<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 June 30, 1997 OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the transition period from to
------------------------ -------------------
Commission file number 0-12138
New England Realty Associates Limited Partnership
(Exact Name of Registrant as Specified in Its Charter)
Massachusetts 04-2619298
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
39 Brighton Avenue, Allston, Massachusetts 02134
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (617)783-0039
Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Indicate by check /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-June 30, 1997
and June 30, 1996 1
Statements of Operations-Six Months
Ended June 30, 1997 and June 30, 1996 2
Statements of Cash Flows-Six Months
Ended June 30, 1997 and June 30, 1996 3
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 13
PART II - OTHER INFROMATION
Item 5. Other Information
SIGNATURES ----
i
f<PAGE>
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31
1997 1996
(Unaudited)
----------- -----------
ASSETS
Rental Properties................................... $51,792,397 $52,293,981
Cash and Cash Equivalents........................... 2,099,831 1,830,605
Short-term Investments.............................. -- 51,528
Rents Receivable.................................... 588,141 688,245
Real Estate Tax Escrows............................. 528,878 503,234
Prepaid Expenses and Other Assets................... 1,539,773 1,696,237
Investment in Joint Ventura......................... 82,699 93,734
Financing and Leasing Fees.......................... 1,462,879 1,631,375
----------- -----------
TOTAL ASSETS $58,094,598 $58,788,939
----------- -----------
----------- -----------
LIABILITIES AND PARTNERS' CAPITAL
Mortgages Payable................................... $52,253,949 $52,538,499
Accounts Payable and Accrued Expenses............... 650,002 684,626
Advance Rental Payments and Security Deposits....... 1,733,678 1,667,316
----------- -----------
Total Liabilities................................. 54,637,629 54,890,441
Commitments and Contingent
Liabilities (Note 9)
Partners' Capital:
173,957 units outstanding in 1997
and 175,163 in 1996............................. 3,456,969 3,898,498
----------- -----------
TOTAL LIABILITIES AND PARTNERS' CAPITAL............. $58,094,598 $58,788,939
----------- -----------
----------- -----------
See notes to consolidated financial statements.
1
<PAGE>
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
(Unaudited) (Unaudited)
------------------------ ------------------------
<S> <C> <C> <C> <C>
Revenues:
Rental income............... $ 4,218,240 $ 4,138,699 $ 8,438,494 $ 8,314,114
Laundry & sundry income..... 40,867 47,972 93,443 109,021
----------- ----------- ----------- -----------
4,259,107 4,187,671 8,531,937 8,423,135
----------- ----------- ----------- -----------
Expenses:
Administrative.............. 275,774 229,642 524,533 399,785
Depreciation and
amortization............... 793,015 682,821 1,584,817 1,373,787
Interest.................... 1,165,602 1,212,447 2,329,178 2,379,609
Management fees............. 179,092 172,609 366,100 353,021
Operating................... 418,149 409,547 1,046,674 1,061,129
Renting..................... 36,079 47,276 75,016 62,209
Repairs & maintenance....... 623,097 685,896 1,211,387 1,232,609
Taxes & insurance........... 474,718 464,732 932,344 924,551
----------- ----------- ----------- -----------
3,965,526 3,904,970 8,070,049 7,786,700
----------- ----------- ----------- -----------
Income from
Operations.................. 293,581 282,701 461,888 636,435
----------- ----------- ----------- -----------
Other income (loss):
Interest income............. 32,884 35,294 61,216 88,344
Income (loss) from
investment in
partnership and
joint venture.............. (7,146) 5,228 (6,181) 11,535
----------- ----------- ----------- -----------
25,738 40,522 55,035 99,879
----------- ----------- ----------- -----------
Net Income................... $ 319,319 $ 323,223 $ 516,923 $ 736,314
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net Income
per Unit.................... $ 1.83 $ 1.82 $ 2.96 $ 4.16
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted Average Number
of Units Outstanding........ 174,020 177,152 174,325 177,152
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
June 30,
