- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 JUNE 30, 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 of Incorporation or Organization) (I.R.S. Employer 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. Consolidated Balance Sheets--June 30, 1999 and December 31, 1998................................. 2 Consolidated Statements of Operations--Three Months Ended June 30, 1999 and June 30, 1998, and Six Months Ended June 30, 1999 and June 30, 1998................................................. 3 Consolidated Statements of Cash Flows--Six Months Ended June 30, 1999 and June 30, 1998.......... 4 Consolidated Statement of Changes in Partners' Capital........................................... 5 Notes to Consolidated Financial Statements....................................................... 6 Item 2. Results of Operations........................................................................... 12 PART II--OTHER INFORMATION SIGNATURES......................................................................... 17 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JUNE 30, 1999 DECEMBER 31, (UNAUDITED) 1998 ------------- ------------- ASSETS Rental Properties.................................................................. $ 58,396,372 $ 50,868,382 Cash and Cash Equivalents.......................................................... 1,144,783 623,078 Short-term Investments............................................................. 5,144,852 3,060,373 Rents Receivable................................................................... 472,182 509,914 Real Estate Tax Escrows............................................................ 517,633 538,852 Prepaid Expenses and Other Assets.................................................. 2,117,629 1,710,537 Investment in Joint Venture........................................................ 45,660 58,910 Financing and Leasing Fees......................................................... 1,101,156 1,036,058 Mortgage Notes Receivable.......................................................... 480,872 -- ------------- ------------- TOTAL ASSETS................................................................... $ 69,421,139 $ 58,406,104 ------------- ------------- ------------- ------------- LIABILITIES AND PARTNERS' CAPITAL Mortgages Payable.................................................................. $ 61,215,234 $ 51,322,552 Accounts Payable and Accrued Expenses.............................................. 1,104,125 868,425 Advance Rental Payments and Security Deposits...................................... 2,343,640 1,943,247 ------------- ------------- Total Liabilities.............................................................. 64,662,999 54,134,224 Commitments and Contingent Liabilities (Note 8) Partners' Capital 173,252 units outstanding in 1999 and 1998..................................... 4,758,140 4,271,880 ------------- ------------- TOTAL LIABILITIES AND PARTNERS' CAPITAL............................................ $ 69,421,139 $ 58,406,104 ------------- ------------- ------------- ------------- See notes to consolidated financial statements 2 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, (UNAUDITED) (UNAUDITED) -------------------- -------------------- 1999 1998 1999 1998 --------- --------- --------- --------- REVENUES: Rental income............................... $4,824,390 $4,545,545 $9,602,588 $9,081,735 Laundry and sundry income................... 42,013 40,479 72,047 85,403 --------- --------- --------- --------- 4,866,403 4,586,024 9,674,635 9,167,138 --------- --------- --------- --------- Expenses: Administrative.............................. 246,266 303,151 536,190 603,048 Depreciation and amortization............... 876,814 801,713 1,731,306 1,597,736 Interest.................................... 1,197,794 1,154,110 2,360,629 2,310,368 Management Fees............................. 206,589 194,035 413,369 388,131 Operating................................... 349,531 406,848 1,006,094 1,046,711 Renting..................................... 76,513 81,102 128,267 121,192 Repairs and Maintenance..................... 661,950 680,453 1,222,261 1,223,295 Taxes and Insurance......................... 475,258 463,120 985,980 960,265 --------- --------- --------- --------- 4,090,715 4,084,532 8,384,096 8,250,746 --------- --------- --------- --------- Income from Operations........................ 775,688 501,492 1,290,539 916,392 --------- --------- --------- --------- Other Income (Loss) Interest income............................. 117,747 38,253 176,069 76,660 Income from investment in partnership and joint venture............................. 9,299 5,070 14,230 1,948 Unrealized appreciation (depreciation) in investment................................ (206,594) 5,301 (269,629) (1,176) Gain on the sale of real estate............. 676,124 -- 676,124 -- --------- --------- --------- --------- 596,576 48,624 596,794 77,432 --------- --------- --------- --------- Net Income.................................... $1,372,264 $ 550,116 $1,887,333 $ 993,824 --------- --------- --------- --------- --------- --------- --------- --------- Net Income per Unit........................... $ 7.92 $ 3.18 $ 10.89 $ 5.74 --------- --------- --------- --------- --------- --------- --------- --------- Weighted Average Number of Units Outstanding................................... 173,252 173,252 173,252 173,252 --------- --------- --------- --------- --------- --------- --------- --------- See notes to consolidated financial statements 3 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED JUNE 30, (UNAUDITED) ------------------------- 1999 1998 ------------ ----------- Cash Flows from Operating Activities Net Income..................................................... $ 1,887,333 $ 993,824 ------------ ----------- Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization.................................. 