-002566.txt : 19971117 0001005477-97-002566.hdr.sgml : 19971117 ACCESSION NUMBER: 0001005477-97-002566 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 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: SEC FILE NUMBER: 000-12138 FILM NUMBER: 97719831 BUSINESS ADDRESS: STREET 1: 39 BRIGHTON AVE CITY: ALLSTON STATE: MA ZIP: 02134 BUSINESS PHONE: 6177830039 MAIL ADDRESS: STREET 1: 39 BRIGHTON AVE CITY: ALLSTON STATE: MA ZIP: 02134 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 -------------------- FORM 10-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1997 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 (I.R.S. Employer 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, 1997 and September 30, 1996 3 Statements of Operations - Nine Months Ended September 30, 1997 and September 30, 1996 4 Statements of Cash Flows - Nine Months Ended September 30, 1997 and September 30, 1996 5 Notes to Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 16 PART II - OTHER INFORMATION SIGNATURES 21 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
September 30, December 31, 1997 1996 (Unaudited) ------------ ------------ ASSETS Rental Properties $ 51,679,328 $ 52,293,981 Cash and Cash Equivalents 1,707,922 1,830,605 Short-term Investments -- 51,528 Rents Receivable 564,647 688,245 Real Estate Tax Escrows 544,966 503,234 Prepaid Expenses and Other Assets 1,673,409 1,696,237 Investment in Joint Venture 78,843 93,734 Financing and Leasing Fees 1,378,630 1,631,375 ------------ ------------ TOTAL ASSETS $ 57,627,745 $ 58,788,939 ============ ============ LIABILITIES AND PARTNERS' CAPITAL Mortgages Payable $ 52,106,992 $ 52,538,499 Accounts Payable and Accrued Expenses 720,273 684,626 Advance Rental Payments and Security Deposits 1,763,022 1,667,316 ------------ ------------ Total Liabilities 54,590,287 54,890,441 Commitments and Contingent Liabilities (Note 9) Partners' Capital: 173,252 units outstanding in 1997 and 175,163 in 1996 3,037,458 3,898,498 ------------ ------------ TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 57,627,745 $ 58,788,939 ============ ============
See notes to consolidated financial statements. 3 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Nine Months Ended September 30, September 30, 1997 1996 1997 1996 (Unaudited) (Unaudited) -------------------------- --------------------------- Revenues: Rental income $ 4,425,032 $ 4,056,357 $12,863,526 $12,370,471 Laundry & sundry income 44,472 45,373 137,915 154,394 ----------- ----------- ----------- ----------- 4,469,504 4,101,730 13,001,441 12,524,865 ----------- ----------- ----------- ----------- Expenses: Administrative 265,692 232,979 790,225 632,764 Depreciation and amortization 834,621 697,471 2,419,438 2,071,258 Interest 1,160,303 1,162,115 3,489,481 3,541,724 Management fees 186,645 171,193 552,745 524,214 Operating 422,569 356,004 1,469,243 1,417,133 Renting 77,099 108,365 152,115 170,574 Repairs & maintenance 770,895 687,992 1,982,282 1,920,601 Taxes & insurance 458,317 437,867 1,390,661 1,362,418 ----------- ----------- ----------- ----------- 4,176,141 3,853,986 12,246,190 11,640,686 ----------- ----------- ----------- ----------- Income from Operations 293,363 247,744 755,251 884,179 ----------- ----------- ----------- ----------- Other income (loss): Interest income 37,685 36,594 98,901 124,938 Income (loss) from investment in partnership and joint venture (7,112) 5,531 (13,293) 17,066 ----------- ----------- ----------- ----------- 30,573 42,125 85,608 142,004 ----------- ----------- ----------- ----------- Net Income $ 323,936 $ 289,869 $ 840,859 $ 1,026,183 ============ ============ ============= =========== Net Income per Unit $ 1.86 $ 1.64 $ 4.83 $ 5.80 ============ ============ ============= =========== Weighted Average Number of Units Outstanding 173,635 176,475 174,093 176,925 ============ ============ ============= ===========
See notes to Consolidated financial statements. 4 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended September 30, (Unaudited) 1997 1996 ----------- ----------- Cash Flows from Operating Activities: Net income $ 840,859 $ 1,026,183 ----------- ----------- Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 2,419,438 2,071,258 (Income) Loss from investments in partnerships and joint venture 13,293 (17,066) (Increase) Decrease in rents receivable 123,598 (34,635) (Increase) in financing and leasing fees (15,022) (35,680) Increase (Decrease) in accounts payable and accrued expenses 35,647 (152,898) (Increase) Decrease in real estate tax escrows (41,732) 54,042 Decrease in prepaid expenses and other assets 22,828 81,546 Increase in advance rental payments and security deposits 95,706 24,804 ----------- ----------- Total Adjustments 2,653,756 1,991,371 ----------- ----------- Net cash provided by operating activities 3,494,615 3,017,554 ----------- ----------- Cash Flows from Investing Activities: Distribution from joint venture 1,598 37,671 Payment for purchase and improvement of rental properties (1,537,018) (1,501,987) Maturity of short-term investments 51,528 -- Purchase of short-term investments -- (1,997) ----------- ----------- Net cash (used in) investing activities (1,483,892) (1,466,313) ----------- ----------- See notes to consolidated financial statements. 