<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------
FORM 10-Q
(Mark One)
_X_ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996 OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR (15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission file number 0-12138
New England Realty Associates Limited Partnership
(Exact Name of Registrant as Specified in Its Charter)
Massachusetts 04-2619298
(State or Other Jurisdiction of (I.R.S. Employer
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 ___
<PAGE>
INDEX
PART I - FINANCIAL INFORMATION
Page No.
Item 1. Financial Statements.
Balance Sheets - September 30, 1996
and September 30, 1995 3
Statements of Operations - Three and Nine Months
Ended September 30, 1996
and September 30, 1995 4
Statements of Cash Flows - Nine Months
Ended September 30, 1996 and
September 30, 1995 5
Notes to Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 17
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K __
SIGNATURES 22
EXHIBIT 27 Financial Data Schedule
2
<PAGE>
CONSOLIDATED BALANCE SHEETS
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
September 30, December 31,
1996 1995
(Unaudited)
------------ ------------
ASSETS
Rental Properties $ 51,437,551 $ 51,688,269
Cash and Cash Equivalents 2,614,550 2,706,124
Short-term Investments 50,874 48,877
Rents Receivable 719,044 684,409
Real Estate Tax Escrows 484,903 538,945
Prepaid Expenses and Other Assets 1,851,926 1,933,472
Investment in Joint Venture 109,384 129,989
Financing and Leasing Fees 1,738,012 2,020,885
------------ ------------
TOTAL ASSETS $ 59,006,244 $ 59,750,970
------------ ------------
------------ ------------
LIABILITIES AND PARTNERS' CAPITAL
Mortgages Payable $ 52,676,231 $ 53,072,037
Accounts Payable and Accrued
Expenses 651,967 804,865
Advance Rental Payments and Security
Deposits 1,575,470 1,550,666
------------ ------------
Total Liabilities 54,903,668 55,427,568
Commitments and Contingent
Liabilities (Notes 9 and 12)
Partners' Capital:
176,452 units outstanding in 1996
and 177,152 in 1995 4,102,576 4,323,402
------------ ------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 59,006,244 $ 59,750,970
------------ ------------
------------ ------------
See notes to consolidated financial statements.
3
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
(Unaudited) (Unaudited)
----------------------- ------------------------
Revenues:
Rental income $4,056,357 $3,816,626 $12,370,471 $8,335,633
Laundry & sundry income 45,373 45,227 154,394 113,753
---------- ---------- ----------- ----------
4,101,730 3,861,853 12,524,865 8,449,386
---------- ---------- ----------- ----------
Expenses:
Administrative 232,979 164,961 632,764 479,650
Depreciation and
amortization 697,471 659,008 2,071,258 1,512,122
Interest 1,162,115 1,069,833 3,541,724 2,130,615
Management fees 171,193 172,759 524,214 371,612
Operating 356,004 327,862 1,417,133 798,669
Renting 108,365 193,041 170,574 265,230
Repairs & maintenance 687,992 757,377 1,920,601 1,502,389
Taxes & insurance 437,867 434,684 1,362,418 975,003
---------- ---------- ----------- ----------
3,853,986 3,779,525 11,640,686 8,035,290
---------- ---------- ----------- ----------
Income from Operations 247,744 82,328 884,179 414,096
---------- ---------- ----------- ----------
Other income:
Interest income 36,594 7,166 124,938 32,189
Income from investment
in the joint venture 5,531 6,914 17,066 15,766
Gain on the sale of
property - 69,064 - 69,064
---------- ---------- ----------- ----------
42,125 83,144 142,004 117,019
---------- ---------- ----------- ----------
Net Income $ 289,869 $ 165,472 $ 1,026,183 $ 531,115
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Net Income per
Unit $ 1.64 $ .93 $ 5.80 $ 3.00
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Weighted Average Number
of Units Outstanding 176,475 177,152 176,925 177,152
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
See notes to consolidated financial statements.