1,731,306 1,597,736 (Income) loss from investments in partnerships and joint venture...................................................... (14,230) (1,948) Gain on the sale of rental property............................ (676,124) -- Unrealized depreciation on short-term investments.............. 269,629 -- Decrease in rents receivable................................... 37,732 135,202 (Increase) in financing and leasing fees....................... (230,149) (10,274) Increase (Decrease) in accounts payable........................ 235,700 (21,566) Decrease in real estate tax escrow............................. 21,219 41,228 (Increase) Decrease in prepaid expenses and other assets....... (407,092) 119,039 Increase in advance rental payments and security deposits...... 400,393 106,825 Increase in notes receivable................................... (480,872) -- ------------ ----------- Total Adjustments.............................................. 1,563,636 1,966,242 ------------ ----------- Net cash provided by operating activities...................... 3,450,969 2,960,066 Cash Flows from Investing Activities Distribution from joint venture................................ 27,480 -- Purchase and improvement of rental properties.................. (9,213,059) (1,083,933) Maturity of short-term investments............................. 2,033,832 -- Purchase of short-term investments............................. (4,594,918) (485,169) Sale of rental property........................................ 850,000 -- ------------ ----------- Net cash (used in) investing activities........................ (12,940,827) (1,569,102) ------------ ----------- Cash Flows from Financing Activities Principal payments and early repayment of mortgages payable.... (482,540) (310,271) Distributions to partners...................................... (1,401,073) (709,185) Proceeds from the refinancing.................................. 5,283,025 -- Proceeds from notes payable.................................... 5,244,113 -- ------------ ----------- Net cash provided by (used in) financing activities............ 8,643,525 (1,019,456) ------------ ----------- Net Increase in Cash and Cash Equivalents........................ 521,705 371,508 Cash and Cash Equivalents, Beginning............................. 623,078 456,277 ------------ ----------- Cash and Cash Equivalents, Ending................................ $ 1,144,783 $ 827,785 ------------ ----------- ------------ ----------- See notes to consolidated financial statements 4 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.................................... 795,059 188,827 9,938 993,824 ---------- --------- ----------- ---------- Balance, June 30, 1998........................ $2,996,962 $ 715,234 $ 37,673 $3,749,869 ---------- --------- ----------- ---------- ---------- --------- ----------- ---------- Units authorized and issued, net of 6,973 Treasury Units at June 30, 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.................................... 1,509,866 358,593 18,874 1,887,333 ---------- --------- ----------- ---------- Balance, June 30, 1999........................ $3,803,579 $ 906,805 $ 47,756 $4,758,140 ---------- --------- ----------- ---------- ---------- --------- ----------- ---------- Units authorized and issued, net of 6,973 Treasury Units at June 30, 1999............. 138,602 32,918 1,732 173,252 ---------- --------- ----------- ---------- ---------- --------- ----------- ---------- See notes to consolidated financial statements 5 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 a 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. CASH EQUIVALENTS: The Partnerships consider cash equivalents to be all highly liquid instruments purchased with a maturity of three months or less. 6 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 June 30, 1999 approximately $900,000 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 $30,409 and $45,842 for the six months ended June 30, 1999 and 1998, respectively. NOTE 2--RENTAL PROPERTIES Rental properties consist of the following: JUNE 30, DECEMBER 31, USEFUL 1999 1998 LIFE ------------- ------------- ------------- Land................................................................ $ 12,974,908 $ 9,710,733 -- Buildings........................................................... 48,501,096 43,627,173 25-31 years Building improvements............................................... 13,069,674 12,610,196 15-31 years Kitchen cabinets.................................................... 1,223,296 1,138,588 5-10 years Carpets............................................................. 1,244,869 1,176,261 5-10 years Air conditioning.................................................... 281,777 281,776 7-10 years Land improvements................................................... 747,635 684,850 10-31 years Laundry equipment................................................... 58,791 58,081 5-7 years Elevators........................................................... 133,211 57,952 20 years Swimming pools...................................................... 42,450 42,450 10 years Equipment........................................................... 732,014 649,370 5-7 years Motor vehicles...................................................... 65,926 65,926 5 years Fences.............................................................. 30,495 18,624 5-10 years Furniture and fixtures.............................................. 