5 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended September 30, (Unaudited) 1997 1996 ----------- ----------- Cash Flows from Financing Activities: Principal payments and early repayment of mortgages payable (431,507) (395,806) Distributions to partners (1,527,813) (1,199,257) (Payments on) stock buyback (174,086) (47,252) ----------- ----------- Net cash (used in) financing activities (2,133,406) (1,642,815) ----------- ----------- Net (Decrease) in Cash and Cash Equivalents (122,683) (91,574) Cash and Cash Equivalents, Beginning 1,830,605 2,706,124 ----------- ----------- Cash and Cash Equivalents, Ending $ 1,707,922 $ 2,614,550 =========== =========== See notes to consolidated financial statements. 6 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' CAPITAL (Unaudited) Partners' Capital ------------------------------------------------- Limited General ----------------------- -------- Class A Class B Class C Total ----------- --------- -------- ----------- Balance, January 1, 1996 $ 3,455,787 $ 824,206 $ 43,409 $ 4,323,402 Unit Buyback (47,252) -- -- (47,252) Distributions to Partners (959,806) (227,954) (11,997) (1,199,757) Net Income 820,946 194,975 10,262 1,026,183 ----------- --------- -------- ----------- 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 ======= ====== ===== ======= Balance, January 1, 1997 $ 3,115,865 $ 743,473 $ 39,160 $ 3,898,498 Unit Buyback (139,269) (33,076) (1,741) (174,086) Distributions to Partners (1,222,250) (290,284) (15,279) (1,527,813) Net Income 672,687 159,763 8,409 840,859 ----------- --------- -------- ----------- Balance, Sept. 30, 1997 $ 2,427,033 $ 579,876 $ 30,549 $ 3,037,458 =========== ========= ======== =========== Units authorized and issued, net of 6,973 Treasury Units at September 30, 1997 138,499 33,014 1,739 173,252 ======= ====== ===== ======= See notes to consolidated financial statements. 7 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1--SIGNIFICANT ACCOUNTING POLICIES Line of Business: New England Realty Associates Limited Partnership ("NERA" or the "Partnership") was organized in Massachusetts during 1977. NERA and its subsidiaries own and operate various residential apartment buildings, condominium units, and commercial properties located in Massachusetts, Connecticut, New Hampshire, and Maine. NERA has an investment in a real estate partnership and a joint venture. In connection with the 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. Accordingly, actual results could differ from those estimates. 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. Financing and Leasing Fees: Financing fees are capitalized and amortized, using the interest method, over the life of the related mortgages. Leasing fees are capitalized and amortized on a straight-line basis over the life of the related lease. 8 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. 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 1997, 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, 1997, approximately $1,544,000 of cash and cash equivalents exceeded federally insured amounts of which approximately $1,400,000 was held 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 1997 1996 Life ------------ ----------- ----------- Land $ 9,710,733 $ 9,710,733 -- Buildings 43,627,173 43,622,868 25-31 years Building improvements 11,457,741 10,648,403 15-31 years Kitchen cabinets 1,203,107 940,870 5-10 years Carpets 1,184,552 977,574 5-10 years Air conditioning 254,911 233,995 7-10 years Land improvements 605,059 599,909 10-31 years Laundry equipment 51,282 45,248 5-7 years Elevators 45,592 16,842 20 years Swimming pools 42,450 42,450 10 years Equipment 430,823 311,809 5-7 years Motor vehicles 65,926 49,852 5 years Fences 20,785 20,785 5-10 years Furniture and fixtures 257,019 201,638 5-7 years Smoke alarms 9,064 6,224 5-7 years ----------- ------------ 68,966,217 67,429,200 Less accumulated depreciation 17,286,889 15,135,219 ----------- ----------- $51,679,328 $52,293,981 =========== =========== 9 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2--RENTAL PROPERTIES (CONTINUED) On December 11, 1996, the Partnership acquired a residential complex containing 36 apartment units in Lowell, Massachusetts for a purchase price of approximately $790,000. The purchase was paid from the Partnership's cash reserves and is unencumbered. NOTE 3--RELATED PARTY TRANSACTIONS The Partnerships' properties are managed by an entity which is owned by the majority shareholder of the General Partner. The management fee is equal to 4% of rental revenue and laundry income. Total fees paid were $552,745, and $524,214 for the nine months ended September 30, 1997 and 1996, 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 were no mortgage servicing fees paid in 1997 and 1996. The Partnership Agreement also permits the General Partner or a management company to charge the costs of professional services (such as counsel, accountants, and contractors) to NERA. During