4
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
Nine Months Ended
September 30,
(Unaudited)
1996 1995*
----------- -----------
Cash Flows from Operating Activities:
Net income $ 1,026,183 $ 531,115
----------- -----------
Adjustments to reconcile net income
to net cash provided by
(used in) operating activities:
Depreciation and amortization 2,071,258 1,512,122
(Income) on investments in
partnerships and joint venture (17,066) (15,766)
(Gain) on the sale of property - (69,064)
(Increase) in rents receivable (34,635) (144,185)
(Increase) in financing and
leasing fees (35,680) (1,344,556)
(Decrease) Increase in accounts payable
and accrued expenses (152,898) 124,281
Decrease(Increase) in real estate
tax escrows 54,042 (416,584)
Decrease(Increase)in prepaid
expenses and other assets 81,546 (2,032,053)
Increase in advance rental payments
and security deposits 24,804 1,084,988
----------- -----------
Total Adjustments 1,991,371 ( 1,300,817)
----------- -----------
Net cash provided by (used in)
operating activities 3,017,554 (769,702)
----------- -----------
Cash Flows from Investing Activities:
Distribution from the joint venture 37,671 41,866
Payment for purchase and improvement
of rental properties (1,501,987) (30,808,861)
Purchase of short-term investments (1,997) (1,560)
----------- -----------
Net cash (used in)
investing activities (1,466,313) (30,768,555)
----------- -----------
See notes to consolidated financial statements.
*Certain items have been re-classified for comparative purposes.
5
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CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
Nine Months Ended
September 30,
(Unaudited)
1996 1995
----------- -----------
Cash Flows from Financing Activities:
Principal payments and early
repayment of mortgages payable (395,806) (8,299,631)
Distributions to partners (1,199,757) (1,202,734)
Proceeds from refinancing of
Partnership properties - 20,214,000
Decrease in notes payable to related party - (1,175,000)
Increase in mortgages payable - 22,627,000
(Payments on) proceeds from stock
buyback (47,252) 7,920
Proceeds from the sale of property - 98,127
----------- -----------
Net cash (used in) provided by
financing activities (1,642,815) 32,269,682
----------- -----------
Net (Decrease)Increase in Cash and
Cash Equivalents (91,574) 731,425
Cash and Cash Equivalents, Beginning 2,706,124 996,353
----------- -----------
Cash and Cash Equivalents, Ending $2,614,550 $1,727,778
----------- -----------
----------- -----------
See notes to consolidated financial statements.
6
<PAGE>
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
(Unaudited)
Partners' Capital
------------------------------------------------
Limited General
----------------------- ---------
Class A Class B Class C Total
---------- ---------- --------- -----------
Balance, January 1, 1995 $6,717,849 $1,598,946 $ 84,184 $ 8,400,979
Distributions to
Partners (962,188) (228,519) (12,027) (1,202,734)
Net Income 424,892 100,912 5,311 531,115
Stock buyback - 7,920 - 7,920
---------- ---------- -------- -----------
Balance, Sept. 30, 1995 $6,180,553 $1,479,259 $ 77,468 $ 7,737,280
---------- ---------- -------- -----------
---------- ---------- -------- -----------
Units authorized and
issued, net of 3,073
Treasury Units, at
September 30, 1995 141,722 33,659 1,771 177,152
------- ------ ----- -------
------- ------ ----- -------
Balance, January 1, 1996 $3,455,787 $ 824,206 $ 43,409 $ 4,323,402
Distributions to
Partners (959,806) (227,954) (11,997) (1,199,757)
Net Income 820,946 194,975 10,262 1,026,183
Stock buyback (47,252) - - (47,252)
---------- ---------- -------- -----------
Balance, Sept. 30, 1996 $3,269,675 $ 791,227 $ 41,674 $ 4,102,576
---------- ---------- -------- -----------
---------- ---------- -------- -----------
Units authorized and
issued, net of 3,073
Treasury Units at
September 30, 1996 141,022 33,659 1,771 176,452
------- ------ ----- -------
------- ------ ----- -------
See notes to consolidated financial statements.
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
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 subsidiary partnerships 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 new mortgages referred to in Note 5 a substantial number
of NERA's properties were restructured into separate subsidiary limited
partnerships. The financial statements for prior periods are unchanged.
Principles of Consolidation: The consolidated financial statements include
the accounts of NERA and its subsidiary limited partnerships. NERA has a
99.67% ownership interest in each of such subsidiary limited partnerships.
The consolidated group is referred to as the "Partnerships." Minority
interests are not recorded since they are insignificant. All significant
intercompany accounts and transactions are eliminated in consolidation. The
Partnership accounts for its investment in the joint venture on the equity
method.
