-----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, BDtZNE/b4KBInMY+Z+6RxUpAtX2QCbIfii+Gr5dMqGJFcDD2q0dEexVRlbNOI7hn zau/V8hItAiHqjmZqV7Kcg== 0001047469-98-041126.txt : 19981118 0001047469-98-041126.hdr.sgml : 19981118 ACCESSION NUMBER: 0001047469-98-041126 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 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: 98751198 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, 1998 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 Identification No.) Incorporation or Organization) 39 Brighton Avenue, Allston, Massachusetts 02134 (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code (617) 783-0039 Not Applicable (Former Name, Former Address and Former Fiscal Year, if Changed Since 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. Balance Sheets - September 30, 1998 and September 30, 1997 2 Statements of Operations - Six Months Ended September 30, 1998 and September 30, 1997 3 Statements of Cash Flows - Six Months Ended September 30, 1998 and 4 September 30, 1997 Notes to Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 16 PART II - OTHER INFORMATION Item 5. Other Information SIGNATURES 23
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
September 30, December 31, 1998 1997 (Unaudited) ------------ ------------ ASSETS Rental Properties $ 51,019,727 $ 51,575,342 Cash and Cash Equivalents 329,668 456,277 Short-term Investments 2,756,053 2,055,429 Rents Receivable 502,381 604,350 Real Estate Tax Escrows 529,999 570,713 Prepaid Expenses and Other Assets 1,727,323 1,514,370 Investment in Joint Venture 68,015 75,467 Financing and Leasing Fees 1,082,933 1,295,555 ------------ ------------ TOTAL ASSETS $ 58,016,099 $ 58,147,503 ------------ ------------ ------------ ------------ LIABILITIES AND PARTNERS' CAPITAL Mortgages Payable $ 51,486,305 $ 51,956,821 Accounts Payable and Accrued Expenses 911,858 903,430 Advance Rental Payments and Security Deposits 1,925,743 1,822,022 ------------ ----------- Total Liabilities 54,323,906 54,682,273 Commitments and Contingent Liabilities (Note 9) Partners' Capital: 173,252 units outstanding in 1998 and 1997 3,692,193 3,465,230 ------------ ------------ TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 58,016,099 $ 58,147,503 ------------ ------------ ------------ ------------
See notes to consolidated financial statements. 2 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Nine Months Ended September 30, September 30, 1998 1997 1998 1997 (Unaudited) (Unaudited) ------------------------ ------------------------ Revenues: Rental income $ 4,566,164 $ 4,425,032 $13,647,899 $12,863,526 Laundry & sundry income 49,829 44,472 135,232 137,915 ----------- ----------- ----------- ----------- 4,615,993 4,469,504 13,783,131 13,001,441 ----------- ----------- ----------- ----------- Expenses: Administrative 212,641 265,692 815,689 790,225 Depreciation and amortization 845,081 834,621 2,442,817 2,419,438 Interest 1,149,919 1,160,303 3,460,287 3,489,481 Management fees 193,018 186,645 581,149 552,745 Operating 384,595 422,569 1,431,306 1,469,243 Renting 116,463 77,099 237,655 152,115 Repairs & maintenance 739,200 770,895 1,962,495 1,982,282 Taxes & insurance 464,605 458,317 1,424,870 1,390,661 ----------- ----------- ----------- ----------- 4,105,522 4,176,141 12,356,268 12,246,190 ----------- ----------- ----------- ----------- Income from Operations 510,471 293,363 1,426,863 755,251 ----------- ----------- ----------- ----------- Other income(loss): Interest income 48,258 37,685 124,918 98,901 Income(loss) from investment in partnership and joint venture 7,148 (7,112) 9,096 (13,293) Unrealized appreciation (depreciation) in investment 85,631 0 84,455 0 ----------- ----------- ----------- ----------- 141,037 30,573 218,469 85,608 ----------- ----------- ----------- ----------- Net Income $ 651,508 $ 323,936 $ 1,645,332 $ 840,859 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Net Income per Unit $ 3.76 $ 1.86 $ 9.50 $ 4.83 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Weighted Average Number of Units Outstanding 173,252 173,635 173,252 174,093 ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
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) 1998 1997 ----------- ---------- Cash Flows from Operating Activities: Net income $ 1,645,332 $ 840,859 ----------- ----------- Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 2,442,817 2,419,438 Unrealized (appreciation) in investment (84,455) -- (Income)Loss from investments in partnerships and joint venture (9,096) 13,293 Decrease in rents receivable 101,969 123,598 (Increase) in financing and leasing fees (14,016) (15,022) Increase in accounts payable and accrued expenses 8,428 35,647 (Increase)Decrease in real estate tax escrows 40,714 (41,732) Decrease(Increase) in prepaid expenses and other assets (212,953) 22,828 Increase in advance rental payments and security deposits 103,721 95,706 ----------- ---------- Total Adjustments 2,377,129 2,653,756 ----------- ---------- Net cash provided by operating activities 4,022,461 3,494,615 ----------- ---------- Cash Flows from Investing Activities: Distribution from joint venture 16,548 1,598 Payment for purchase and improvement of rental properties (1,660,564) (1,537,018) Maturity of short-term investments -- 51,528 Purchase of short-term investments (616,169) -- ---------- ---------- Net cash (used in) investing activities (2,260,185) (1,483,892) ---------- ----------