(Unaudited)
1997 1996
---------- ----------
Cash Flows from Operating Activities:
Net income................................. $ 516,923 $ 736,314
---------- ----------
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation and amortization........... 1,584,817 1,373,787
(Income) loss from investments in
partnerships and joint venture........ 6,181 (11,535)
(Increase) Decrease in rents
receivable............................ 100,104 (69,481)
(Increase) in financing and
leasing fees.......................... (9,837) (26,255)
Increase (Decrease) in accounts payable
and accrued expenses.................. (34,624) (151,411)
(Increase) Decrease in real estate
tax escrows........................... (25,644) 64,004
Decrease in prepaid expenses and
other assets.......................... 156,464 69,597
Increase (Decrease) in advance rental
payments and security deposits........ 66,362 15,636
---------- ----------
Total Adjustments....................... 1,843,823 1,264,342
---------- ----------
Net cash provided by
operating activities.................. 2,360,746 2,000,656
---------- ----------
Cash Flows from Investing Activities:
Distribution from joint venture............ 4,854 24,048
Payment for purchase and improvement
of rental properties..................... (904,900) (619,624)
Maturity of short-term investments......... 51,528 --
Purchase of short-term investments......... -- (1,337)
---------- ----------
Net cash (used in) investing activities...... (848,518) (596,913)
---------- ----------
See notes to consolidated financial statements.
3
<PAGE>
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
June 30,
(Unaudited)
1997 1996
---------- ----------
Cash Flows from Financing Activities:
Principal payments and early repayment of
mortgages payable............................... (284,550) (261,027)
Distributions to partners......................... (853,222) (601,366)
Purchase of treasury units........................ (105,230) --
---------- ----------
Net cash (used in) financing activities......... (1,243,002) (862,393)
---------- ----------
Net Increase in Cash and Cash Equivalents........... 269,226 541,350
Cash and Cash Equivalents, Beginning................ 1,830,605 2,706,124
---------- ----------
Cash and Cash Equivalents, Ending................... $2,099,831 $3,247,474
---------- ----------
---------- ----------
See notes to consolidated financial statements.
4
<PAGE>
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' CAPITAL
(Unaudited)
Partners' Capital
--------------------------------------------
Limited General
--------------------- --------
Class A Class B Class C Total
---------- --------- -------- -----------
Balance, January 1, 1996......... $3,455,787 $ 824,206 $ 43,409 $ 4,323,402
Distributions to Partners........ (481,093) (114,260) (6,013) (601,366)
Net Income....................... 589,051 139,900 7,363 736,314
---------- --------- -------- -----------
Balance, June 30, 1996........... $3,563,745 $ 849,846 $ 44,759 $ 4,458,350
---------- --------- -------- -----------
---------- --------- -------- -----------
Units authorized and issued,
net of 3,073 Treasury Units,
at June 30, 1996............... 141,722 33,659 1,771 177,152
---------- --------- -------- -----------
---------- --------- -------- -----------
Balance, January 1, 1997......... $3,115,865 $ 743,473 $ 39,160 $ 3,898,498
Unit Buyback..................... (84,184) (19,994) (1,052) (105,230)
Distributions to Partners........ (682,578) (162,112) (8,532) (853,222)
Net Income....................... 413,538 98,215 5,170 516,923
---------- --------- -------- -----------
Balance, June 30, 1997........... $2,762,641 $ 659,582 $ 34,746 $ 3,456,969
---------- --------- -------- -----------
---------- --------- -------- -----------
Units authorized and issued,
net of 6,268 Treasury Units
at June 30, 1997............... 139,063 33,148 1,746 173,957
---------- --------- -------- -----------
---------- --------- -------- -----------
See notes to consolidated financial statements.
5
<PAGE>
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 an investment in a real
estate partnership and a joint venture. In connection with the 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. Accordingly, actual
results could differ from those estimates.
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.
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.