the nine months ended Septemmber 30, 1997 and 1996 approximately $330,000 and $221,000 was charged to NERA for legal, maintenance, architectural services and supervision of capital improvements. Approximately $110,000, and $57,000 was capitalized during the nine months ended September 30, 1997 and 1996, in leasehold improvements and the balance was included in administrative expense and repairs and maintenance expenses. In addition, the Partnership paid to the management company $37,500 and $30,000 in each of the nine months ended September 30, 1997 and 1996 for accounting services previously provided by an outside company. The Partnership Agreement entitles the General Partner or a management company to receive certain commissions upon the sale of Partnership property only to the extent that total commissions do not exceed 3%. No such commissions were paid in 1997 or 1996. In 1997 and 1996, an unrelated individual that performed asset management consulting services to NERA and the management company was appointed President of the management company. This individual continues to receive asset management fees from NERA. NERA has recorded consulting fees of $36,000 during the nine months ended September 30, 1997, and $28,800 during the year ended December 31, 1996. Included in prepaid expenses and other assets were amounts due from related parties of $498,756 at September 30, 1997 and $416,317 at December 31, 1996 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). 10 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3--RELATED PARTY TRANSACTIONS (CONTINUED) 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 $154,096 at September 30, 1997 and $82,856 at December 31, 1996. 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. NOTE 4--OTHER ASSETS The short-term investment $51,528 at December 31, 1996, is carried at cost, which approximates fair value. Such investment is a 5.07% certificate of deposit at Citizens Bank which matured in February 1997. Included in prepaid expenses and other assets at September 30, 1997 and December 31, 1996 is approximately $427,000 and $669,000 held in escrow to pay future capital improvements. Additional escrow payments of approximately $34,000 are paid monthly. As the improvements are made, funds are used from these escrow accounts. The carrying value of the Partnership's 50% interest in the Timpany Plaza joint venture, at equity, is $78,843 and $93,734 at September 30, 1997 and December 31, 1996 respectively. The Partnership owns a 10% ownership interest in a real estate limited partnership which is accounted for by the equity method and reduced to a carrying value of zero. The loss in excess of cost in this limited partnership has not been recorded as the Partnership is not liable for such amounts. In 1996, $18,360 was recorded in other income for the amount received from the disposition of limited partnership investment that had previously been reduced to a carrying value of zero. The majority shareholder of the General Partner is also the majority owner of this real estate limited partnership. 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, 1997 and December 31, 1996, 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' mortgage payable approximate their fair value. 11 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5--MORTGAGES PAYABLE (CONTINUED) The Partnerships have pledged tenant leases as additional collateral for certain of these mortgages. Approximate annual maturities are as follows: 1998 - current maturities $ 620,688 1999 676,834 2000 7,337,726 2001 727,098 2002 791,062 Thereafter 41,953,584 ----------- $52,106,992 =========== NOTE 6--ADVANCE RENTAL PAYMENTS AND SECURITY DEPOSITS The lease agreements for certain properties require tenants to maintain a one-month advance rental payment plus security deposits. The funds are held in escrow by another entity owned by the majority shareholder of the General Partner (see Note 3). NOTE 7--PARTNERS' CAPITAL The Partnership has two categories of limited partners (Class A and B) and one category of General Partner (General Partner). Under the terms of the Partnership Agreement, Class B units and General Partnership units must represent 19% and 1% respectively of the total units outstanding. All classes have equal profit-sharing and distribution rights in proportion to their ownership interests. The Partnership declared distributions of $3.90 during the first and third quarters of 1997 and a special distribution of $1.00 per unit during the first quarter of 1997. Total distributions for 1997 were $8.80 per unit. The Partnership has entered into a deposit agreement with an agent to facilitate public trading of limited partners' interests in Class A units. Under the terms of this agreement, the holders of Class A units have the right to exchange each Class A unit for ten Depositary Receipts. The following is information on the net income per Depositary Receipt: Nine Months Ended September 30, 1997 1996 ---- ---- Net Income per Depositary Receipt $ .48 $ .58 ====== ===== 12 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8--CAPITAL UNIT REPURCHASE