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) 1998 1997 ----------- ---------- Cash Flows from Financing Activities: Principal payments and early repayment of mortgages payable (470,516) (431,507) Distributions to partners (1,418,369) (1,527,813) (Payments on) stock buyback -- (174,086) ---------- ---------- Net cash (used in) financing activities (1,888,885) (2,133,406) ---------- ---------- Net (Decrease) in Cash and Cash Equivalents (126,609) (122,683) Cash and Cash Equivalents, Beginning 456,277 1,830,605 ---------- ---------- Cash and Cash Equivalents, Ending $ 329,668 $1,707,922 ---------- ---------- ---------- ----------
See notes to consolidated financial statements. 5 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' CAPITAL (Unaudited)
Partners' Capital ----------------------------------------------- Limited -------------------------- General Class A Class B Partnership Total ----------- ----------- ----------- ----------- 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 ----------- ----------- ---------- ----------- ----------- ----------- ---------- ----------- Balance, January 1, 1998 $ 2,769,251 $ 661,152 $ 34,827 $ 3,465,230 Distributions to Partners (1,134,695) (269,490) (14,184) (1,418,369) Net Income 1,316,266 312,613 16,453 1,645,332 ----------- ----------- ---------- ----------- Balance, Sept. 30, 1998 $ 2,950,822 $ 704,275 $ 37,096 $ 3,692,193 ----------- ----------- ---------- ----------- ----------- ----------- ---------- ----------- Units authorized and issued, net of 6,973 Treasury Units at September 30, 1998 138,499 33,014 1,739 173,252 ----------- ----------- ---------- ----------- ----------- ----------- ---------- -----------
See notes to consolidated financial statements. 6 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1--SIGNIFICANT ACCOUNTING POLICIES Line of Business: New England Realty Associates Limited Partnership ("NERA" or the "Partnership") was organized in Massachusetts during 1977. NERA and its subsidiaries own and operate various residential apartment buildings, condominium units, and commercial properties located in Massachusetts, Connecticut, New Hampshire, and Maine. NERA has also made investments in other real estate partnerships and has participated in other real estate- related activities, primarily located in Massachusetts. In connection with the mortgages referred to in Note 5, a substantial number of NERA's properties were restructured into separate subsidiary limited partnerships without any change in the historical cost basis. Principles of Consolidation: The consolidated financial statements include the accounts of NERA and its subsidiary limited partnerships. NERA has a 99.67% ownership interest in each of such subsidiary limited partnerships. The consolidated group is referred to as the "Partnerships." Minority interests are not recorded since they are insignificant. All significant intercompany accounts and transactions are eliminated in consolidation. The Partnership accounts for its investment in 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: Rental income from residential and commercial properties is recognized over the term of the related lease. Amounts sixty days in arrears are charged against income. Certain leases of the commercial properties provide for increasing stepped minimum rents, which are accounted for on a straight-line basis over the term of the lease. Rental Properties: Rental properties are stated at cost less accumulated depreciation. Maintenance and repairs are charged to expense as incurred; improvements and additions are capitalized. When assets are retired or otherwise disposed of, the cost of the asset and related accumulated depreciation is eliminated from the accounts, and any gain or loss on such disposition is included in income. Rental properties are depreciated on the straight-line method over their estimated useful lives. In the event that facts and circumstances indicate that the carrying value of rental properties may be impaired, an analysis of recoverability is performed. The estimated future undiscounted cash flows are compared to the asset's carrying value to determine if a write-down to fair value or discounted cash flow value is required. This policy was adopted in 1995. Previously, impairment was considered on a case-by-case basis. 