SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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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
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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
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-------------- --------------
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
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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
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Income from Operations 514,851 414,900
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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
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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
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Net cash (used in ) investing activities (4,851,152) (192,328)
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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)
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Net Increase in Cash and Cash Equivalents 56,180 174,152
Cash and Cash Equivalents, Beginning 623,078 456,277
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Cash and Cash Equivalents, Ending $ 679,258 $ 630,429
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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
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-------------- --------------
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.
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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.
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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.
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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.
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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.
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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.
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