6
<PAGE>
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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 1997, 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 June 30, 1997, approximately $1,694,000 of cash and
cash equivalents exceeded federally insured amounts of which approximately
$1,668,000 was held in a money market fund invested in U.S. Government
securities.
NOTE 2--RENTAL PROPERTIES
Rental properties consist of the following:
<TABLE>
<CAPTION>
June 30, December 31, Useful
1997 1996 Life
------------ ------------ -----------
<S> <C> <C> <C>
Land $ 9,710,733 $ 9,710,733 --
Buildings 43,622,868 43,622,868 25-31 years
Building improvements 11,116,719 10,648,403 15-31 years
Kitchen cabinets 1,101,256 940,870 5-10 years
Carpets 1,117,216 977,574 5-10 years
Air conditioning 249,338 233,995 7-10 years
Land improvements 599,909 599,909 10-31 years
Laundry equipment 50,236 45,248 5-7 years
Elevators 16,842 16,842 20 years
Swimming pools 42,450 42,450 10 years
Equipment 384,291 311,809 5-7 years
Motor vehicles 49,852 49,852 5 years
Fences 20,785 20,785 5-10 years
Furniture and fixtures 244,165 201,638 5-7 years
Smoke alarms 7,441 6,224 5-7 years
------------ ------------
68,334,101 67,429,200
Less accumulated
depreciation 16,541,704 15,135,219
------------ ------------
$ 51,792,397 $ 52,293,981
------------ ------------
------------ ------------
</TABLE>
7
<PAGE>
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2--RENTAL PROPERTIES (CONTINUED)
On December 11, 1996, the Partnership acquired a residential complex
containing 36 apartment units in Lowell, Massachusetts for a purchase price
of approximately $790,000. The purchase was paid from the Partnership's cash
reserves and is unencumbered.
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 $366,100, and
$353,021 for the six months ended June 30, 1997 and 1996, 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 1997 and 1996.
The Partnership Agreement also permits the General Partner or a management
company to charge the costs of professional services (such as counsel,
accountants, and contractors) to NERA. During the six months ended June 30,
1997 and 1996 approximately $213,000 and $142,000 was charged to NERA for
legal, maintenance, architectural services and supervision of capital
improvements. Approximately $64,000, and $40,000 was capitalized during the
six months ended June 30, 1997 and 1996, in leasehold improvements and the
balance was included in administrative expense and repairs and maintenance
expenses. In addition, the Partnership paid to the management company $25,000
in each of the six months ended June 30, 1997 and 1996 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 1997 or 1996.
In 1997 and 1996, an unrelated individual that performed asset management
consulting services to NERA and the management company was appointed
President of the management company. This individual continues to receive
asset management fees from NERA, receiving $18,900 during the six months
ended June 30, 1997 and $28,800 during the year ended December 31, 1996.
Included in prepaid expenses and other assets were amounts due from related
parties of $445,838 at June 30, 1997 and $416,317 at December 31, 1996
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 $151,901 at June 30,
1997 and $82,856 at December 31, 1996.
8
<PAGE>
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3--RELATED PARTY TRANSACTIONS (CONTINUED)
See Note 10 for rental arrangements with the Timpany Plaza joint venture.
As described in Note 4, the Partnership has interests in certain entities in
which the majority shareholder of the General Partner is also involved.
NOTE 4--OTHER ASSETS
The short-term investment $51,528 at December 31, 1996, is carried at cost,
which approximates fair value. Such investment is a 5.07% certificate of
deposit at Citizens Bank which matured in February 1997.
Included in prepaid expenses and other assets at June 30, 1997 and December
31, 1996 is approximately $431,000 and $669,000 held in escrow to pay future
capital improvements. Additional payments of approximately $34,000 are paid
monthly. As the improvements are made, funds are used from these escrow
accounts.
The carrying value of the Partnership's 50% interest in the Timpany Plaza
joint venture, at equity, is $82,699 at June 30, 1997 and $93,734 at
December 31, 1996.