Accounting Estimates: The preparation of the financial statements is in
accordance with generally accepted accounting principles (GAAP) requiring
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reported period.
Revenue Recognition: Certain leases of the commercial properties provide for
increasing stepped minimum rents which are accounted for on a straight-line
basis over the term of the lease.
Rental Properties: Rental properties are stated at cost less accumulated
depreciation. Maintenance and repairs are charged to expense as incurred;
improvements and additions are capitalized. When assets are retired or
otherwise disposed of, the cost of the asset and related accumulated
depreciation is eliminated from the accounts, and any gain or loss on such
disposition is included in income. Rental properties are depreciated on the
straight-line method over their estimated useful lives. In the event that
facts and circumstances indicate that the carrying value of rental properties
may be impaired, an analysis of recoverability is performed. The estimated
future undiscounted cash flows are compared to the asset's carrying value to
determine if a write-down to fair value or discounted cash flow value is
required. This policy was adopted in 1995. Previously, impairment was
considered on a case by case basis. See Note 2 for the effect of this
accounting change.
Financing and Leasing Fees: Financing fees are capitalized and amortized
using the interest method over the life of the related mortages. Leasing
fees are capitalized and amortized on a straight line basis over the life of
the related lease.
8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes: The financial statements have been prepared under the basis
that NERA and its subsidiary limited partnerships are entitled to tax
treatment as partnerships. Accordingly, no provision for income taxes on
income has been recorded.
Cash Equivalents: The Partnerships consider all highly liquid instruments
purchased with a maturity of three months or less to be cash equivalents.
Short-Term Investments: The Partnerships consider short-term investments to
be any bank certificates of deposit, Treasury obligations, or commercial
paper with initial maturities between three and twelve months. These
investments are considered to be trading account securities and are carried
at fair value.
Concentration of Credit Risks and Financial Instruments: The Partnerships'
tenants are located in New England, and the Partnerships are subject to the
general economic risks related thereto. No single tenant accounted for more
than 5% of the Partnerships' revenues in 1996 or 1995. The Partnerships make
their temporary cash investments with high credit quality financial
institutions or purchase money market accounts invested in U.S. Government
securities. At September 30, 1996, approximately $2,250,000 of cash and cash
equivalents exceeded federally insured amounts of which approximately
$1,972,000 was invested in a money market fund invested in U.S. Government
securities.
NOTE 2--RENTAL PROPERTIES
Rental properties consist of the following:
September 30, December 31, Useful
1996 1995 Life
------------- ------------ ------
Land $ 9,554,732 $ 9,554,732 --
Buildings 42,988,784 42,988,784 25-31 years
Building improvements 10,534,778 9,437,144 15-31 years
Kitchen cabinets 1,256,652 1,089,407 5-10 years
Carpets 1,171,893 1,028,473 5-10 years
Air conditioning 99,591 87,745 7-10 years
Land improvements 434,382 422,646 10-31 years
Laundry equipment 57,840 46,994 5-7 years
Elevators 16,842 16,842 20 years
Swimming pools 42,450 42,450 10 years
Equipment 190,140 166,132 5-7 years
Motor vehicles 46,704 46,704 5 years
Fences 25,778 22,229 5-10 years
Furniture and fixtures 125,602 95,793 5-7 years
Smoke alarms 6,224 6,224 5-7 years
------------ ------------
66,552,392 65,052,299
Less accumulated
depreciation 15,114,841 13,364,030
------------ ------------
$ 51,437,551 $ 51,688,269
------------ ------------
------------ ------------
9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTE 2--RENTAL PROPERTIES (CONTINUED)
On June 30, 1995, the Partnerships purchased for $30,198,000 five properties
containing an aggregate of 809 residential apartments and 18,400 square feet
of commercial space. The purchase was paid for in part with the proceeds of
the refinancing of thirteen of the Partnerships' properties and the issuance
of new mortgage notes payable aggregating $22,627,000 and maturing in ten
years. The properties were acquired from a trust owned nominally by the
majority shareholder of NERA's general partner. In substance, the properties
were owned by the trust's secured lender under a previous restructuring
agreement whereby the lender received all of the operating income from the
properties as well as the proceeds from the sale to NERA. The Partnerships
have recorded the purchase at the amount paid for the properties and have
allocated the amounts to the individual properties acquired. An entity owned
by the majority shareholder of the Partnership's general partner received a
fee of $300,000 from the trust's secured lender.