7 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 Partnership and its subsidiary partnerships consider cash equivalents to be all highly liquid instruments purchased with a maturity of three months or less. Short-term Investments: The Partnership accounts for short-term investments in accordance with Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities." The Partnerships consider short-term investments to be mutual funds and bank certificates of deposit, Treasury obligations, or commercial paper with initial maturities between three and twelve months. These investments are considered to be trading account securities and are carried at fair value with unrealized holding gains or losses reflected in earnings. Concentration of Credit Risks 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 1998 or 1997. 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 state and municipal securities. At September 30, 1998, approximately $129,000 of cash and cash equivalents exceeded federally insured amounts. The mutual fund investment is subject to price volatility associated with any interest-bearing investment. Fluctuations in actual interest rates affect the value of these investments. 8 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2--RENTAL PROPERTIES Rental properties consist of the following:
September 30, December 31, Useful 1998 1997 Life ------------ ------------ ------------ Land $ 9,710,733 $ 9,710,733 -- Buildings 43,627,173 43,627,173 25-31 years Building improvements 12,312,363 11,351,613 15-31 years Kitchen cabinets 1,197,786 1,029,671 5-10 years Carpets 1,246,150 1,028,065 5-10 years Air conditioning 282,544 251,950 7-10 years Land improvements 645,351 623,453 10-31 years Laundry equipment 63,078 62,899 5-7 years Elevators 57,952 45,592 20 years Swimming pools 42,450 42,450 10 years Equipment 617,101 471,263 5-7 years Motor vehicles 65,926 65,926 5 years Fences 20,785 20,785 5-10 years Furniture and fixtures 351,276 255,033 5-7 years Smoke alarms 17,209 10,706 5-7 years ------------ ------------ 70,257,877 68,597,312 Less accumulated depreciation 19,238,150 17,021,970 ------------ ------------ $ 51,019,727 $ 51,575,342 ------------ ------------ ------------ ------------
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 $581,149, and $552,745 for the nine months ended September 30, 1998 and 1997 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 1998 and 1997. 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 September 30, 1998 and 1997 approximately $336,000 and $330,000 was charged to NERA for legal, maintenance, architectural services and supervision of capital improvements. Approximately $128,000 and $110,000 was capitalized during the nine months ended September 30, 1998 and 1997, in rental 9 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE--3 RELATED PARTY TRANSACTIONS (CONTINUED) properties. Included in the 1998 expenses referred to above, approximately $104,000 is recorded in repairs and maintenance expenses and approximately $104,000 is included in administrative expenses for the nine months ended September 30, 1998. Additionally the Partnership paid to the management company $45,000 and $37,500 in each of the nine months ended September 30, 1998 and 1997 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 1998 or 1997. In 1996, an unrelated individual who 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, receiving $23,400 during the nine months ended September 30, 1998, and $30,600 during the year ended December 31, 1997. Included in prepaid expenses and other assets were amounts due from related parties of $572,119 at September 30, 1998 and $487,321 at December 31, 1997 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 at December 31, 1997 is an insurance reserve account funded by the Partnerships and held by the management company. The balance in the reserve was $155,072 at December 31, 1997. Due to a change in the insurance policies, the reserve account was closed during 1998 and the funds were transfered to the operating account. 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 Short-term investments are considered to be trading securities per FAS No. 115 and are carried on the balance sheet at their market value. At September 30, 1998, a mutual fund investment with a cost of $2,671,598 was recorded at its market value of $2,756,053. The unrealized gain of $84,455 is included in other income. Included in prepaid expenses and other assets at September 30, 1998 and December 31, 1997 is approximately $463,000 and $389,000 respectively held in escrow to pay future capital improvements. 10 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4--OTHER ASSETS (CONTINUED) The carrying value of the Partnership's 50% interest in the Timpany Plaza joint venture, at equity, is $68,015 and $75,467 at September 30, 1998 and December 31, 1997 respectively. The Partnership owns a 10% ownership interest in a real estate limited partnership accounted for by the equity method and reduced to a carrying value of zero. This investment was disposed of in September 1998. (See Note 14). Losses in excess of cost in limited partnerships have not been recorded as the Partnership is not liable for such amounts. The majority shareholder of the General Partner is also the majority owner of this 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, 1998 and December 31, 1997, 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. The Partnerships have pledged tenant leases as additional collateral for certain of these mortgages. Approximate annual maturities are as follows:
1999 - current maturities $ 677,000 2000 7,338,000 2001 727,000 2002 791,000 2003 861,000 Thereafter 41,092,000 ----------- $51,486,000 ----------- -----------
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. The funds are held in escrow by another entity owned by the majority shareholder of the General Partner (see Note 3). 11 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 $4.10 during the first and third quarters of 1998. Total distributions for 1998 were $8.20 per unit. The Partnership has entered into a deposit agreement with an agent to facilitate public trading of limited partners' interests in Class A units. Under the terms of this agreement, the holders of Class A units have the right to exchange each Class A unit for ten Depositary Receipts. The following is information on the net income per Depositary Receipt:
Nine Months Ended September 30, 1998 1997 ------ ------ Net Income per Depositary Receipt $ .95 $ .48 ------ ------ ------ ------
NOTE 8--CAPITAL UNIT REPURCHASE PLAN During the second quarter of 1996, the Partnership announced a plan to purchase up to $500,000 of its Depositary Receipts from existing holders of securities. The purchase of Depositary Receipts took place over a period of approximately eighteen months. The purchase prices paid for Depositary Receipts varied and were equal to the price at which such securities were traded on the Nasdaq Stock Market at the time of the purchase. During 1997 and 1996, the Partnership purchased 15,288 and 15,915 Depositary Receipts for a total cost of $139,268 and $110,060 respectively. The plan to purchase Depositary Receipts was terminated on December 10, 1997. In addition, 363 Class B and 19 General Partnership units were purchased in 1997 for a total cost of $34,819 and 378 Class B and 20 General Partnership units were purchased in 1996 for a total cost of $27,517 to maintain the ownership percentages required by the current form of partnership agreement (see Note 7). Treasury units at September 30, 1998 are as follows:
Class A 5,681 Class B 1,228 General Partner 64 ------ 6,973 ------ ------
12 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 During the nine months ended September 30, 1998, 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 ----------- ----------- ----------- 1999 $ 1,528,000 $ 134,000 $ 1,662,000 2000 1,227,000 142,000 1,369,000 2001 1,006,000 150,000 1,156,000 2002 838,000 150,000 988,000 2003 684,000 150,000 834,000 Thereafter 1,603,000 984,000 2,587,000 ----------- ----------- ----------- $ 6,886,000 $ 1,710,000 $ 8,596,000 ----------- ----------- ----------- ----------- ----------- -----------
In August 1988, the Partnership entered into a land lease agreement with an existing tenant of the Timpany Plaza Shopping Center in Gardner, Massachusetts. The minimum annual rents are $110,000 per year for the first five years, increasing each subsequent five year period, with the average being $137,500 per year for the minimum twenty-year term. Included in rents receivable at September 30, 1998 and December 31, 1997 is $176,250 and $171,000 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. 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 for the nine months ended September 30, 1998 was approximately $ 9,000 compared to losses of approximately $13,000 for the nine months ended September 30, 1997. 13 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 $694,807, and $751,831 for the nine months ended September 30, 1998 and 1997 respectively. NOTE 11--CASH FLOW INFORMATION During the nine months ended September 30, 1998 and 1997, cash paid for interest on debt was $3,412,683 and $3,451,694 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. NOTE 13--READINESS FOR YEAR 2000 The Partnership is aware of the uncertainty regarding the effect of the Year 2000 problem as it relates to the generation of erroneous data or failure by computer systems which do not recognize the date sensitive information when the year changes to 2000. The Partnership's records are maintained and managed by its manager, The Hamilton Company. The Partnership has undertaken through its manager to safeguard against any such Year 2000 problem by leasing and installing new internal hardware and software which are expected to be fully Year 2000 compliant. The Hamilton Company engaged an independent consultant to provide Year 2000 consulting services and advice regarding the operation of the Partnership's new hardware and software. As of the end of the third quarter of 1998, The Hamilton Company has incurred approximately $30,000 in costs associated with the Year 2000 issues. This amount includes the approximate replacement cost of non-compliant computer hardware and software, the cost of training the employees and staff and the fees and expenses of consultants. Such