-----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, SJEGKxpjMQkiwb+OquJJIz9epfCuvnCnRJwquiR5sGxku+7ueAGSUwkogRU9/CLc vDwt6CSOZQoAJOP1IZ+kvw== 0001047469-99-021190.txt : 19990518 0001047469-99-021190.hdr.sgml : 19990518 ACCESSION NUMBER: 0001047469-99-021190 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 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: 99627811 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 March 31, 1999 OR ___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________________ to _____________________ Commission file number 0-12138 New England Realty Associates Limited Partnership (Exact Name of Registrant as Specified in Its Charter) Massachusetts 04-2619298 (State or Other Jurisdiction (I.R.S. Employer of 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 - March 31, 1999 and March 31, 1998 1 Statements of Operations - Three Months Ended March 31, 1999 and March 31, 1998 2 Statements of Cash Flows - Three Months Ended March 31, 1999 and 3 March 31, 1998 Notes to Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 PART II - OTHER INFORMATION Item 5. Other Information SIGNATURES 18
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31, 1999 1998 -------------- -------------- (Unaudited) ASSETS Rental Properties $ 50,444,306 $ 50,868,382 Cash and Cash Equivalents 679,258 623,078 Short-term Investments 7,518,108 3,060,373 Rents Receivable 449,540 509,914 Real Estate Tax Escrows 451,859 538,852 Prepaid Expenses and Other Assets 2,174,538 1,710,537 Investment in Joint Venture 50,741 58,910 Financing and Leasing Fees 1,149,215 1,036,058 -------------- -------------- TOTAL ASSETS $ 62,917,565 $ 58,406,104 -------------- -------------- -------------- -------------- LIABILITIES AND PARTNERS' CAPITAL Mortgages Payable 56,453,664 $ 51,322,552 Accounts Payable and Accrued Expenses 931,999 868,425 Advance Rental Payments and Security Deposits 2,146,028 1,943,247 -------------- -------------- Total Liabilities 59,531,691 54,134,224 Commitments and Contingent Liabilities (Note 8) Partners' Capital 173,252 units outstanding in 1999 and 1998 3,385,874 4,271,880 -------------- -------------- TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 62,917,565 $ 58,406,104 -------------- -------------- -------------- --------------
See notes to consolidated financial statements NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, (UNAUDITED) 1999 1998 ----------- ----------- REVENUES: Rental income $ 4,778,198 $ 4,536,190 Laundry and sundry income 30,034 44,924 ----------- ----------- 4,808,232 4,581,114 ----------- ----------- Expenses: Administrative 289,924 299,897 Depreciation and amortization 854,492 796,023 Interest 1,162,835 1,156,258 Management Fees 206,780 194,096 Operating 656,563 639,863 Renting 51,754 40,090 Repairs and Maintenance 560,311 542,842 Taxes and Insurance 510,722 497,145 ----------- ----------- 4,293,381 4,166,214 ----------- ----------- Income from Operations 514,851 414,900 ----------- ----------- Other Income(Loss) Interest income 58,322 38,407 Income(Loss) from investment in partnership and joint venture 4,931 (3,122) Unrealized depreciation in investment (63,035) (6,477) ----------- ----------- 218 28,808 ----------- ----------- Net Income $ 515,069 $ 443,708 ----------- ----------- ----------- ----------- Net Income per Unit $ 2.97 $ 2.56 ----------- ----------- ----------- ----------- Weighted Average Number of Units Outstanding 173,252 173,252 ----------- ----------- ----------- -----------
See notes to consolidated financial statements 2 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH, 31, (UNAUDITED) 1999 1998 ----------- ----------- Cash Flows from Operating Activities Net Income $ 515,069 $ 443,708 ----------- ----------- Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 854,492 796,023 (Income) loss from investments in partnerships and joint venture (4,931) 3,122 Unrealized depreciation on short-term investments 63,035 -- Decrease in rents receivable 60,374 60,131 (Increase) in financing and leasing fees (200,082) (4,829) Increase(Decrease) in accounts payable 63,566 (65,662) Decrease in real estate tax escrow 86,993 4,783 (Increase) in prepaid expenses and other assets (464,001) (31,867) Increase in advance rental payments and security deposits 202,781 23,711 ----------- ----------- Total Adjustments 662,227 785,412 ----------- ----------- Net cash provided by operating activities 1,177,296 1,229,120 Cash Flows from Investing Activities 13,101 -- Distribution from joint venture (343,483) -- Purchase and improvement of rental properties -- (584,310) Maturity of short-term investments (4,520,770) 391,982 ----------- ----------- Net cash (used in ) investing activities (4,851,152) (192,328) ----------- ----------- Cash Flows from Financing Activities Principal payments and early repayment of mortgages payable (151,916) (153,455) Distributions to partners (1,401,073) (709,185) Proceeds from the refinancing 5,283,025 -- ----------- ----------- Net cash provided by (used in) financing activities 3,730,036 (862,640) ----------- ----------- Net Increase in Cash and Cash Equivalents 56,180 174,152 Cash and Cash Equivalents, Beginning 623,078 456,277 ----------- ----------- Cash and Cash Equivalents, Ending $ 679,258 $ 630,429 ----------- ----------- ----------- -----------