Included in rental properties at September 30, 1996 is a building in Newton,
Massachusetts acquired by the Partnership on January 25, 1995. The building
consists of 21,223 square feet of commercial space, 9 residential units and
29 parking spaces for a total purchase price of $1,925,000. This building
was acquired from an entity in which the majority shareholder of NERA's
general partner had a substantial ownership interest. The Partnership's
management company received a fee of approximately $11,000 from the seller in
this transaction. To facilitate this acquisition, the Partnership's
management company, an entity owned by the majority shareholder of NERA's
general partner, loaned the Partnership $1,175,000 in December 1994. In May
1995, the Partnership refinanced this property and obtained a $1,329,000
mortgage payable in 10 years with interest at 9.25%, and paid off the
existing loan of $1,175,000 to the management company. Total interest paid
on this loan was $38,073.
In 1995, the Partnership sold two condominiums located in Stoneham and
Boston, Massachusetts. The gain of $152,463 is included in net income for
the year ended December 31, 1995.
In the fourth quarter of 1995, the Partnerships recorded a special charge of
$3,250,000 relating to the early adoption of Statement of Financial
Accounting Standards No. 121 (FAS 121) on accounting for the impairment of
long-lived assets effective for fiscal years beginning after December 15,
1995. This statement requires that long-lived assets held and used by the
entity be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be recoverable. During
1995, the Lewiston Mall with a carrying value of approximately $8,200,000 was
remortgaged for $2,933,000. As part of this refinancing, the lender obtained
an appraisal of $5,000,000. A further analysis of estimated future cash
flows as required by FAS 121 indicated an impairment. The carrying value of
the Lewiston Mall has been reduced to the net present value of expected
future cash flows, which approximates the aforementioned appraisal. Similiar
analysis of the other properties did not result in impairment.
10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTE 3--RELATED PARTY TRANSACTIONS
The Partnerships' properties are managed by an entity which is owned by the
majority shareholder of the General Partner (see Note 12). The management
fee is equal to 4% of rental revenue and laundry income. Total fees paid
were $524,214, and $371,612 for the nine months ended September 30, 1996 and
1995, 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 1996 and 1995.
The Partnership Agreement also permits the General Partner or management
company to charge the costs of professional services (such as counsel,
accountants, contractors) to NERA. During the nine months ended September
30, 1996 and 1995 approximately $221,000, and $145,000 was charged to NERA
for legal, maintenance, and architectural services, and supervision of
capital improvements. Approximately $57,000 was capitalized in leasehold
improvements, approximately $111,000 is included in administrative expenses,
and approximately $53,000 is included in repairs and maintenance expense
during the nine months ended September 30, 1996. In addition, the
Partnership paid the management company $30,000 during the year ended
December 31, 1995 and and have accrued $37,500 for the nine months ended
September 30, 1996 for accounting services previously provided by an outside
company.
The Partnership Agreement entitles the General Partner or the 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 1996 or 1995.
Included in prepaid expenses and other assets were amounts due from related
parties of $399,047 at September 30, 1996 and $366,258 at December 31, 1995,
representing Massachusetts tenant security and prepaid rent deposits, which
are held for the Partnerships by another entity also owned by one of the
shareholders of the General Partner (see Note 6).
Also included in prepaid expenses and other assets is an insurance reserve
account funded by the Partnerships and held by the management company. The
insurance reserve includes funds from other properties which are also owned
by the related parties. The balance in the reserve was $129,378 at September
30, 1996 and $105,924 at December 31, 1995.
See Note 10 for rental arrangements with the Timpany Plaza joint venture.
As described in Note 4, the Partnership has interests in certain entities in
which the majority shareholder of the General Partner is also involved.
See Note 2 for fees paid to related parties by the sellers of the
Partnerships' 1995 acquisitions.
11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTE 4--OTHER ASSETS
The short term investment totalling $50,874 at September 30, 1996 and $48,877
at December 31, 1995 is carried at cost which approximates fair value. Such
investment at September 30, 1996 is a 5.07% certificate of deposit maturing
in February 1997. The issuer and amount of this investment is as follows:
September 30, December 31,
1996 1995
---------- ----------
Citizens Bank - Certificate of deposit $ 50,874 $ 48,877
---------- ----------
---------- ----------
The carrying value of the Partnership's 50% interest in the Timpany Plaza
Joint Venture, at equity, is $109,384 at September 30, 1996 and $129,989 at
December 31, 1995.
