<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 March 31, 1998 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, (617) 783-0039
Including Area Code
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
<TABLE>
<CAPTION>
Page No.
<S> <C> <C>
Item 1. Financial Statements.
Balance Sheets - March 31, 1998
and March 31, 1997 4
Statements of Operations - Three Months
Ended March 31, 1998
and March 31, 1997 5
Statements of Cash Flows - Three Months
Ended March 31, 1998 and
March 31, 1997 6
Notes to Financial Statements 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 17
PART II - OTHER INFORMATION
Item 5. Other Information
SIGNATURES 3
</TABLE>
2
<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: May 15, 1998
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.
3
<PAGE>
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
(Unaudited)
------------ -------------
<S> <C> <C>
ASSETS
Rental Properties $ 51,439,541 $ 51,575,342
Cash and Cash Equivalents 630,429 456,277
Short-term Investments 1,663,447 2,055,429
Rents Receivable 544,219 604,350
Real Estate Tax Escrows 565,930 570,713
Prepaid Expenses and Other Assets 1,546,237 1,514,370
Investment in Joint Venture 72,344 75,467
Financing and Leasing Fees 1,224,473 1,295,555
------------ ------------
TOTAL ASSETS $ 57,686,620 $ 58,147,503
------------ ------------
------------ ------------
LIABILITIES AND PARTNERS' CAPITAL
Mortgages Payable $ 51,803,366 $ 51,956,821
Accounts Payable and Accrued
Expenses 837,768 903,430
Advance Rental Payments and Security
Deposits 1,845,733 1,822,022
------------ ------------
Total Liabilities 54,486,867 54,682,273
Commitments and Contingent
Liabilities (Note 9)
Partners' Capital:
173,252 units outstanding
in 1998 and 1997 3,199,753 3,465,230
------------ ------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 57,686,620 $ 58,147,503
------------ ------------
------------ ------------
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
(Unaudited)
1998 1997
----------- -----------
<S> <C> <C>
Revenues:
Rental income $ 4,536,190 $ 4,220,254
Laundry and sundry income 44,924 52,576
----------- -----------
4,581,114 4,272,830
----------- -----------
Expenses:
Administrative 299,897 248,759
Depreciation and amortization 796,023 791,802
Interest 1,156,258 1,163,576
Management fees 194,096 187,008
Operating 639,863 628,525
Renting 40,090 38,937
Repairs and maintenance 542,842 588,290
Taxes and insurance 497,145 457,626
----------- -----------
4,166,214 4,104,523
----------- -----------
Income from Operations 414,900 168,307
----------- -----------
Other Income (Loss):
Interest income 38,407 28,332
Income (loss) from investments in
partnership and joint venture (3,122) 965
Unrealized depreciation in investment (6,477) --
----------- -----------
28,808 29,297
----------- -----------
Net Income $ 443,708 $ 197,604
----------- -----------
----------- -----------
Net Income per Unit $ 2.56 $ 1.13
----------- -----------
----------- -----------
Weighted Average Number
of Units Outstanding 173,252 174,634
----------- -----------
----------- -----------
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
(Unaudited)
1998 1997
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 443,708 $ 197,604
----------- -----------
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation and amortization 796,023 791,802
(Income) Loss from investments in
partnerships and joint venture 3,122 (965)
Decrease in rents receivable 60,131 136,770
(Increase) in financing and
leasing fees (4,829) (4,808)
Increase (Decrease) in accounts
payable and accrued expenses (65,662) 105,837
(Increase) Decrease in real estate
tax escrows 4,783 (1,160)
(Increase) Decrease in prepaid
expenses and other assets (31,867) 23,774
Increase in advance rental payments
and security deposits 23,711 52,946
----------- -----------
Total Adjustments 785,412 1,104,196
----------- -----------
Net cash provided by
operating activities 1,229,120 1,301,800
----------- -----------
Cash Flows from Investing Activities:
Distribution from joint venture -- 5,080
Payment for purchase and improvement
of rental properties (584,310) (510,719)
Maturity of short-term investments 391,982 51,528
Purchase of short-term investments -- --
----------- -----------
Net cash (used in)
investing activities (192,328) (454,111)
----------- -----------
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
(Unaudited)
1998 1997
----------- -----------
<S> <C> <C>
Cash Flows from Financing Activities:
Principal payments and early
repayment of mortgages payable (153,455) (140,735)
Distributions to partners (709,185) (853,222)
Purchase of treasury units -- (66,983)
----------- -----------
Net cash (used in) financing
activities (862,640) (1,060,940)
----------- -----------
Net Increase in Cash and
Cash Equivalents 174,152 213,251
Cash and Cash Equivalents, Beginning 456,277 1,830,605
----------- -----------
Cash and Cash Equivalents, Ending $ 630,429 $1,617,354
----------- -----------
----------- -----------
</TABLE>
See notes to consolidated financial statements.