PLAN During the second quarter of 1996, the Partnership announced a plan to repurchase up to $500,000 of its Depositary Receipts from existing holders of securities. The repurchase of Depositary Receipts may take place over a period of a year or more. The purchase price would be equal to the price at which such securities are traded on the Nasdaq Stock Market at the time of the repurchase. In January 1997, the Partnership repurchased 6,048 depositary receipts for a total cost of $53,586 and repurchased Class B and General Partnership units for a total cost of $13,397. In April 1997, the Partnership repurchased 3600 depositary receipts for a total cost of $30,600 and repurchased Class B and General Partnership units for a total cost of $7,650. In August 1997, the Partnership repurchased 5,640 depositary receipts for a total cost of $54,990 and repurchased Class B and General Partnership units for a total cost of $13,748. During the third and fourth quarters of 1996, the Partnership repurchased 15,915 depositary receipts for a total cost of $110,060 and repurchased Class B and General Partnership units for a total cost of $27,517. The Class B and General Partnership units were repurchased to maintain the required ownership percentage (See Note 7). Treasury units at September 30, 1997 are as follows: Class A 5,681 Class B 1,229 General Partner 63 ------ 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 Partnerships are not involved in any material pending legal proceedings. 13 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10--RENTAL INCOME During the nine months ended September 30, 1997, approximately 85% of rental income is related to residential apartments and condominium units with leases of one year or less. The remaining 15% is related to commercial properties which have minimum future rental income on noncancellable operating leases as follows: Commercial Property Leases Land Leases Total 1998 $1,486,844 $ 146,667 $1,633,511 1999 1,133,955 146,667 1,280,622 2000 908,244 146,667 1,054,911 2001 630,466 146,667 777,133 2002 411,845 146,667 558,512 Thereafter 1,146,115 990,002 2,136,117 ---------- ---------- ----------- $5,717,469 $1,723,337 $7,440,806 ========== ========== =========== In August 1988, the Partnership entered into a land lease agreement with an existing tenant of the Timpany Plaza Shopping Center in Gardner, Massachusetts. As part of this lease, the tenant, at its cost, demolished approximately one-third of the mall and replaced it with a new store of comparable size. The minimum fixed term of this lease is for 20 years, which commenced with the opening of the new store in December 1989. The minimum annual rents are $110,000 per year for the first five years, increasing each subsequent five-year period, with the average being $137,500 per year for the minimum twenty-year term. Included in rents receivable at September 30, 1997 and December 1996 is $168,625 and $163,000 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 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 the loss was approximately $13,000 for the nine months ended September 30, 1997 compared to income of approximately $17,000 for the nine months ended September 30, 1996. 14 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10--RENTAL INCOME (CONTINUED) 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 $751,831, and $722,108 for the nine months ended September 30, 1997 and 1996 respectively. NOTE 11--CASH FLOW INFORMATION During the nine months ended September 30, 1997 and 1996, cash paid for interest on debt was $3,451,694 and $3,487,392 respectively. NOTE 12--FAIR VALUE OF FINANCIAL INSTRUMENTS The Partnership considers the fair value of its financial instruments to approximate their carrying values because conditions pertaining to the historic carrying values approximate those in the current market. 15 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 1997 was approximately $293,000, compared to approximately $248,000 for the same period in 1996, an increase of approximately $45,000. For the nine months ended September 30, 1997, income from operations was approximately $755,000 compared to approximately $884,000 for the same period in 1997, a decrease of approximately $129,000. Net cash provided by operations during the nine months ended September 30, 1997 was approximately $3,495,000 compared to approximately $3,018,000 during the same period in 1996, an increase of approximately $477,000. This increase in cash provided from operations is the result of a decrease in rents receivable; and an increase in advance rental payments and security deposits related to a higher occupancy level at the Partnerships residential properties. Rental income during the third quarter of 1997 was approximately $4,425,000 compared with approximately $4,056,000, for the same period in 1996, an increase of approximately $369,000. For the nine months ended September 30, 1997, rental income was approximately $12,864,000 compared with approximately $12,370,000 for the same period in 1996, an increase of approximately $494,000. The increase in rental income both for the quarter