The Partnership owns a 10% ownership interest in three real estate
partnerships accounted for by the equity method and reduced to a carrying
value of zero. Losses in excess of cost in limited partnerships have not
been recorded as the Partnership is not liable for such amounts. During the
fourth quarter of 1995 the real estate owned by another partnership in which
NERA had a 10% ownership interest was sold for less than the mortgage debt.
Accordingly, NERA did not receive proceeds from this sale.
The majority shareholder of the General Partner is also the majority owner of
these partnerships (see Note 12). There can be no assurance that any of
NERA's partnership investments will be realizable in the future in excess of
their carrying value.
NOTE 5--MORTGAGES PAYABLE
At September 30, 1996 and December 31, 1995 the mortgages payable consisted
of various loans, substantially all of which were secured by first mortgages
on properties referred to in Note 2, with interest ranging from 8.25% to
10.99%, payable in monthly installments currently aggregating approximately
$431,000, including interest, to various dates through 2005. Although the
loans mature within ten years, they are being amortized on a basis between 25
and 27.5 years. The carrying amounts of the Partnerships' mortgages payable
approximate their fair value.
12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTE 5--MORTGAGES PAYABLE (CONTINUED)
The Partnerships have pledged tenant leases as additional collateral for
certain of their mortgages.
Approximate annual maturities are as follows:
1997 - current maturities $ 569,200
1998 620,700
1999 676,800
2000 738,100
2001 805,000
Thereafter 49,266,400
-----------
$52,676,200
-----------
-----------
NOTE 6--ADVANCE RENTAL PAYMENTS AND SECURITY DEPOSITS
The lease agreements for certain properties require tenants to maintain a
one-month advance rental payment and security deposits. The funds are held
in escrow by another entity owned by the majority shareholder of the General
Partner (see Notes 3 and 12).
NOTE 7--PARTNERS' CAPITAL
The Partnership has two categories of limited partners (Classes 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 represent
19% and 1% respectively of the total units outstanding. All classes have
equal profit-sharing and distribution rights in proportion to their ownership
interests.
The Partnership declared distributions of $3.40 unit in the first and third
quarters of 1996 and 1995 for a total distribution of $6.80 for the nine
months ended September 30, 1996 and 1995.
The Partnership has entered into a deposit agreement with a bank 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 of the net income per Depositary Receipt:
Nine Months Ended
September 30,
1996 1995
---- ----
Net Income Per Depositary Receipt $.58 $.30
---- ----
---- ----
13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTE 8--STOCK REPURCHASE PLAN
During the second quarter of 1996, the Partnership announced a plan to
repurchase up to $500,000 of its Depositary Receipts from existing holders of
securities. The repurchase of Depositary Receipts may take place over a
period of a year or more. The purchase price would be equal to the price at
which such securities are traded on Nasdaq at the time of the repurchase.
During the third quarter of 1996, the Partnership repurchased 7,000
depositary receipts for a total cost of approximately $47,000. On October
17, 1996, the Partnership repurchased 3,670 shares for a total purchase price
of $25,412.
NOTE 9--COMMITMENTS AND CONTINGENCIES
From time to time, the Partnerships are involved in various ordinary routine
litigation incidental to their business. The Partnerships are not involved
in any material pending legal proceedings.
NOTE 10--RENTAL INCOME
In 1996, approximately 83% of rental income is related to residential
apartment and condominium units with leases of one year or less. The
remaining 17% is related to commercial properties which have minimum future
rental income on noncancellable operating leases as follows:
Commercial
Property
Leases Land Leases Total
----------- ----------- -----------
1997 $ 1,631,528 $ 146,667 $ 1,778,195
1998 1,478,740 146,667 1,625,407
1999 1,123,447 146,667 1,270,114
2000 834,477 146,667 981,144
2001 609,013 146,667 755,680
Thereafter 1,853,122 1,136,669 2,989,791
----------- ---------- -----------
$ 7,530,327 $1,870,004 $ 9,400,331
----------- ---------- -----------
----------- ---------- -----------
In August 1988, the Partnership entered into a land lease agreement with an
existing tenant of the Timpany Plaza Shopping Center in Gardner,
Massachusetts. As part of this lease, the tenant, at its cost, demolished
approximately one-third of the mall and replaced it with a new store of
comparable size. The minimum fixed term of this lease is for 20 years which
commenced with the opening of the new store in December 1989.