See notes to consolidated financial statements 3 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' CAPITAL
Units ---------------------------------------------------------------- Limited General ------------------------------ Partnership Class A Class B Class C Total ------------- ------------- ------------- ------------- Balance, January 1, 1998 $ 2,769,251 $ 661,152 $ 34,827 $ 3,465,230 Distribution to Partners (567,348) (134,745) (7,092) (709,185) Net Income 354,966 84,304 4,438 443,708 ----------- ----------- ----------- ----------- Balance, March 31, 1998 $ 2,556,869 $ 610,711 $ 32,173 $ 3,199,753 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Units authorized and issued, net of 6,973 Treasury Units at March 31, 1998 138,602 32,918 1,732 173,252 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Balance, January 1, 1999 $ 3,414,571 $ 814,416 $ 42,893 $ 4,271,880 Distribution to Partners (1,120,858) (266,204) (14,011) (1,401,073) Net Income 412,054 97,863 5,150 515,067 ----------- ----------- ----------- ----------- Balance, March 31, 1999 $ 2,705,767 $ 646,075 $ 34,032 $ 3,385,874 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Units authorized and issued, net of 6,973 Treasury Units at March 31, 1999 138,602 32,918 1,732 173,252 ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
See notes to consolidated financial statements 4 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. 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. 5 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 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; 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 1999 or 1998. 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 March 31, 1999, approximately $400,000 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. ADVERTISING EXPENSE: Advertising is expensed as incurred. Advertising expense was $15,338 and $14,503 for the three months ended March 31, 1999 and 1998, respectively. NOTE 2--RENTAL PROPERTIES Rental properties consist of the following:
MARCH 31, DECEMBER 31, USEFUL 1999 1998 LIFE -------------- -------------- ---------------- Land $9,710,733 $9,710,733 Buildings 43,627,173 43,627,173 25-31 years Building improvements 12,826,305 12,610,196 15-31 years Kitchen cabinets 1,180,868 1,138,588 5-10 years Carpets 1,214,649 1,176,261 5-10 years Air conditioning 281,776 281,776 7-10 years Land improvements 685,707 684,850 10-31 years Laundry equipment 58,081 58,081 5-7 years Elevators 69,361 57,952 20 years Swimming pools 42,450 42,450 10 years Equipment 680,140 649,370 5-7 years Motor vehicles 65,926 65,926 5 years Fences 18,624 18,624 5-10 years Furniture and fixtures 393,293 390,209 5-7 years Smoke alarms 18,409 17,817 5-7 years -------------- -------------- 70,873,495 70,530,006 Less accumulated depreciation 20,429,189 19,661,624 -------------- -------------- $50,444,306 $50,868,382 -------------- -------------- -------------- --------------
6 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 $206,780 and $194,096 for the three months ended March 31, 1999 and 1998, respectively. Advance rental payments and security deposits are held in escrow by the management company (see Note 6). The management company also receives a mortgagee 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 the three months ended March 31, 1999 and the year ended December 31, 1998. The Partnership Agreement also permits the General Partner or management company to charge the costs of professional services (such as counsel, accountants, and contractors that otherwise would be charged by third party vendors) to NERA. During the three months ended March 31, 1999 and 1998, approximately $132,000 and $124,000 was charged to NERA for legal, maintenance, architectural services and supervision of capital improvements. Approximately $36,000 and $44,000 was capitalized during the three months ended March 31, 1999 and 1998 in leasehold improvements. Included in the 1999 expenses referred to above, approximately $56,000 is recorded in repairs and maintenance, and $38,000 in administrative expense. Included in the 1998 expenses referred to above, approximately $41,000 is recorded in repairs and maintenance, and approximately $39,000 is included in administrative expenses. Additionally in each of the quarters ended March 31, 1999 and 1998 the Partnership paid to the management company $16,250 and $15,000 respectively 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 1999 or 1998. In 1996, an 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, receiving $7,650 during the three months ended March 31, 1999 and $31,200 during the year ended December 31, 1998. Included in prepaid expenses and other assets were amounts due from related parties of $571,497 at March 31, 1999 and $534,357 at December 31, 1998 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). See Note 9 for rental arrangements with Timpany Plaza joint venture. As described in Note 4, the Partnership had interests in certain entities in which the majority shareholder of the General Partner is also involved. 