The Partnership owns a 10% ownership interest in a real estate limited
partnership which is accounted for by the equity method and reduced to a
carrying value of zero. The loss in excess of cost in this limited
partnership has not been recorded as the Partnership is not liable for such
amounts. In 1996, $18,360 was recorded in other income for the amount
received from the disposition of limited partnership investment that had
previously been reduced to a carrying value of zero.
The majority shareholder of the General Partner is also the majority owner of
this real estate limited partnership. There can be no assurance that any of
NERA's partnership investments will be realizable in the future in excess of
their carrying value.
NOTE 5--MORTGAGES PAYABLE
At June 30, 1997 and December 31, 1996, 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' mortgage payable approximate
their fair value.
9
<PAGE>
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5--MORTGAGES PAYABLE (CONTINUED)
The Partnerships have pledged tenant leases as additional collateral for
certain of these mortgages.
Approximate annual maturities are as follows:
1998 - current maturities........ $ 607,400
1999 ............................ 662,335
2000 ............................ 7,340,075
2001 ............................ 711,932
2002 ............................ 774,562
Thereafter....................... 42,157,645
----------
$52,253,949
-----------
-----------
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 1997, the Partnership declared a regular semi annual dividend of
$3.90 and a special distribution of $1.00 per unit. In March 1996, the
Partnership declared a distribution of $3.40 per unit.
The Partnership has entered into a deposit agreement with an agent to
facilitate public trading of limited partners' interest 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,
1997 1996
------- -------
Net Income per Depository Receipt $ .30 $ .42
------- -------
------- -------
10
<PAGE>
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8--CAPITAL UNIT 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 the Nasdaq Stock market at the time of
the repurchase. In January 1997, the Partnership repurchased 6,048 depository
receipts for a total cost of $53,586 and repurchased Class B and General
Partnership units for a total cost of $13,397. In April 1997, the Partnership
repurchased 3600 depository receipts for a total cost of $30,600 and
repurchased Class B and General Partnership units for a total cost of
$21,044. During the third and fourth quarters of 1996, the Partnership
repurchased 15,915 depository receipts for a total cost of $110,060 and
repurchased Class B and General Partnership units for a total cost of $27,517.
The Class B and General Partnership units were repurchased to maintain the
required ownership percentage (See Note 7).
Treasury units at June 30, 1997 are as follows:
Class A 5,117
Class B 1,095
General Partner 56
------
6,268
------
------
NOTE 9--COMMITMENTS AND CONTINGENCIES
From time to time, the Partnerships are involved in various ordinary routine
litigation incidental to their business. The Partnerships are not involved in
any material pending legal proceedings.
NOTE 10--RENTAL INCOME
During the six months ended June 30, 1997, approximately 85% of rental income
is related to residential apartments and condominium units with leases of one
year or less. The remaining 15% is related to commercial properties which
have minimum future rental income on noncancellable operating leases as
follows:
Commercial
Property
Leases Land Leases Total
1998.......... $1,493,790 $146,667 $1,640,457
1999.......... 1,115,981 146,667 1,262,648
2000.......... 882,400 146,667 1,029,067
2001.......... 579,653 146,667 726,320
2002.......... 383,642 146,667 530,309
Thereafter.... 1,210,660 1,026,669 2,237,329
----------- ----------- -----------
$5,666,126 $1,760,004 $7,426,130
----------- ----------- -----------
----------- ----------- -----------
11
<PAGE>
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10--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. 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.
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, 1997 and December 1996 is $167,000 and $163,000 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 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 the loss was $6,181 for the six months
ended June 30, 1997 compared to income of $11,500 for the six months ended
June 30, 1996.
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 $435,000, and $486,000 for the six
months ended June 30, 1997 and 1996 respectively.
NOTE 11--CASH FLOW INFORMATION
During the six months ended June 30, 1997 and 1996, cash paid for interest on
debt was $2,304,252 and $2,327,771 respectively.
NOTE 12--FAIR VALUE OF FINANCIAL INSTRUMENTS
The Partnership considers the fair value of its financial instruments to
approximate their carrying values because conditions pertaining to the
historic carrying values approximate those in the current market.