7
<PAGE>
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' CAPITAL
(Unaudited)
<TABLE>
<CAPTION>
Units
-------------------------------------------------
Limited General
------------------------- Partnership
Class A Class B Class C Total
----------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
Balance, January 1, 1997 $3,115,865 $ 743,473 $ 39,160 $3,898,498
Unit Buyback (53,586) (12,727) (670) (66,983)
Distributions to
Partners (682,578) (62,112) (8,532) (853,222)
Net Income 158,083 37,545 1,976 197,604
---------- ---------- ----------- ----------
Balance, March 31, 1997 $2,537,784 $ 606,179 $ 31,934 $3,175,897
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Units authorized and
issued, net of 5,818
Treasury Units, at
March 31, 1997 139,423 33,234 1,750 174,407
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Balance, January 1, 1998 $2,769,251 $ 661,152 $ 34,827 $3,465,230
Distributions to
Partners (567,348) (134,745) (7,092) (709,185)
Net Income 354,966 84,304 4,438 443,708
---------- ---------- ----------- ----------
Balance, March 31, 1998 $2,556,869 $ 610,711 $ 32,173 $3,199,753
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Units authorized and
issued, net of 6,973
Treasury Units at
March 31, 1998 138,602 32,918 1,732 173,252
----------- ---------- ----------- ----------
----------- ---------- ----------- ----------
</TABLE>
See notes to consolidated financial statements.
8
<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 also made investments in
other real estate partnerships and has participated in other real estate-
related activities, primarily located in Massachusetts. In connection with
the mortgages referred to in Note 5, a substantial number of NERA's
properties were restructured into separate subsidiary limited partnerships
without any change in the historical cost basis.
Principles of Consolidation: The consolidated financial statements include
the accounts of NERA and its subsidiary limited partnerships. NERA has a
99.67% ownership interest in each of such subsidiary limited partnerships.
The consolidated group is referred to as the "Partnerships." Minority
interests are not recorded since they are insignificant. All significant
intercompany accounts and transactions are eliminated in consolidation. The
Partnership accounts for its investment in the joint venture on the equity
method.
Accounting Estimates: The preparation of the financial statements is in
accordance with generally accepted accounting principles (GAAP) requiring
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reported period. Accordingly, actual
results could differ from those estimates.
Revenue Recognition: Rental income from residential and commercial
properties is recognized ratably 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. 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.
9
<PAGE>
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 and its Subsidiary Partnerships consider
cash equivalents to be all highly liquid instruments purchased with a
maturity of three months or less.
Short-term Investments: The Partnership accounts for short-term investments
in accordance with Statements 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 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 1998 or 1997. The Partnerships make
their temporary cash investments with high credit quality financial
institutions or purchase money market accounts invested in U.S. Government
securities. At March 31, 1998, approximately $59,566 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.
10
<PAGE>
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2--RENTAL PROPERTIES
Rental properties consist of the following:
<TABLE>
<CAPTION>
March 31, December 31, Useful
1998 1997 Life
----------- ----------- -----------
<S> <C> <C> <C>
Land $ 9,710,733 $ 9,710,733 --
Buildings 43,627,173 43,627,173 25-31 years
Building improvements 11,710,515 11,351,613 15-31 years
Kitchen cabinets 1,075,900 1,029,671 5-10 years
Carpets 1,107,880 1,028,065 5-10 years
Air conditioning 251,950 251,950 7-10 years
Land improvements 627,453 623,453 10-31 years
Laundry equipment 62,899 62,899 5-7 years
Elevators 55,480 45,592 20 years
Swimming pools 42,450 42,450 10 years
Equipment 541,055 471,263 5-7 years
Motor vehicles 65,926 65,926 5 years
Fences 20,785 20,785 5-10 years
Furniture and fixtures 266,965 255,033 5-7 years
Smoke alarms 14,458 10,706 5-7 years
----------- -----------
69,181,622 68,597,312
Less accumulated
depreciation 17,742,081 17,021,970
----------- -----------
$51,439,541 $51,575,342
----------- -----------
----------- -----------
</TABLE>
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 $194,096 and
$187,008 for the three months ended March 31, 1998 and 1997, 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 three months
ended March 31, 1998 and the year ended December 31, 1997.