7 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4--OTHER ASSETS Short-term investments are considered to be trading securities per FAS 115 and are carried on the balance sheet at their fair value. At March 31, 1999, mutual funds with a cost of $7,581,143 was recorded at its market value of $7,518,108. At March 31, 1998, a mutual fund with a cost of $1,669,924 was recorded at its market value of $1,663,447. The unrealized (loss) of ($63,035) and ($6,477 ) is included in other income (loss) at March 31, 1999 and 1998 respectively. Included in prepaid expenses and other assets at March 31, 1999 and December 31, 1998, is approximately $658,000 and $567,000 respectively held in escrow to pay future capital improvements (See Note 5). The carrying value of the Partnership's 50% interest in the Timpany Plaza joint venture, at equity, is $50,741 and $58,910 at March 31, 1999 and December 31, 1998 respectively. In 1998, the Partnership disposed of a 10% ownership interest in a real estate partnership which had been accounted for by the equity method and which had been reduced to a carrying value of zero. Losses in excess of cost in limited partnerships had not been recorded as the Partnership is not liable for such amounts. This sale did not result in any proceeds to the Partnership. The majority shareholder of the General Partner was also the majority owner of this partnership. As a result of the disposition of this Limited Partnership interest, each of the limited partners will recognize income in an amount equal to their proportionate share of Partnership's losses in excess of such limited partner's tax basis. NOTE 5--MORTGAGES PAYABLE At March 31, 1999 and December 31, 1998, the mortgages payable consisted of various loans, substantially all of which were secured by first mortgages on properties referred to in Note 2. At March 31, 1999 the interest rate on these loans ranged from 7.07% to 9.25% payable in monthly installments aggregating approximately $450,000 including interest, to various dates through 2014. 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: 2000--current maturities $ 822,000 2001 891,000 2002 968,000 2003 1,050,000 2004 1,138,000 Thereafter 51,584,000 --------------- $56,453,000 --------------- ---------------
In March 1999, the Partnership refinanced the outstanding mortgage of approximately $6,700,000 maturing in 2000, on the Westgate apartments. The new 15 year mortgage is for $12,000,000 at a 7.07% interest rate with an amortization schedule of 25 years. This refinancing is reflected in the above maturity schedule. 8 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. In March 1999, the Partnership declared a regular semi-annual dividend of $4.60 and a special dividend of $3.50 per unit. In March 1998, the Partnership declared a regular semi-annual dividend of $4.10 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:
Three Months Ended MARCH 31, ---------------------------- 1999 1998 --------- --------- Net Income per Depositary Receipt $ .28 $ .26 --------- --------- --------- ---------
NOTE 8--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. 9 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 9--RENTAL INCOME During the three months ended March 31, 1999, approximately 85% of rental income was related to residential apartments and condominium units with leases of one year or less. The remaining 15% was related to commercial properties which have minimum future rental income on noncancellable operating leases as follows:
COMMERCIAL PROPERTY LEASES LAND LEASES TOTAL -------------- -------------- -------------- 2000 $1,597,000 $ 130,000 $1,727,000 2001 1,530,000 150,000 1,680,000 2002 1,136,000 150,000 1,286,000 2003 962,000 150,000 1,112,000 2004 813,000 150,000 963,000 Thereafter 1,610,000 913,000 2,523,000 -------------- -------------- -------------- $7,648,000 $1,643,000 $9,291,000 -------------- -------------- -------------- -------------- -------------- --------------
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 March 31, 1999 and December 1998 is $201,875 and $167,500 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 (loss) is $4,931 and ($3,122) for the three months ended March 31, 1999 and 1998 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 $256,000 and $271,000 for the three months ended March 31, 1999 and 1998 respectively. Rents receivable are net of allowances for doubtful accounts of $57,584 at March 31, 1999 and $135,559 at December 31, 1998. 10 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10--CASH FLOW INFORMATION During the three months ended March 31, 1999 and 1998, cash paid for interest was $1,143,250 and $1,140,943 respectively. NOTE 11--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 12--SUBSEQUENT EVENT On April 30, 1999, the Partnership sold the Willard Street apartments located in Quincy, Massachusetts for $850,000. The purchaser paid $85,000 in cash, assumed the existing mortgage of approximately $285,000 and gave to the Partnership a mortgage note for the remaining $480,000. This 7.5% mortgage note is collateralized by other real estate owned by the purchaser and matures at the earlier of the refinancing of the purchased property or July 31, 2005, the maturity date of the assumed mortgage. In March 1999, the Partnership entered into an agreement to purchase a 39,600 square foot commercial property known as Staples Plaza, located in Framingham, Massachusetts. The purchase price is $8,200,000. The Partnership will assume an 8% mortgage on the property of approximately $5,200,000, maturing in 2016 and the balance of $3,000,000 will be funded from the Partnership's cash reserves. The Partnership plans to close on the property in June 1999. This purchase is conditional on the assignment of the existing mortgage which has not been obtained as of May 12, 1999. 11 RESULTS OF OPERATIONS New England Realty Associates Limited Partnership and its Subsidiary Partnerships earned income from operations of $514,851 for the three months ended March 31, 1999 compared to $414,900 for the three months ended March 31, 1998 an increase of $99,951. The rental activity is summarized as follows:
Occupancy Date April 29, 1999 March 31, 1998 - -------------------------------------------------------------------------------------- RESIDENTIAL Units 1668 1668 Vacancies 25 30 Vacancy rate 1.5% 1.7% COMMERCIAL Total square feet 457,700 457,700 Vacancy 69,000 92,000 Vacancy rate 15% 20% - -------------------------------------------------------------------------------------- Rental Income (in thousands) 1999 1998 - -------------------------------------------------------------------------------------- Total rents $4,778 $4,536 Residential percentage 85% 85% Commercial percentage 15% 15% Contingent rentals $ 271 $ 256
Rental income for the three months ended March 31, 1999 was approximately $4,778,000 compared to approximately $4,536,000 for the three months ended March 31, 1998 an increase of approximately $242,000 (5.3%). Rental income increased at the residential properties approximately $237,000 (6%), while rental income at the commercial properties remained relatively stable. The demand for residential rental property in the greater Boston area remains strong with an increase in rental rates of approximately 5% during the three months ended March 31, 1999 compared to the three months ended March 31, 1998. Vacancies at the residential properties have also decreased to 25 vacancies at April 29, 1999 compared to 30 at March 31, 1998. At the commercial properties, vacancies decreased during the first quarter of 1999, and there was little change in the commercial rental rates. Expenses for the three months ended March 31, 1999 were approximately $4,293,000 compared to approximately $4,166,000 for the three months ended March 31, 1999, an increase of approximately $127,000. Interest expense increased $6,577 from $1,156,258 for the three months ended March 31, 1998 to $1,162,835 for the three months ended March 31, 1999. This increase is due to a higher level of debt due to the refinancing of the Westgate apartments in March 1999. 12 Management fees increased $12,684 from $194,096 for the three months ended March 31, 1998 to $206,780 for the three months ended March 31, 1999. This increase is due to the increase in rental income. Operating expenses increased $16,700 from $639,863 for the three months ended March 31, 1998 to $656,563 for the three months ended March 31, 1999. This increase is due to an increase in the costs of snow removal in 1999 compared to the same period in 1998. Renting expenses increased $11,665 from $40,090 for the three months ended March 31, 1998 to $51,754 for the three months ended March 31, 1999. This increase is due to an increase in rental commissions due to a higher level of tenant turnover, as well as higher rental rates. Taxes and insurance increased $13,577 from $497,145 for the three months ended March 31, 1998 to $510,722 for the three months ended March 31, 1999. This increase is due to an increase in real estate taxes of approximately $22,000 offset by a decrease in insurance costs of approximately $9,000. Real estate taxes increased at most of the partnership properties with the most significant increase, $12,825 at the Westgate Apartments. The Partnership has filed for an abatement for the taxes paid on behalf of Westgate. Insurance expenses have decreased due to a drop in the premiums due to fewer claims being made by the Partnership properties. Repairs and maintenance expenses increased $17,469 from $542,842 for the three months ended March 31, 1998 to $560,311 for the three months ended March 31, 1999. This increase is due to the ongoing repairs to Partnership properties. Interest income was approximately $58,000 for the three months ended March 31, 1999 compared to approximately $38,000 for the three months ended March 31, 1999, an increase of approximately $20,000. This increase is due to an increase in the cash balance available for investment in 1999. 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 for the three months ended March 31, 1999 in the joint venture at the Timpany Plaza Shopping Center was approximately $5,000 compared to a loss of approximately $3,000 for the three months ended March 31, 1998, a fluctuation of approximately $8,000. This increase in income at the joint venture is due to a rental rate increase from a significant tenant. Included in other income (loss) during three months ended March 31, 1999 and 1998 is approximately $63,000 and $6,000 respectively in unrealized depreciation in the Partnership's short-term investment. 