14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTE-10--RENTAL INCOME (CONTINUED)
The minimum annual rents are $110,000 per year for the first five years,
increasing each subsequent five-year period with the average being $137,500
per year for the minimum twenty-year term. Included in rents receivable at
September 30, 1996 and December 31, 1995 is $186,125 and $158,000
respectively, representing the deferred rental income from this lease. There
are also contingent rents based upon sales volume, common area maintenance,
and other charges. This lease also provides for six extension periods of
five years each at increased rents. The minimum rents pertaining to this
agreement are reflected in the foregoing table.
The ownership of this new building addition transfers to the Partnership at
the termination of the lease. Accordingly, the Partnership included in
property assets approximately $1,400,000 of book value of the demolished
building allocable to the Partnership leasehold interest and is depreciating
this amount on a straight-line basis over a twenty-year period.
Concurrently, the Partnership entered into a joint venture with this same
tenant relating to the space formerly leased by the tenant. Under this
arrangement, the two parties have agreed to relet the space and divide the
net income or loss after paying to the Partnership an annual minimum rent of
$84,546. The Partnership's share of income was approximately $17,000 and
$16,000, for the nine months ended September 30, 1996 and 1995 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 $722,108, and $589,000 for the nine
months ended September 30, 1996 and 1995 respectively.
NOTE 11--CASH FLOW INFORMATION
During the nine months ended September 30, 1996 and 1995, cash paid for
interest on debt was $3,487,392, and $2,166,095 respectively.
NOTE 12--BANKRUPTCY OF RELATED PARTIES
As described in Notes 3, 4 and 6, the Partnerships had transactions with and
have interests in certain entities in which the majority shareholder of the
General Partner is involved. Such shareholder had guaranteed certain notes
receivable and had agreed to indemnify the Partnerships for losses incurred
from certain partnerships in which NERA is a General Partner. During March
1991, this shareholder, the Partnerships' management company, and other
related entities filed for protection from their creditors under Chapter 11
of the Federal Bankruptcy Code.
15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTE 12--BANKRUPTCY OF RELATED PARTIES (CONTINUED)
In September 1992, the U.S. Bankruptcy Court confirmed a reorganization plan
pursuant to which this shareholder was discharged of all liabilities
including all guarantees and indemnifications.
The management of the Partnership believes that the proceedings described
above will not adversely affect the Partnerships' properties or operations.
In August 1996, the U.S. Bankruptcy Court approved a settlement resulting in
the final implementation of that reorganization plan, which occurred in
September 1996.
16
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation
Results of Operations
Income from operations for the third quarter of 1996 was approximately
$248,000, compared to approximately $82,000 for the same period in 1995, an
increase of approximately $166,000. For the nine months ended September 30,
1996, income from operations was approximately $884,000 compared to
approximately $414,000 for the same period in 1995, an increase of
approximately $470,000. These increases in income are due primarily to the
properties acquired in June of 1995. Net cash provided by operations during
the nine months ended September 30, 1996 was approximately $3,018,000
compared to cash used in operations of approximately $770,000 during the same
period in 1995, a fluctuation of approximately $3,788,000. This increase in
funds is due to an increase in net income during the nine months ended
September 30, 1995 as well as the acquisition of six properties as of June
30, 1995. In connection with these 1995 acquisitions, the bank required that
the Partnership fund real estate tax escrow accounts, insurance reserves, and
reserves for capital improvements for the newly acquired properties. In
addition, nine properties were refinanced during the second quarter of 1995
and the prepaid financing fees, related to the refinancing also affected the
Partnerships cash flow.
Rental income during the third quarter of 1996 was approximately
$4,056,000 compared with approximately $3,817,000, for the same period in
1995, an increase of approximately $239,000. Increased rental rates at three
of the properties acquired in June 1995 represent approximately $227,000 of
this increase. A reduction in the vacancy rate accompanied by an increase in
rental rates at Westgate Woburn contributed to a rental income increase of
approximately $36,000. These increases are offset by a $45,000 decrease in
percentage rents at the Timpany Plaza Shopping Mall. The Partnership
attributes this to a decline in sales at the retail locations. For the nine
months ended September 30, 1996, rental income was approximately $12,370,000
compared with approximately $8,336,000 for the same period in 1995, an
increase of approximately $4,034,000. Rental income from the properties
acquired in June 1995 represent approximately $3,918,000 of this increase.