as well as the nine months ended September 30, 1997 is due to the collection of $118,000 in July 1997 of rent, which relates to a prior year, from a tenant who filed for bankruptcy in 1996. In addition, the acquisition of Highland Street property represents approximately $52,000 of the increase in the third quarter of 1997 and approximately $160,000 of the increase in rental income for the nine months ended September 30, 1997. The Partnership has also seen an increase in rental income from the residential properties due to a strong rental market and increasing rental rates. Rental income at the commercial properties has decreased slightly due to the vacancy level and reduced rental rates at the Timpany Plaza Shopping Center, offset by a lower vacancy rate at the Lewiston Mall Shopping Center. Expenses for the third quarter of 1997 were approximately $4,176,000 compared to approximately $3,854,000 for the same period in 1996, an increase of approximately $322,000. This increase reflects an increase in administrative expenses of approximately $33,000 due to an increase in staffing levels and accompanying employee benefits. The Partnership does not anticipate continued increases in staffing levels in the near 16 term. In addition, depreciation and amortization increased approximately $138,000 due to the acquisition of the property at Highland Street during the fourth quarter of 1996, as well as depreciation related to ongoing capital improvements at the Partnership properties; the management fee increased approximately $15,000 due to a higher level of rental income; operating expenses increased approximately $67,000, of which approximately $7,000 represents Highland Street, approximately $28,000 represents the utilities paid by the Partnership for the vacant space at the Timpany Plaza, and the balance represent an increase in utilities at the Partnership properties. Repairs and maintenance expenses increased approximately $83,000 due to ongoing improvements at the Partnership properties; taxes and insurance increased approximately $20,000, of which approximately $5,000 represents the acquisition of Highland Street and the balance represents an increase in real estate taxes. These increases are offset by a decrease in renting expenses of approximately $31,000 due to a drop in advertising expenditures as a result of a strong rental market. Expenses for the first nine months of 1997 were approximately $12,246,000 compared with approximately $11,641,000 for the same period in 1996, an increase of approximately $605,000. This represents an increase of approximately $157,000 in administrative expenses; an increase of approximately $348,000 in depreciation and amortization; an increase of approximately $29,000 in the management fee; an increase of approximately $52,000 in operating expenses; an increase of approximately $61,000 in repairs and maintenance expenses; and an increase of approximately $29,000 in taxes and insurance. The reason for these increases are discussed in the preceding paragraph. Interest income for the three months ended September 30, 1997 remained relatively stable, $37,685 for the three months ended September 30, 1997 and $36,594 for the three months ended September 30, 1996 an increase of $1,091. Interest income for the nine months ended September 30, 1997 was $98,901, compared to $124,938 for the same period in 1996, a decrease of $26,037. The decrease in interest income for the nine months ended September 30, 1997 is due to the receipt of $19,790 during the first quarter of 1996 from interest on the funds held in escrow related to the properties acquired in 1995. 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. 17 The Partnership's share of loss in the joint venture at the Timpany Plaza Shopping Center was $7,112 for the third quarter of 1997 compared to income of $5,531 for the third quarter of 1996, a fluctuation of $12,643. For the nine months ended September 30, 1997, the Partnership's share of loss from the joint venture at Timpany Plaza Shopping Center was $13,293 compared to income of $17,066 for the same period in 1996, a fluctuation of approximately $30,359. The rental income from the joint venture is down significantly due to lower rental rates negotiated with the tenants as the result of the loss of a major tenant in the Timpany Plaza Shopping Center. This decrease in rental income from the joint venture is consistent with the decrease in rental income from the Timpany Plaza Shopping Center. As a result of the changes discussed above, net income for the three months ended September 30, 1997 was $329,936 compared to $289,869 for the same period in 1996, an increase of $40,067 and net income for the nine months ended September 30, 1997 was $840,026 compared to $1,026,183 and decrease of $185,314. Liquidity and Capital Resources The Partnership's principal source of cash during 1997 and 1996 has been the collection of rents. The majority of cash and cash equivalents of $1,707,922 at September 30, 1997 and $1,830,605 at December 31, 1996 is invested in a U.S. government money market account. Additionally, the Partnership purchased