costs and expenses are not directly charged to the Partnership but are included with the annual management fee charged by The Hamilton Company to the Partnership. The Partnership believes that there are sufficient funds from the Partnership's operating income to cover the costs and expenses associated with such annual fees to The Hamilton Company and that such costs and expenses will not materially adversely affect the Partnership's business financial condition and results of operation. During the last quarter of 1998 The Hamilton Company will be validating the processes of its new computer hardware and software to assure the reliability of their risk and will utilize the services of an independent consultant to provide verification in the testing phase. The new computer systems are expected to be fully Year 2000 compliant and are expected to be operational on or before March 31, 1999. Although the Partnership and its manager believe that its Year 2000 initiative will adequately prepare the Partnership with respect to Year 2000 issues, the Partnership has not developed any contingency plan should its Year 2000 initiative be unsuccessful. 14 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 14--INCOME TAXES In September 1998, an investment partnership in which the Partnership held a 10% ownership interest was sold. This investment had previously been reduced to a carrying value of zero. This event resulted in the Partnership recording an additional $700,000 of taxable income, substantially representing the recapture of losses previously deducted for tax purposes in excess of basis. 15 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION RESULTS OF OPERATIONS New England Realty Associates Limited Partnership and its Subsidiary Partnerships earned income from operations of $510,471 during the three months ended September 30, 1998, compared to $293,363 for the three months ended September 30, 1997, an increase of $217,108. For the nine months ended September 30, 1998 income from operations was $1,426,863 compared to $755,251 for the same period in 1997, an increase of $671,612. The rental activity is summarized as follows:
OCCUPANCY DATE --------------------------------------------- AT SEPTEMBER 30, 1998 1997 ----------- ----------- Residential Units............... 1,668 1,668 Vacancies........... 55 46 Vacancy rate........ 3.3% 2.8% Commercial Total square feet... 457,700 457,700 Vacancy............. 93,000 82,000 Vacancy rate........ 20% 18%
RENTAL INCOME --------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30, 1998 1997 ----------- ----------- Total rents.................. $ 13,648,000 $ 12,864,000 Residential percentage....... 85% 85% Commercial percentage........ 15% 15% Contingent rentals........... $ 695,000 $ 752,000
16 Rental income for the three months ended September 30, 1998 was $4,566,164 compared to $4,425,032 for the three months ended September 30, 1997, an increase of $141,132 (3.2%). Rental income for the nine months ended September 30, 1998 was $13,647,899 compared to $12,863,526 for the nine months ended September 30, 1998, an increase of $784,373(6.1%). The overall increase in rental income is directly attributable to the Partnership's residential properties. This increase is due primarily to the increase during the past year in the demand for residential rental housing in greater Boston. Approximately eighty five percent (85%) of the Partnership's rental income is derived from its residential properties, a number of which properties are located in greater Boston and surrounding communities. Rental rates at these residential properties have increased approximately 3 - 5% since 1997 and the average vacancy rate at the residential properties has decreased from 3.5% for the nine months ended September 30, 1997 to 2.07% for the nine months ended September 30, 1998. While the demand for residential properties in greater Boston remains high, the Partnership cannot make any assurances that the current demand for its residential properties will continue in the future. Rental income decreased at the commercial properties during the nine months ended September 30, 1998 due to decreases at the Timpany Plaza Shopping Center. In 1997, the Partnership received a settlement due to the early termination of a tenant who vacated 71,000 square feet of space. The settlement is included in rental income in 1997 however the space remains vacant in 1998. There has not been any major change in the tenant mix at the commercial properties during the nine months ended September 30, 1998. Expenses for the third quarter of 1998 were $4,105,522 compared to $4,176,141 for the same period in 1997, a decrease of $70,619. Administrative expenses decreased $53,051 from $265,692 for the three months ended September 30, 1997 to $212,641 for the three months ended September 30, 1998. This represents a decrease in professional fees and employee benefits. This decrease in employee benefits is due in part to a change in the status of some of the Partnership's employees from