Expenses for the third quarter of 1996 were approximately $3,854,000
compared to approximately $3,780,000 for the same period in 1995, an increase
of approximately $74,000. The increases of approximately $68,000 in
professional fees and $92,00 in interest expense result
17
<PAGE>
from the acquisition and refinancing which occurred during June and July of
1995. These increases are offset by an $85,000 reduction in rental
commissions due to reduced tenant turnover and a lower commission rate; and a
$69,000 reduction in repairs and maintenance resulting from significant
repairs and maintenance performed on acquired properties in 1995.
Expenses for the first nine months of 1996 were approximately
$11,641,000 compared with approximately $8,035,000 for the same period in
1995, an increase of approximately $3,606,000. The properties acquired in
June 1995 accounted for $3,061,000 of the increase. The year-to-date 1995
operating results included only three months of the acquired properties
operating activity and nine months in 1996. Other increases related to the
acquisition include an increase of approximately $463,000 in interest expense
due to the refinancing of existing Partnership properties. Expense increases
unrelated to the acquired properties include an $83,000 increase in repairs
and maintenance, and a $45,000 increase in professional fees. The increases
are offset by a $95,000 reduction in rental commissions due to reduced tenant
turnover and a lower commission rate.
Interest income for the three months ended September 30, 1996 was
approximately $37,000, compared to approximately $7,000 for the same period
in 1995, an increase of approximately $30,000. Interest income for the nine
months ended September 30, 1996 was approximately $125,000, compared to
approximately $32,000 for the same period in 1995, an increase of
approximately $93,000. These increases are due to the increase in cash
available for investment as well as a slight increase in the interest rate.
The Partnership is a partner in a joint venture with a tenant at the
Timpany Plaza Shopping Center in Gardner, Massachusetts. Under the terms of
the agreement, the parties have agreed to relet the space and divide the net
income or loss after paying to the Partnership an annual minimum rent of
approximately $84,000. The Partnership's investment in the Timpany Plaza
joint venture represents less than 1% of NERA's assets.
The Partnership's share of income in the joint venture at the Timpany
Plaza Shopping Center was approximately $6,000 for the third quarter of 1996
compared to approximately $7,000 for the third quarter of 1995, a decrease of
approximately $1,000. For the nine months ended September 30, 1996, the
Partnership's share of income from the joint venture at Timpany Plaza
Shopping Center was approximately $17,000 compared to approximately $16,000
18
<PAGE>
for the same period in 1995, an increase of approximately $1,000. The income
and expenses of the joint venture have remained relatively stable during the
year.
In March 1996, a major tenant in the Timpany Plaza Shopping Center filed
for bankruptcy under Chapter 11. This tenant paid approximately $347,000 of
rent in 1995 and was current through October 1996. The Partnership has no
reason to believe that the tenant will stop making rental payments in the
future. Although the tenant is current as of October 1996, the Partnership
cannot guarantee that rental payments will continue in the future in light of
the tenant's bankruptcy.
As a result of the changes discussed above, net income for the three
months ended September 30, 1996 was $289,869 compared to $165,472 for the
same period in 1995, an increase of $124,397; and net income for the nine
months ended September 30, 1996 was $1,026,183 compared to $531,115 for the
same period in 1995, an increase of $495,068.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's principal source of cash during 1996 and 1995 has been
the collection of rents and the refinancing of Partnership properties. The
majority of cash and cash equivalents of $2,614,550 at September 30, 1996 and
$2,706,124 at December 31, 1995 is invested in commercial paper and
certificates of deposit maturing in less than 90 days. Additionally, the
Partnership purchased a short term investment valued at $50,874 at September
30, 1996 and $48,877 at December 31, 1995. This investment is a certificate
of deposit maturing in February 1997.