13 As a result of the changes discussed above, net income for the three months ended March 31, 1999 was approximately $515,000 compared to approximately $444,000 for the three months ended March 31, 1998, an increase of approximately $71,000. LIQUIDITY AND CAPITAL RESOURCES The Partnership's principal source of cash during 1999 and 1998 was the collection of rents and the refinancing of a Partnership property. The majority of cash and cash equivalents of approximately $679,000 at March 31, 1999 and approximately $623,000 at March 31, 1999 was held in an interest bearing account. The Partnership's short-term investments are approximately $7,518,000 at March 31, 1999 of which approximately $1,933,000 is invested in a Massachusetts Municipal Bond Fund and approximately $5,585,000 is invested in a U.S. Treasury Fund. At December 31, 1998 the Partnerships short-term investments are approximately $3,060,000, of which approximately $1,921,000 is invested in a Massachusetts Municipal Bond Fund and approximately $1,139,000 is invested in a U.S. Treasury Fund. On April 30, 1999, the Partnership sold the Willard Street Apartments located in Quincy, Massachusetts. The sale price was $850,000. The buyer assumed the first mortgage of approximately $285,000, and the Partnership took back a mortgage of approximately $480,000 at a rate of 7.5%. The net cash from the sale of this property was approximately $85,000. The mortgage matures at the earlier of the refinancing of the property or July 31, 2005. On March 24, 1999, the Partnership refinanced the Westgate Apartments located in Woburn, Massachusetts. The new loan is $12,000,000 with an interest rate of 7.07%, and a term of 15 years, amortized over 25 years. The net cash of approximately $5,000,000 from this refinancing will be used for future acquisitions and redevelopment of the Westgate Apartments. In March 1999, the Partnership entered into an agreement to purchase a 39,600 square foot commercial property known as Staples Plaza, located in Framingham, Massachusetts. The purchase price is $8,200,000. The Partnership will assume an 8% mortgage on the property of approximately $5,200,000 maturing in 2016 and the balance of $3,000,000 will be funded from the Partnership's cash reserves. The Partnership plans to close on the property in June 1999. The purchase is conditional on the assignment of the existing mortgage which has not been obtained as of May 12, 1999. During the first quarter of 1999, the Partnership and its Subsidiary Partnerships completed certain improvements to their properties at a total cost of approximately $343,000. The most significant improvements were made at the Timpany Plaza Shopping Center, located in Gardner, Massachusetts for a total cost of approximately $108,000. The Partnership signed a ten year lease with a new tenant at the Timpany Plaza Shopping Center and the improvements made during the first quarter of 1999 were made to the newly occupied space. Other improvements of approximately $62,000, $36,000 and $29,000 were made to the apartments at 62 Boylston Street, Courtyard on North Beacon, and Westgate Woburn. 14 In addition to the improvements made in the first quarter of 1999, the Partnership and its Subsidiary Partnerships plan to invest approximately $2,100,000 in capital improvements, the majority of which will be done at the residential properties. These improvements will be funded from escrow accounts as well as from the Partnership's cash reserves. The Partnership anticipates that cash from operations and interest-bearing investments and mortgage refinancings 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 contain 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 LP in Lewiston, Maine, which paid rents of approximately $90,000 during the first quarter of 1999 and $329,000 in 1998, 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. Readiness for Year 2000 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 its 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. 15 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 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 effort 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 $150,000 associated with the replacement of hardware and software by The Hamilton Company, which replacement will address all Year 2000 compliance issues, approximately $100,000 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 quarter of 1998 began 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 June 30, 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 June 30, 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 holding on or before June 30, 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. 16 Vendors The Partnership further has reviewed its relationship with principal vendors. The Partnership is soliciting 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. 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 2% 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 June 30, 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, which coverages (typically) expressly exclude damages caused by Year 2000 issues. The failure of third-party vendors to provide adequate financial support to 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. 17 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: May 17, 1999 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. 18 EX-27 2 EXHIBIT 27
5 12-MOS DEC-31-1999 MAR-31-1999 679,258 7,518,108 449,540 0 0 11,273,303 70,873,495 20,429,189 62,917,565 3,078,027 0 0 0 0 3,385,874 62,917,565 4,778,198 4,808,232 0 0 3,130,546 0 1,162,835 515,069 0 0 0 0 0 515,069 2.97 2.97
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