individuals with families to individuals with single status during 1998. Repairs and maintenance expenses decreased $31,695 from $770,895 for the three months ended September 30, 1997 to $739,200 for the three months ended September 30, 1998. The Partnership did significant repairs in 1997 primarily to the properties acquired in 1995 and 1996. As a result, the level of repairs necessary to maintain the partnership properties decreased during 1998. Operating expenses decreased $37,974 from $422,569 for the three months ended September 30, 1997 to $384,595 for the quarter ended September 30, 1998. During the three months ended September 30, 1997, the Partnership was billed and paid for water charges which relate to previous years. These expenses were paid in 1997 and are not ongoing expenses in 1998. In addition, 1998 was a milder winter, resulting in lower utility costs. Renting expenses increased $39,364 from $77,099 for the three months ended September 30, 1997 to $116,463 for the three months ended September 30, 1998, due to increases in tenant turnover, rental commissions and advertising expenses. The management fees increased $6,373 from $186,645 for the three months ended September 30, 1997 to $193,018 for the three months ended September 30, 1998 due to the increase in rental income. 17 Interest expense decreased $10,384 to $1,149,919 for the three months ended September 30, 1998 from $1,160,303 for the three months ended September 30, 1997. This decrease is due to a lower level of debt. Expenses for the first nine months of 1998 were $12,356,268 compared to $12,246,190 for the same period in 1997, an increase of $110,078. Administrative expenses increased $25,464 to $815,689 for the nine months ended September 30, 1998 from $790,225 for the nine months ended September 30, 1997. This increase in administrative expenses is due in part to special projects for which the Partnership contracted for during the early part of 1998. Taxes and insurance increased $34,209 from $1,390,661 for the nine months ended September 30, 1997 to $1,424,870 for the nine months ended September 30, 1998. This represents an increase in real estate taxes as well as an insurance abatement received in 1997 resulting in a lower than usual insurance expense in 1997. Other increases include the management fees of $28,404(5%), and renting expenses of $85,540 (56%) and decreases of $37,937 (2.5%) in operating expenses. An explanation of these fluctuations are discussed in the previous paragraph. Interest income was $48,258 for the three months ended September 30, 1998, compared to $37,685 for the three months ended September 30, 1997, an increase of $10,573. Interest income was $124,918 for the nine months ended September 30, 1998, compared to $98,901 for the same period in 1997, an increase of $26,017. This increase is due to an increase in the average cash balance available for investment in 1998 compared to 1997. The Partnership is a partner in a joint venture with a tenant at the Timpany Plaza Shopping Center in Gardner, Massachusetts. Under the terms of the agreement, the two parties have agreed to relet the space formerly leased by the tenant, and divide the net income or loss after paying to the Partnership an annual rent of approximately $84,000. The Partnership's investment in the Timpany Plaza joint venture represents less than 1% of the Partnership's assets. The Partnership's share of income in the joint venture at the Timpany Plaza Shopping Center was $7,148 for the three months ended September 30, 1998 compared to a loss of $7,112 for the same period in 1997, a fluctuation of $14,260. For the nine months ended September 30, 1998, the Partnership's share of income from the joint venture was $9,096 compared to a loss of $13,293 for the same period in 1997, a fluctuation of $22,389. This increase in income is due to a vacancy of approximately 9,000 square feet of space in 1997 which has been occupied for the nine months ended September 30, 1998. Included in other income for the three months ended September 30, 1998 is $84,631, which represents the unrealized gain in the value of the Partnership's short term investment. For the nine months ended September 30, 1998, the unrealized gain in the value of the investment is $84,455. The Partnership's short-term investment consists of a Massachusetts municipal bond 18 fund, the value of which will fluctuate daily. The Partnership records the investment at its fair market value, which will result in unrealized income or loss based on the purchase price of the investment and its fair market value. As a result of the changes discussed above, net income for the three months ended September 30, 1998 was $651,508 compared to $323,936 for the three months ended September 30, 1997, an increase of $327,572 and net income for the nine months ended September 30, 1998 was $1,645,332 compared to $840,859 for the nine months ended September 30, 1997, an increase of $804,473. LIQUIDITY AND CAPITAL RESOURCES The Partnership's principal source of cash during the third