402,793 390,209 5-7 years Smoke alarms........................................................ 19,705 17,817 5-7 years ------------- ------------- 79,528,640 70,530,006 ------------- ------------- Less accumulated depreciation....................................... 21,132,268 19,661,624 ------------- ------------- $ 58,396,372 $ 50,868,382 ------------- ------------- ------------- ------------- 7 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2--RENTAL PROPERTIES (CONTINUED) On May 27, 1999 the Partnership purchased a 39,600 square feet commercial property known as Staples Plaza, located in Framingham, Massachusetts. The purchase price was $8,200,000. The Partnership assumed an 8% mortgage on the property of $5,267,949 which matures in June 2017. 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 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 $413,369 and $388,131 for the six months ended June 30, 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 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 the six months ended June 30, 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 six months ended June 30, 1999 and 1998, approximately $241,000 and $248,000 was charged to NERA for legal, maintenance, architectural services and supervision of capital improvements. Approximately $66,000 and $96,000 was capitalized during the six months ended June 30, 1999 and 1998 in leasehold improvements. Included in the 1999 expenses referred to above, approximately $95,000 is recorded in repairs and maintenance, and $80,000 in administrative expense. Included in the 1998 expenses referred to above, approximately $75,000 is recorded in repairs and maintenance, and approximately $77,000 is included in administrative expenses. Additionally in each of the six months ended June 30, 1999 and 1998 the Partnership paid to the management company $31,250 and $30,000 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 employed by the management company performed asset management consulting services for NERA and the management company and subsequently was appointed President of the management company. This individual continues to receive asset management fees from NERA, receiving $15,150 during the six months ended June 30, 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 $646,420 at June 30, 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). 8 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3--RELATED PARTY TRANSACTIONS (CONTINUED) 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. 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 June 30, 1999 mutual funds with a cost of $5,414,481 was recorded at its market value of $5,144,852. At June 30, 1998 a mutual fund with a cost of $2,541,774 was recorded at its market value of $2,540,598. The unrealized (loss) of ($269,629) and ($1,176) is included in other income (loss) at June 30, 1999 and 1998 respectively. Included in prepaid expenses and other assets at June 30, 1999 and December 31, 1998, is approximately $788,000 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 $45,660 and $58,910 at June 30, 1999 and December 31, 1998 respectively. In 1998, the Partnership disposed of a 10% ownership interest in a real estate partnership accounted for by the equity method and 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. NOTE 5--MORTGAGES PAYABLE At June 30, 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 June 30, 1999 the interest rate on these loans ranged from 7.07% to 9.25% payable in monthly installments aggregating approximately $495,000 including interest, to various dates through 2017. Although the majority of 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........................................ 985,000 2001............................................................ 1,068,000 2002............................................................ 1,158,000 2003............................................................ 1,256,000 2004............................................................ 1,362,000 Thereafter...................................................... 55,386,000 --------- 61,215,000 --------- --------- On March 24, 1999, the Partnership refinanced the outstanding mortgage on 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. 9 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: SIX MONTHS ENDED JUNE 30, -------------------- 1999 1998 --------- --------- Net Income per Depositary Receipt............................................. $ 1.09 $ .57 --------- --- --------- --- 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. NOTE 9--RENTAL INCOME During the six months ended June 30, 1999, approximately 86% of rental income was related to residential apartments and condominium units with leases of one year or less. The remaining 14% was related to commercial properties which have minimum future rental income on noncancellable operating leases as follows: COMMERCIAL PROPERTY LEASES LAND LEASES TOTAL ------------ ------------ ------------ 2000................................................ 2,532,000 140,000 2,672,000 2001................................................ 2,279,000 150,000 2,429,000 2002................................................ 2,130,000 150,000 2,280,000 2003................................................ 1,976,000 150,000 2,126,000 2004................................................ 1,851,000 150,000 2,001,000 Thereafter.......................................... 