a short term investment valued at $51,528 at December 31, 1996. This investment is a certificate of deposit which matured in February 1997. At September 30, 1997, the Partnership's cash and cash equivalents decreased approximately $906,000 from September 30, 1996. This decrease represents the acquisition of a residential complex consisting of 36 apartments in Lowell, Massachusetts. The purchase price was $790,000 and was funded from cash reserves. In 1996, the Partnership announced a plan under which it may repurchase up to $500,000 of its Depositary Receipts from existing holders of securities. The repurchase plan may take place over a period of one year or more. The purchase price will be equal to the price at which such securities are traded on the Nasdaq Stock Market at the time of the repurchase. In 1997, the Partnership repurchased 15,288 depositary receipts for a total purchase price of $139,268, and purchased Class B and General Partnership units for a total cost of $34,818. During the second and third quarters of 1996, the Partnership purchased 15,915 depositary receipts for a total cost of $110,060 and Class B and General Partnership units for a total cost of $27,517. The Class B and General Partnership units are purchased to maintain the required ownership percentages. 18 During the third quarter of 1997, the Partnership completed approximately $632,000 of capital improvements to its properties. These improvements were funded from escrow accounts previously established for this purpose and from cash reserves. The most significant improvements were made at the Lincoln Street apartments in Newton, Massachusetts for a total cost of approximately $221,000. Significant improvements were also made at the apartments at 62 Boylston Street in Boston, Massachusetts for a total cost of approximately $88,000, as well as improvements of approximately $60,000 at the Courtyard on North Beacon; approximately $59,000 at the Westgate Apartments in Woburn, Massachusetts; approximately $38,000 at the Apartments at 1144 Commonwealth Avenue in Brighton, Massachusetts; and approximately $26,000 the Redwood Hills apartments in Worcester, Massachusetts. In keeping with its five year capital improvement program and budgeted 1997 capital improvements, the Partnership and its Subsidiary partnerships plan to invest an additional $600,000 in capital improvements in 1997, of which approximately $510,000 is designated for residential properties and $90,000 is designated for commercial properties. These improvements will be funded from cash reserves and escrow accounts. The Partnership anticipates that available cash and interest bearing investments, collection of rents, and proceeds from the sale and refinancing of Partnership properties will be sufficient to finance current improvements to its properties. 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 a loss of a significant tenant. Since the Partnership's long term goals include the acquisition of additional properties, a portion of the proceeds from the refinancing and sale of properties is reserved for this purpose. The Partnership will consider refinancing existing properties if either insufficient funds exist from cash reserves to repay existing mortgages or if funds required for future acquisitions are not available. The Partnership paid a distribution of $3.90 per Partnership unit ($0.39 per depositary receipt) during the first and third quarters of 1997 and a special distribution of $1.00 per unit during the first quarter of 1997. Total distributions for 1997 were $8.80 per unit. 19 Factors that may affect future results The discussion above contains information based on management's belief and forward looking statements that involve a number of risks, uncertainties and assumptions. There can be no assurances that actual results will not differ materially as a result of various factors, including but not limited to the following: The Timpany Plaza Shopping Center in Gardner, Massachusetts is 47% vacant at November 1, 1997. If the space remains unoccupied, the 1997 rental income will be approximately $200,000 less than 1996. Should circumstances remain unchanged, the Partnership may need to review the carrying value of this property for impairment in accordance with the Statement of Financial Accounting Standards No. 121 (Fas No. 121). A major tenant of the shopping mall in Lewiston, Maine, which paid approximately $240,000 in 1996, can terminate its lease with nine months notice effective January 1, 1997. The Partnership is currently negotiating to obtain a long-term lease. The Partnership, at this time, cannot make any assurances that the tenant will renew its lease for this space. 20 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, 1997 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. 21 EX-27 2 FINANCIAL DATA SCHEDULE
5 9-MOS DEC-31-1997 SEP-30-1997 $ 1,707,922 0 564,647 0 0 4,490,944 68,966,217 17,286,889 57,627,745 2,483,295 0 0 0 0 3,037,458 57,627,745 12,863,526 13,001,441 0 0 8,756,709 0 3,489,481 840,859 0 840,859 0 0 0 840,859 4.83 4.83
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