quarter of 1998 and the year ended December 31, 1997 was the collection of rents. The majority of cash and cash equivalents of $329,668 at September 30, 1998 and $456,277 at December 31, 1997 is held in interest bearing accounts. The Partnership's short-term investment of $2,756,053 at September 30, 1998 and $2,055,429 at December 31, 1997 is invested in a Massachusetts municipal bond fund. In 1996, the Partnership announced a plan to purchase up to $500,000 of its Depositary Receipts from existing holders of securities. The purchase plan took place over a period of approximately eighteen months. The purchase prices paid for such Depositary Receipts were equal to the price at which such securities are traded on the NASDAQ Stock Market at the time of the purchase. During 1997 and 1996, the Partnership purchased 15,288 and 15,915 Depositary Receipts for a total cost of $139,268 and $110,060, respectively. In addition, 363 Class B and 19 General Partnership units were purchased for a total cost of $34,818 in 1997 and 378 Class B and 20 General Partnership units for a total cost of $27,517 in 1996 to maintain the ownership percentages required by the current form of partnership agreement. The plan to purchase Depositary Receipts was terminated on December 10, 1997. During the third quarter of 1998 the Partnership and its Subsidiary Partnerships completed certain improvements to their properties at a total cost of $576,636. The most significant improvements were made at the Westgate Apartments in Woburn, Massachusetts for a total cost of $172,591. Additional capital improvements of $67,968, $65,782, $58,425, $38,714, $27,813, and $25,765 were made to Redwood Hills, 62 Boylston Street, Lincoln Street, 1137 Commonwealth Avenue, Coach Estates, and Oakridge Apartments. These improvements were funded from the escrow accounts previously established, as well as cash reserves. In addition to the improvements made to date in 1998, the Partnership and its Subsidiary Partnerships plan to invest an additional $500,000 in capital improvements prior to the end of 1998, primarily at the residential properties. These improvements will be funded from escrow accounts as well as from the Partnership's cash reserves. 19 The Partnership anticipates that cash from operations and interest-bearing investments will be sufficient to fund its current operations and to finance current improvements to its properties. The Partnership's net income and cash flow may fluctuate dramatically from year to year as a result of the sale of properties, unanticipated increases in expenses, or the loss of significant tenants. Since the Partnership's long-term goals include the acquisition of additional properties, a portion of the proceeds from the refinancing and sale of properties is reserved for this purpose. The Partnership will consider refinancing existing properties if insufficient funds exist from cash reserves to repay existing mortgages or if funds for future acquisitions are not available. Factors That May Affect Future Results The discussions above contains information based upon management's belief and forward-looking statements that involve a number of risks, uncertainties, and assumptions. There can be no assurances that actual results will not differ materially as a result of various factors, including but not limited to the following: A major tenant of the Lewiston Mall in Lewiston, Maine, which paid approximately $269,000 during the year ended December 31, 1997 and approximately $207,000 for the nine months ended September 30, 1998, can terminate its lease with nine months' notice. 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. The Year 2000 problem arises because older or noncompliant computer systems are unable either to process data with accuracy, or to operate building systems correctly, by reason of the inability of either software or elements of hardware contained within such systems correctly to process dates after December 31, 1999. The Partnership has considered the Year 2000 problem as it relates to the business of the Partnership in three areas: partnership operations, problems with vendors, and problems with tenants. Operations. Partnership operations have been considered in two areas: financial operations and building operations. With respect to financial operations, all of the accounting and management functions of the Partnership are discharged for the Partnership by its contracted property manager, The Hamilton Company. The Partnership has been advised by The Hamilton Company that, as part of routine computer software and hardware updates which are presently in process, The Hamilton Company will be able to continue to perform the financial operations of the Partnership in the ordinary 20 course. The costs of such compliance will be borne as operating costs by The Hamilton Company and will not be a charge to the earnings of the Partnership. The Partnership believes that the management fee paid by the Partnership to The Hamilton Company will be adequate to support The Hamilton