10,655,000 875,000 11,530,000 ------------ ------------ ------------ 21,423,000 1,655,000 23,038,000 ------------ ------------ ------------ ------------ ------------ ------------ 10 NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 9--RENTAL INCOME (CONTINUED) 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 June 30, 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 is $14,230 and $1,948 for the six months ended June 30, 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 $442,000 and $483,000 for the six months ended June 30, 1999 and 1998 respectively. Rents receivable are net of allowances for doubtful accounts of $98,738 at June 30, 1999 and $135,559 at December 31, 1998. NOTE 10--CASH FLOW INFORMATION During the six months ended June 30, 1999 and 1998, cash paid for interest was $2,325,525 and $2,278,529 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. 11 RESULTS OF OPERATIONS New England Realty Associates Limited Partnership and its Subsidiary Partnerships earned income from operations of $775,688 for the three months ended June 30, 1999, compared to $501,492 for the three months ended June 30, 1998 an increase of $274,196. For the six months ended June 30, 1999, income from operations was $1,290,539 compared to $916,392 for the six months ended June 30, 1998, an increase of $374,147. The rental activity is summarized as follows: OCCUPANCY DATE ------------------------ JUNE 30, JUNE 30, 1999 1998 ----------- ----------- RESIDENTIAL Units............................................... 1652 1668 Vacancies........................................... 28 37 Vacancy rate........................................ 1.7% 2.2% COMMERCIAL Total square feet................................... 496,700 457,700 Vacancy............................................. 70,000 93,000 Vacancy rate........................................ 14% 20% RENTAL INCOME (IN THOUSANDS) -------------------- 1999 1998 --------- --------- Total rents................................................. $ 9,603 $ 9,082 Residential percentage...................................... 86% 89% Commercial percentage....................................... 14% 11% Contingent rentals.......................................... $ 271 $ 483 Rental income for the three months ended June 30, 1999 was $4,824,390 compared to $4,545,545 for the three months ended June 30, 1998, an increase of $278,845 (6.1%). Rental income for the six months ended June 30, 1999 was $9,602,588, compared to $9,081,735 for the six months ended June 30, 1998, an increase of $520,853 (5.7%). Rental income increased at the commercial properties approximately $63,000 during the six months ended June 30, 1999 due to the acquisition of the Staples Plaza in Framingham, Massachusetts. The rental income from the Staples Plaza since the acquisition on May 27, 1999 was $84,292. Rental income from the Partnership's existing properties decreased slightly due to vacancies at 62 Boylston Street. One major tenant and several smaller tenants moved out in late 1998 and the space remained vacant during the first six months of 1999. At June 30, 1999, the Partnership has obtained signed leases for the previously vacant space at 62 Boylston Street. Rental income increased at the residential properties approximately $458,000 during the six months ended June 30, 1999, compared to the six months ended June 30, 1998. The demand for residential apartments remains very strong in the greater Boston area. As a result, vacancies have decreased to 28 at June 30, 1999 compared to 37 at June 30, 1998. Rental rates at the residential properties have also increased 6-7% at June 30, 1999 compared to June 30, 1998. Expenses for the three months ended June 30, 1999 were $4,090,715 compared to $4,084,532 for the three months ended June 30, 1998, an increase of $6,183. Interest expense increased $43,684 from $1,154,110 for the three months ended June 30, 1998 to $1,197,794 for the three months ended June 30, 1999. The Partnership incurred additional debt of $5,200,000 during the three months ended June 30, 1999 due to the acquisition of the Staples Plaza in May 1999. In addition, the Partnership refinanced the Westgate Apartments in March 1999, resulting in additional debt of $5,300,000. 12 Management believes that its reserves are sufficient to service the the new debt of $10,500,000. Management fees increased $12,554 from $194,035 for the three months ended June 30, 1998 to $206,589 for the three months ended June 30, 1999. This increase is due to the increase in rental income. Taxes and insurance increased $12,138 from $463,120 for the three months ended June 30, 1998 to $475,258 for the six months ended June 30, 1999. This increase is due to an increase in the real estate taxes in 1999 compared to the same period in 1998. These increases are offset by a decrease in administrative expenses of $56,885 from $303,151 for the three months ended June 30, 1998 to $246,266 for the three months ended June 30, 1999. This decrease is due to significant accounting costs incurred in 1998 due to special projects done in 1998 which are not recurring costs in 1999. Operating expenses decreased $57,317 from $406,848 for the six months ended June 30, 1998 to $349,531 for the six months ended June 30, 1999. This decrease is due to lower utility costs in 1999 as a result of a milder winter in 1999 compared to 1998. Repairs and maintenance expenses decreased $18,503 from $680,453 for the three months ended June 30, 1998 to $661,950 for the three months ended June 30, 1999. This increase is due to the significant repairs done to the Partnership properties in 1998. Expenses for the six months ended June 30, 1999 were $8,384,096 compared to $8,250,746 for the six months ended June 30, 1998, an increase of $133,350. This increase in expenses includes increases of $50,261 in interest expense; an increase of $25,715 in taxes and insurance; and an increase of $25,238 in the management fees. These increases are offset by a decrease of $66,858 