11
<PAGE>
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3--RELATED PARTY TRANSACTIONS (CONTINUED)
The Partnership Agreement also permits the General Partner or management
company to charge the costs of professional services (such as counsel,
accountants, and contractors) to NERA. During the three months ended March
31, 1998 and 1997, approximately $124,000 and $133,000 was charged to NERA
for legal, maintenance, architectural services and supervision of capital
improvements. Approximately $44,000 and $34,000 was capitalized during the
three months ended March 31, 1998 and 1997 in leasehold improvements.
Included in the 1998 expenses referred to above, approximately $41,000 is
recorded in repairs and maintenance, and approximately $39,000 is included in
administrative expenses. Included in the 1997 expenses referred to above,
approximately $46,000 is recorded in repairs and maintenance, approximately
$41,000 is recorded in administrative expenses and approximately $12,000 is
recorded in renting expenses. Additionally in each of the quarters ended
March 31, 1998 and 1997 the Partnership paid to the management company
$15,000 and $12,500 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 1998 or 1997.
In 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 $9,000 during the three months ended March 31, 1998
and $30,600 during the year ended December 31, 1997.
Included in prepaid expenses and other assets were amounts due from related
parties of $488,928 at March 31, 1998 and $487,321 at December 31, 1997
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 $155,949 at March 31,
1998 and $155,072 at December 31, 1997.
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.
12
<PAGE>
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 market value. At March 31,
1998, a mutual fund with a cost of $1,669,924 was recorded at its market
value of $1,663,447. The unrealized loss of $6,477 is included in other
income (loss).
Included in prepaid expenses and other assets at March 31, 1998 and December
31, 1997 is approximately $355,000 and $389,000 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 $72,344 and $75,467 at March 31, 1998 and
December 31, 1997 respectively.
The Partnership owns 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 have not been recorded as
the Partnership is not liable for such amounts. The majority shareholder of
the General Partner is also the majority owner of this 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 March 31, 1998 and December 31, 1997, 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.
The Partnerships have pledged tenant leases as additional collateral for
certain of these mortgages.
Approximate annual maturities are as follows:
<TABLE>
<S> <C>
1999 - current maturities $ 648,000
2000 707,000
2001 7,333,000
2002 758,000
2003 825,000
Thereafter 41,532,000
-----------
$51,803,000
-----------
-----------
</TABLE>
13
<PAGE>
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
current form of Partnership Agreement, the required percentages of Class B
units and General Partnership units are 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 1998 the Partnership declared a regular semi annual dividend of
$4.10 per unit. In March 1997, the Partnership declared a regular semi
annual dividend of $3.90 and a special distribution of $1.00 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:
<TABLE>
Three Months Ended
March 31,
1998 1997
---- ----
<S> <C> <C>
Net Income per Depositary Receipt $ .26 $ .11
----- -----
----- -----
</TABLE>
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 purchase of Depositary Receipts took place over a period of
eighteen months. The purchase prices paid for Depositary Receipts varied and
were equal to the price at which such securities were traded on the Nasdaq
Stock Market at the time of purchase. During 1997 and 1996, the Partnership
purchased 15,288 and 15,915 Depositary Receipts for a total cost of $139,268
and $110,060, respectively.
14
<PAGE>
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8--CAPITAL UNIT REPURCHASE PLAN (CONTINUED)
In addition, 363 Class B and 19 General Partnership units were purchased in
1997 for a total cost of $34,819 and 378 Class B and 20 General Partnership
units were purchased in 1996 for a total cost of $27,517 to maintain the
ownership percentages required by the current form of Partnership Agreement
(see Note 7).
Treasury units at March 31, 1998 are as follows:
<TABLE>
<S> <C>
Class A 5,681
Class B 1,228
General Partner 64
-----
6,973
-----
-----
</TABLE>
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 three months ended March 31, 1998, 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:
<TABLE>
<CAPTION>
Commercial
Property
Leases Land Leases Total
------ ----------- -----
<S> <C> <C> <C>
1999 $1,591,000 $ 130,500 $1,721,500
2000 1,249,000 136,500 1,385,500
2001 1,023,000 150,000 1,173,000
2002 769,000 150,000 919,000
2003 628,000 150,000 778,000
Thereafter 1,725,000 1,049,500 2,774,500
---------- ---------- ----------
$6,985,000 $1,766,500 $8,751,500
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
15
<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. The minimum annual rents are $110,000 per year for the first
five years, increasing each subsequent five-year period, with the average
being $137,500 per year for the minimum twenty-year term. Included in rents
receivable at March 31, 1998 and December 1997 is $205,375 and $171,000
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.