12
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation
Results of Operations
Income from operations for the second quarter of 1997 was approximately
$294,000, compared to approximately $283,000 for the same period in 1996, an
increase of approximately $11,000. For the six months ended June 30, 1997,
income from operations was approximately $462,000 compared to approximately
$636,000 for the same period in 1996, a decrease of approximately $174,000.
Net cash provided by operations during the six months ended June 30, 1997 was
approximately $2,361,000 compared to approximately $2,001,000 during the same
period in 1996, an increase of approximately $360,000. This increase in cash
provided from operations is the result of a decrease in rents receivable; a
decrease in prepaid expenses and other assets due to the Partnerships use of
funds previously held in escrow; and an increase in advance rental
payments and security deposits related to a higher occupancy level at the
Partnerships residential properties.
Rental income during the second quarter of 1997 was approximately $4,218,000
compared with approximately $4,140,000, for the same period in 1996, an
increase of approximately $78,000. For the six months ended June 30,1997,
rental income was approximately $8,438,000 compared with approximately
$8,314,000 for the same period in 1996, an increase of approximately
$124,000. This increase in rental income is due to increased rental rates at
the residential properties. The increase in rental income at the residential
properties is offset by a decrease in rental income from the commercial
properties, primarily the Timpany Plaza Shopping Center. A major tenant
filed for bankruptcy under Chapter 11 in March 1996. This tenant previously
occupied 67,000 square feet, and the annual rent paid by this tenant was
approximately $347,000. At June 30, 1997, the space remains vacant, however,
the Partnership plans to sub-divide the space to make it more marketable.
Expenses for the second quarter of 1997 were approximately $3,966,000
compared to approximately $3,905,000 for the same period in 1996, an increase
of approximately $61,000. This increase reflects an increase in depreciation
and amortization of approximately $110,000 due to the acquisition of a
residential apartment building in November 1996 as well as depreciation on
the ongoing capital improvements being made to properties; an increase in
taxes and insurance of approximately $10,000 due to higher real estate taxes;
and an increase in the management fee of approximately $7,000 due to higher
rental income. These
13
<PAGE>
increases are offset by a decrease in interest expenses of approximately
$47,000 due to a drop in the level of debt, and a decrease in repairs and
maintenance expenses of approximately $63,000 due to significant improvements
made to properties in 1996.
Expenses for the first six months of 1997 were approximately $8,070,000
compared with approximately $7,787,000 for the same period in 1996, an
increase of approximately $283,000. This change represents an increase in
administrative expenses of approximately $125,000 related primarily to
staffing level increases as well as increased legal and accounting fees. The
Partnership does not anticipate continued increases in staffing levels in
the near term. Depreciation and amortization increased approximately
$211,000; and the management fee has increased approximately $13,000. The
reason for these increases are discussed in the preceding paragraph.
Interest income for the three months ended June 30, 1997 was approximately
$33,000, compared to approximately $35,000 for the same period in 1996, a
decrease of approximately $2,000. Interest income for the six months ended
June 30, 1997 was approximately $61,000, compared to approximately $88,000
for the same period in 1996, a decrease of approximately $27,000. The
decrease in interest income for the six months is due to the receipt of
$19,790 during the first quarter of 1996 of interest on the funds
previously held in escrow.
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 loss in the joint venture at the Timpany Plaza
Shopping Center was approximately $7,000 for the second quarter of 1997
compared to income of approximately $5,000 for the second quarter of 1996, a
decrease of approximately $12,000. For the six months ended June 30,
1997, the Partnership's share of loss from the joint venture at Timpany Plaza
Shopping Center was approximately $6,000 compared to income of approximately
$12,000 for the same period in 1996, a decrease of approximately $18,000.
This represents a decrease in rental income due to lower rental rates
negotiated with the tenants due to the high vacancy level at the Timpany
Plaza Shopping Center.