The Partnership believes it strengthened its portfolio by making
significant acquisitions of rental and mixed-use properties in 1995. During
1995, the Partnership acquired six properties for a total purchase price of
approximately $32,123,000. The acquisitions were financed by $23,956,000 of
new mortgages on the acquired properties. Additional funds of $22,446,000
were provided by obtaining 13 mortgages on refinanced or debt-free
properties. Approximately $10,900,000 of this amount was used to repay
existing mortgages and approximately $11,546,000 was used in the acquisition
of the above properties. In connection with these mortgages, the lender
required that separate escrow accounts totaling approximately $870,000 be
established to fund capital improvements at the properties. The Partnership
is also required by the lender to make additional monthly payments of
approximately $34,000 to fund these escrow accounts. The monthly payments to
these escrow accounts are in addition to the monthly mortgage payments. In
connection with these new mortgages, a substantial number of the
Partnership's properties were restructured into separate subsidiary
Partnerships.
19
<PAGE>
During the second quarter of 1996, the Partnership announced a plan
under which it may repurchase up to $500,000 of its Depositary Receipts from
existing holders of securities. The repurchase plan may take place over a
period of one year or more. The purchase price will be equal to the price at
which such securities are traded on Nasdaq at the time of the repurchase.
During the third quarter of 1996, the Partnership repurchased 7,000 shares
for a total purchase price of approximately $47,000. In addition, on
October 17, 1996, the Partnership repurchased 3,670 shares for a total
purchase price of $25,412. The funds pursuant to this program have and will
continue to come from cash reserves. Management believes this repurchase plan
of up to $500,000 will not have a negative impact on cash reserves. Management
believes it has adequate cash reserves to meet the Partnership's needs.
During the third quarter of 1996, the Partnership completed
approximately $885,000 of capital improvements to its properties. Many of
these improvements were anticipated in connection with the acquisitions made
in June 1995 and were funded from the previously established escrow accounts,
as well as cash reserves. The most significant improvements were made at the
Westgate Woburn Apartments in Woburn, Massachusetts for a total cost of
approximately $133,000 as well as improvements of approximately $125,000 at
the Lincoln Street Apartments in Newton, Massachusetts; approximately
$100,000 at the apartments at 1144 Commonwealth Avenue in Brighton,
Massachusetts; approximately $87,000 at the Redwood Hills Apartments in
Worcester, Massachusetts; approximately $82,000 at the apartments at 62
Boylston Street in Boston, Massachusetts; approximately $56,000 at the
Executive apartments in Framingham, Massachusetts; approximately $54,000 at
the Clovelly apartments in Nashua, New Hampshire; and approximately $54,000
at the apartments at 1137 Commonwealth Avenue in Brighton, Massachusetts.
The Partnership plans to invest an additional $500,000 in capital
improvements in the residential and commercial properties during the fourth
quarter of 1996. These improvements will be funded from cash reserves and
escrow accounts previously established.
The Partnership anticipates that available cash and interest-bearing
investments, collection of rents, and proceeds from the sale and refinancing
of Partnership properties will be sufficient to finance current improvements
to its properties. As a result of the sale of properties, unanticipated
increases in expenses, or a loss of a significant tenant, the Partnership's
net income and cash flow may fluctuate dramatically from year to year.
20
<PAGE>
Since the Partnership's long term goals include the acquisition of
additional properties, a portion of the proceeds from the refinancing and
sale of properties is reserved for this purpose. The Partnership will
consider refinancing existing properties if either insufficient funds exist
from cash reserves to repay existing mortgages or if funds required for
future acquisitions are not available.
The Partnership paid distributions totalling $6.80 per Partnership unit
($0.68 per depositary receipt) during each of the nine months ended September
30, 1996 and 1995.
Statements made in this Quarterly Report may contain information about
the Partnership's future business prospects. Some of these statements may be
considered "forward looking". These statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
set forth in or implied by such forward-looking statements. For further
information regarding cautionary statements and factors affecting future
operating results, please refer to the Partnership's annual report on 10-K
dated December 31, 1995.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 13, 1996
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.
22
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 2,614,550
<SECURITIES> 50,874
<RECEIVABLES> 719,044
<ALLOWANCES> 0
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<CURRENT-ASSETS> 5,721,297
<PP&E> 66,552,392
<DEPRECIATION> 15,114,841
<TOTAL-ASSETS> 59,006,244
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0
0
<COMMON> 0
<OTHER-SE> 4,102,576
<TOTAL-LIABILITY-AND-EQUITY> 59,006,244
<SALES> 12,370,471
<TOTAL-REVENUES> 12,524,865
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