Concurrently, the Partnership entered into a joint venture with this same
tenant relating to the space formerly leased by the tenant. Under this
arrangement, the two parties have agreed to relet the space and divide the
net income or loss after paying to the Partnership an annual minimum rent of
$84,546. The Partnership's share of income (loss) is $(3,122) and $965 for
the three months ended March 31, 1998 and 1997 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 $271,000, and $217,000 for the three
months ended March 31, 1998 and 1997 respectively.
NOTE 11--CASH FLOW INFORMATION
During the three months ended March 31, 1998 and 1997, cash paid for
interest was $1,140,943 and $1,153,664 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.
16
<PAGE>
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
RESULTS OF OPERATIONS
New England Realty Associates Limited Partnership and its Subsidiary
Partnerships incurred income from operations of $414,900 during the three
months ended March 31, 1998, compared to $168,307 for the three months ended
March 31, 1997 an increase of $248,593.
The rental activity is summarized as follows:
<TABLE>
<CAPTION>
OCCUPANCY DATE
----------------------------------
MARCH 31, 1998 MARCH 31, 1997
--------------- --------------
<S> <C> <C>
Residential
Units................ 1,668 1,668
Vacancies............ 30 56
Vacancy rate......... 1.7% 3.1%
Commercial
Total square feet.... 457,700 457,700
Vacancy.............. 92,000 95,000
Vacancy rate......... 20% 21%
</TABLE>
<TABLE>
<CAPTION>
RENTAL INCOME
--------------------------------------------
1998 1997
------------------- -------------------
(IN THOUSANDS)
<S> <C> <C>
Total rents.............. $4,536 $4,220
Residential percentage... 85% 85%
Commercial percentage.... 15% 15%
Contingent rentals....... $ 271 $ 217
</TABLE>
Rental income for the three months ended March 31, 1998 was $4,536,190
compared to $4,220,254 for the three months ended March 31, 1997, an increase
of $315,936. There has been a steady increase in the residential rates due
to the demand in
17
<PAGE>
rental units. Vacancies have also declined at the residential properties
during the three months ended March 31, 1998 compared to the same period in
1997. Rental income increased at the commercial properties due primarily to
increases in the contingent rentals at the Lewiston Mall Shopping Center.
Timpany Plaza Shopping Center continues to have available space, and the
Partnership plans to subdivide the vacant space created by the vacancy of a
major tenant in 1996, in an effort to make it more marketable.
Expenses for the three months ended March 31, 1998 were $4,166,214 compared
to $4,104,523 for the three months ended March 31, 1997 an increase of
$61,691. Administrative expenses increased $51,138 from $248,759 for the
three months ended March 31, 1997 to $299,897 for the three months ended
March 31, 1998. This represents an increase in legal and accounting fees.
Interest expense decreased to $1,156,258 for the three months ended March 31,
1998 from $1,163,576 for the three months ended March 31, 1997, a decrease of
$7,318. This decrease is due to a lower level of debt. Operating expenses
increased to $639,863 at March 31, 1998 from $628,525 at March 31, 1997, an
increase of $11,338. This represents an increase in utility costs, primarily
the cost of water. Water and sewer rates have increased since 1997 and the
usage has also increased due to a higher level of occupancy at the
Partnership's residential properties. Repairs and maintenance expenses
decreased to $542,842 at March 31, 1998 from $588,290 at March 31, 1997, a
decrease of $45,448. The Partnership performed significant repairs to
Partnership properties in 1997 in an effort to improve occupancy levels.
Taxes and insurance increased to $497,145 for the three months ended March
31, 1998 from $457,626 at March 31, 1997, an increase of $39,519. Real
estate taxes as well as filing fees associated with the various entities
increased in 1998 compared to 1997. In addition, the Partnership received an
insurance abatement of $28,237 during the three months ended March 31, 1997,
resulting in a lower than usual insurance expense in 1997.