As a result of the changes discussed above, net income for the three months
ended June 30, 1997 was $319,319 compared to $323,223 for the same period in
1996, a decrease of $3,904 and net income for the six months ended June 30,
1997 was $516,923 compared to $736,314 for the same period in 1996, a
decrease of $219,391.
14
<PAGE>
Liquidity and Capital Resources
The Partnership's principal source of cash during 1997 and 1996 has been the
collection of rents. The majority of cash and cash equivalents of $2,099,831
at June 30, 1997 and $1,830,605 at December 31, 1996 is invested in a U.S.
government money market account. Additionally, the Partnership purchased a
short term investment valued at $51,528 at December 31, 1996. This
investment is a certificate of deposit which matured in February 1997.
In November 1996, the Partnership and its subsidiaries acquired a residential
complex consisting of 36 apartments in Lowell, Massachusetts. The total
purchase price of this property was approximately $790,000, and was funded
from the Partnership's cash reserves
In 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 the Nasdaq Stock Market at the time of their purchase. In 1997, the
Partnership repurchased 9,648 depositary receipts for a total purchase price
of $84,186,and purchased Class B and General Partnership units for a total
cost of $21,044. During the second and third quarters of 1996, the
Partnership purchased 15,915 depositary receipts for a total cost of $110,060
and Class B and General Partnership units for a total cost of $27,517. The
Class B and General Partnership units are purchased to maintain the required
ownership percentages.
During the second quarter of 1997, the Partnership completed approximately
$394,000 of capital improvements to its properties. These improvements were
funded from escrow accounts previously established for this purpose and from
cash reserves. The most significant improvements were made at the apartments
located at the Courtyard Apartments on North Beacon in Brighton,
Massachusetts for a total cost of approximately $154,000. Significant
improvements were also made at Westgate Woburn Apartments in Woburn,
Massachusetts for a total cost of approximately $30,000, as well as
improvements of approximately $24,000 at the Redwood Hills Apartments in
Worcester, Massachusetts; approximately $25,000 at the Highland Street
apartments located in Lowell, Massachusetts; and approximately $17,000 at the
Apartments at 1144 Commonwealth Avenue in Brighton, Massachusetts.
In keeping with its five year capital improvement program,the Partnership and
its Subsidiary partnerships plan to invest an additional $1,200,000 in
capital improvements in 1997, of which $965,000 is designated for residential
properties and $235,000 is designated for commercial properties. These
improvements will be funded from cash reserves and escrow accounts.
15
<PAGE>
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. 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 a loss of a significant tenant.
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 a distribution of $3.90 per Partnership unit ($0.39 per
depositary receipt) and a special distribution of $1.00 per unit ($0.10 per
depositary receipt) during the six months ended June 30, 1997 and $3.40
($0.34 per depositary receipt)during the six months ended June 30, 1996.
Factors that may affect future results
The discussion above contains information based on 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:
The Timpany Plaza Shopping Center in Gardner, Massachusetts is 47% vacant at
July 15, 1997. If the space remains unoccupied, the 1997 rental income will
be approximately $200,000 less than 1996. Should circumstances remain
unchanged, the Partnership may need to review the carrying value of this
property for impairment in accordance with the Statement of Financial
Accounting Standards No. 121 (Fas No.121).
A major tenant of the Mall in Lewiston, Maine, which paid approximately
$240,000 in 1996, 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.
16
<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: August 14, 1997
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
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 2,099,831
<SECURITIES> 0
<RECEIVABLES> 588,141
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<CURRENT-ASSETS> 4,756,623
<PP&E> 68,334,101
<DEPRECIATION> 16,541,704
<TOTAL-ASSETS> 58,094,598
<CURRENT-LIABILITIES> 2,383,680
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<COMMON> 0
<OTHER-SE> 3,456,969
<TOTAL-LIABILITY-AND-EQUITY> 58,094,598
<SALES> 8,438,494
<TOTAL-REVENUES> 8,531,937
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<NET-INCOME> 516,923
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