Company's efforts in this regard, which understanding has been confirmed to the Partnership by The Hamilton Company. Specifically, The Hamilton Company has advised the Partnership as follows: that it has retained professional Year 2000 consulting services to provide advice concerning the installation of new hardware and software; that the new systems to be installed are used as standard systems by many real estate management companies, and such systems are Year 2000 compliant; that of a total estimated cost of $50,000 associated with the replacement of hardware and software by The Hamilton Company, which replacement will address all Year 2000 compliance issues, approximately $30,000 have already been incurred; that such expenses include and will include the cost of training of employees and staff and all fees and expenses of consultants; that The Hamilton Company during the last calendar quarter of 1998 will be validating the processes of its newly installed computer hardware and software systems to assure reliability and provide testing and verification; that the new computer systems are expected to be fully Year 2000 compliant and operational on or before March 31, 1999, and that the Partnership will obtain appropriate assurances in such regard from The Hamilton Company. The Partnership and its manager believe that its Year 2000 initiative will adequately prepare the Partnership with respect to Year 2000 issues; the Partnership has not developed any contingency plan for financial operations should the current initiative prove to be unsuccessful, and believes that there would be adequate time to effect a different and compliant systems installation if the March 31, 1999 testing date is not met. With respect to building operations, the Partnership expects to have completed its review of all computerized systems which are operant in the Partnership's real estate holdings on or before March 31, 1999. The Partnership does not believe that its real estate holdings are particularly subject to Year 2000 problems, but will institute appropriate remedial procedures forthwith upon the conclusion of its review of its real estate holdings. The Partnership has yet to determine the cost of any such remediation, nor has it established any contingency plan to date. Vendors The Partnership further has reviewed its relationship with principal vendors. The Partnership has received written assurance that its third party vendors which process the rents and deposits received from tenants, and its bank of deposit and account, are Year 2000 compliant. During 1999, the Partnership will confirm such compliance, and believes that alternate servicing arrangements of a compliant nature would be available to the Partnership in the event any noncompliance is experienced. 21 Tenants Finally, the Partnership's entire income is derived from the payment of rents, and the impact of Year 2000 problems on the viability and credit worthiness of tenants could pose a significant economic threat to the income and profitability of the Partnership. However, approximately 85% of the Partnership's tenants are residential and are not subject to the same magnitude of risk that might be incurred in a tenant mix which was more commercially oriented. Further, no commercial tenant accounts for more than 1% of the gross rental income of the Partnership, and the Partnership therefore does not consider its gross income or profitability to be materially at risk by reason of possible impact of the Year 2000 problem on its tenant population. On or before March 31, 1999, the Partnership intends to seek written assurance of substantial compliance by its largest commercial tenants with Year 2000 issues, both on the part of such tenants and their respective essential third-party trading partners. Risks Summarized Failure of the Partnership adequately to provide for Year 2000 compliance with respect to its financial operations could result in an inability to collect, credit or track rental income. Failure to bring computerized operational systems within its real estate holdings into compliance might cause liability on the part of the Partnership for economic or physical loss to its tenants and the invitees of those tenants in excess of applicable insurance coverages. The failure of third-party vendors to provide adequate financial support to the rental collection and crediting function could have a significant negative impact on the gross income and net profit of the Partnership, and the inability of the Partnership's tenants to sustain financial health would, in turn, result in a reduction of gross rentals received by the Partnership. 22 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 16, 1998 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. 23 EX-27 2 EX-27
5 12-MOS DEC-31-1998 SEP-30-1998 329,668 2,756,053 502,381 0 0 5,845,424 70,257,877 19,238,150 58,016,099 2,837,601 0 0 0 0 3,692,193 58,016,099 13,647,899 13,783,131 0 0 8,895,981 0 3,460,287 1,645,332 0 0 0 0 0 1,645,332 9.50 9.50
-----END PRIVACY-ENHANCED MESSAGE-----