Interest income was $38,407 for the three months ended March 31, 1998,
compared to $28,332 for the three months ended March 31, 1997, an increase of
$10,075. This increase is due to an increase in the average cash balance
available for investment in 1998 compared to 1997.
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.
18
<PAGE>
The Partnership's share of loss for 1998 in the joint venture at the Timpany
Plaza Shopping Center was $3,122 compared to income of $965 in 1997, a
fluctuation of $4,087. The income from the joint venture is down due to a
vacancy at the Timpany Plaza Shopping Center during the three months ended
March 31, 1998. As of March 31, 1998, the space at the Timpany Plaza Shopping
Center relating to the joint venture was completely relet.
Included in other income (loss) in the three months ended March 31, 1998 is
$6,477 which represents the unrealized loss in the value of the Partnership's
short term investments. The Partnership's short-term investments consists of
a Massachusetts Municipal Bond Fund, the value of which will fluctuate daily.
The Partnership records the investment at its fair market value, which will
result in unrealized income or loss based on the purchase price of the
investment and its fair market value.
As a result of the changes discussed above, net income for the three months
ended March 31, 1998 was $443,708 compared to $197,604 for the three months
ended March 31, 1997, an increase of $246,104.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's principal source of cash during the first quarter of 1998
and the year ended December 31, 1997 were the collection of rents. The
majority of cash and cash equivalents of $630,429 at March 31, 1998 and
$456,277 at December 31, 1997 is held in an interest bearing account. The
Partnership's short-term investments of $1,663,447 at March 31, 1998 and
$2,055,429 at December 31, 1997 is invested in a Massachusetts Municipal Bond
Fund.
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 purchase of Depositary Receipts took place over a period of
eighteen months. The purchase prices paid for Depositary Receipts varied and
were equal to the price at which such securities were traded on the Nasdaq
Stock Market at the time of purchase. During 1997 and 1996, the Partnership
purchased 15,288 and 15,915 Depositary Receipts for a total cost of $139,268
and $110,060, respectively.
19
<PAGE>
In addition, 363 Class B and 19 General Partnership units were purchased for
a total cost of $34,819 in 1997 and 378 Class B and 20 General Partnership
units for a total cost of $27,517 in 1996 to maintain the required ownership
percentages.
During the first quarter of 1998, the Partnership and its Subsidiary
Partnerships completed certain improvements to their properties at a total
cost of $584,307. The most significant improvements were made at Boylston
Downtown, located in Boston, Massachusetts for a total cost of $161,459.
Additional capital improvements of $75,088, $65,044, $51,276, $33,184 and
$31,030 were made to Lincoln Street, 1144-1160 Commonwealth Avenue, the
Westgate Apartments, Avon Street, and Executive, respectively.
In addition to the improvements made in the first quarter of 1998, the
Partnership and its Subsidiary Partnerships plan to invest approximately
$2,300,000 in capital improvements, of which approximately $2,020,000 is
designated for residential properties and approximately $280,000 for
commercial 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 will be sufficient to fund its current operations and to finance
current improvements to its properties. The Partnership's net income and
cash flow may fluctuate dramatically from year to year as a result of the
sale of properties, unanticipated increases in expenses, or the loss of
significant tenants.
Since the Partnership's long-term goals include the acquisition of additional
properties, a portion of the proceeds from the refinancing and sale of
properties is reserved for this purpose. The Partnership will consider
refinancing existing properties if insufficient funds exist from cash
reserves to repay existing mortgages or if funds for future acquisitions are
not available.
Factors That May Affect Future Results
The discussions above contains 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:
20
<PAGE>
A major tenant of the Lewiston Mall in Lewiston, Maine, which paid
approximately $269,000 during the year ended December 31, 1997 and
approximately $69,000 for the three months ended March 31, 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.
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEETS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 630,429
<SECURITIES> 1,663,447
<RECEIVABLES> 544,219
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,950,262
<PP&E> 69,181,622
<DEPRECIATION> 17,742,081
<TOTAL-ASSETS> 57,686,620
<CURRENT-LIABILITIES> 2,683,501
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 3,199,753
<TOTAL-LIABILITY-AND-EQUITY> 57,686,620
<SALES> 4,536,190
<TOTAL-REVENUES> 4,581,114
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,009,956
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,156,258
<INCOME-PRETAX> 443,708
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 443,708
<EPS-PRIMARY> 2.56
<EPS-DILUTED> 2.56
</TABLE>