in administrative expenses, and a decrease of $40,617 in operating expenses. An explanation of these fluctuations is described in the preceding paragraph. Interest income was $117,747 for the three months ended June 30, 1999 compared to $38,253 for the three months ended June 30, 1998, an increase of $79,494. Interest income was $176,069 for the six months ended June 30, 1999 compared to $76,660 for the six months ended June 30, 1998 an increase of $99,409. These increases are due to an increase in the cash 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 June 30, 1999 in the joint venture at the Timpany Plaza Shopping Center was $9,299 compared to $5,070 for the three months ended June 30, 1998, a fluctuation of $4,229. For the six months ended June 30, 1999, income from the joint venture was $14,230 compared to $1,948 for the six months ended June 30, 1998, an increase of $12,282. These increases in income at the joint venture are due to a rental rate increase in 1999 from a significant tenant. Included in other income (loss) during the three and six months ended is a gain of $676,124 on the sale of the Williard Street Apartments. This property was sold for $850,000 in April 1999. Also included in other income (loss) during three months ended June 30, 1999 and June 30, 1998 is ($206,594) and $5,301 respectively in unrealized (depreciation) appreciation in the Partnership's short-term investments. For the six months ended June 30, 1999 and June 30, 1998 the unrealized (depreciation) in the Partnership's investment was ($269,629) and ($1,176) respectively. As a result of the changes discussed above, net income for the three months ended June 30, 1999 was $1,372,264 compared to $550,116 for the three months ended June 30, 1998, an increase of $822,148. Net income for the six months ended June 30, 1999 was $1,887,333 compared to $993,824 for the six months ended June 30, 1998, an increase of $893,509. The significant increases in net income for both of these periods is due primarily to the gain of approximately $676,000 on the sale of the Williard Street property. 13 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 $1,144,783 at June 30, 1999 and $623,078 at December 31, 1998 was held in an interest bearing account. The Partnership's short-term investments are $5,144,852 at June 30, 1999 of which $1,886,591 is invested in a Massachusetts Municipal Bond Fund and $3,258,261 is invested in a U.S. Treasury Fund. At December 31, 1998 the Partnerships short-term investments were $3,060,373, of which $1,921,123 was invested in a Massachusetts Municipal Bond Fund and approximately $1,139,250 was 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. On May 27, 1999, the Partnership purchased a 39,600 square foot commercial property known as Staples Plaza, located in Framingham, Massachusetts. The purchase price was $8,200,000. The Partnership assumed an 8% mortgage on the property of $5,267,949 which matures in 2017 and the balance of $2,932,051 was funded from the Partnership's cash reserves, which were adequate to support this purchase. During the second quarter of 1999, the Partnership and its Subsidiary Partnerships completed certain improvements to their properties at a total cost of approximately $669,000. These improvements were funded from cash reserves which were adequate to support these improvements. The most significant improvements were made at the property located at 62 Boylston Street, for a total cost of approximately $285,000. These improvements were made due to the new tenants who have occupied the space at 62 Boylston Street. Significant improvements were also made at Timpany Plaza in Gardner, Massachusetts for a total cost of approximately $120,000. The Partnership signed a ten year lease with a new tenant at the Timpany Plaza Shopping Center and the improvements made during the second quarter of 1999 were made to the newly occupied space. The Partnership also made improvements of approximately $56,000, $34,000 and $31,000 to the apartments at Westgate Woburn, 1144 Commonwealth Avenue, and Executive Apartments. In addition to the improvements made in the second quarter of 1999, the Partnership and its Subsidiary Partnerships plan to invest approximately $1,400,000 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. 14 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 approximately $169,000 during the first six months 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 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 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 newly installed systems 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 $140,000 has 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 as of July 31, 1999, the new computer systems are believed by the Partnership to be Year 2000 compliant and operational, however testing of such systems has not been but should be completed by September 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 15 would be adequate time to effect a different and compliant systems installation if the September 30, 1999 testing date is not met. With respect to building operations, the Partnership has completed its review of all computerized systems which are operant in the Partnership's real estate holdings. 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 has been confirming 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 86% 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 September 30, 1999, the Partnership intends to use best efforts to complete the seeking of 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. 16 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: August 13, 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. 17