<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------
FORM 10-Q
(MARK ONE)
<TABLE>
<C> <S>
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
</TABLE>
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999 OR
<TABLE>
<C> <S>
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
</TABLE>
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 0-12138
------------------------
<TABLE>
<CAPTION>
<S> <C>
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP
(Exact Name of Registrant as Specified in Its Charter)
MASSACHUSETTS 04-2619298
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
39 BRIGHTON AVENUE, ALLSTON, MASSACHUSETTS 02134
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (617) 783-0039
NOT APPLICABLE
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
</TABLE>
------------------------
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>
Item 1. Financial Statements.
Consolidated Balance Sheets--June 30, 1999 and December 31, 1998................................. 2
Consolidated Statements of Operations--Three Months Ended June 30, 1999 and June 30, 1998, and
Six Months Ended June 30, 1999 and June 30, 1998................................................. 3
Consolidated Statements of Cash Flows--Six Months Ended June 30, 1999 and June 30, 1998.......... 4
Consolidated Statement of Changes in Partners' Capital........................................... 5
Notes to Consolidated Financial Statements....................................................... 6
Item 2. Results of Operations........................................................................... 12
</TABLE>
PART II--OTHER INFORMATION
<TABLE>
<S> <C>
SIGNATURES......................................................................... 17
</TABLE>
<PAGE>
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
1999 DECEMBER 31,
(UNAUDITED) 1998
------------- -------------
<S> <C> <C>
ASSETS
Rental Properties.................................................................. $ 58,396,372 $ 50,868,382
Cash and Cash Equivalents.......................................................... 1,144,783 623,078
Short-term Investments............................................................. 5,144,852 3,060,373
Rents Receivable................................................................... 472,182 509,914
Real Estate Tax Escrows............................................................ 517,633 538,852
Prepaid Expenses and Other Assets.................................................. 2,117,629 1,710,537
Investment in Joint Venture........................................................ 45,660 58,910
Financing and Leasing Fees......................................................... 1,101,156 1,036,058
Mortgage Notes Receivable.......................................................... 480,872 --
------------- -------------
TOTAL ASSETS................................................................... $ 69,421,139 $ 58,406,104
------------- -------------
------------- -------------
LIABILITIES AND PARTNERS' CAPITAL
Mortgages Payable.................................................................. $ 61,215,234 $ 51,322,552
Accounts Payable and Accrued Expenses.............................................. 1,104,125 868,425
Advance Rental Payments and Security Deposits...................................... 2,343,640 1,943,247
------------- -------------
Total Liabilities.............................................................. 64,662,999 54,134,224
Commitments and Contingent Liabilities (Note 8)
Partners' Capital
173,252 units outstanding in 1999 and 1998..................................... 4,758,140 4,271,880
------------- -------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL............................................ $ 69,421,139 $ 58,406,104
------------- -------------
------------- -------------
</TABLE>
See notes to consolidated financial statements
2
<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,
(UNAUDITED) (UNAUDITED)
-------------------- --------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES:
Rental income............................... $4,824,390 $4,545,545 $9,602,588 $9,081,735
Laundry and sundry income................... 42,013 40,479 72,047 85,403
--------- --------- --------- ---------
4,866,403 4,586,024 9,674,635 9,167,138
--------- --------- --------- ---------
Expenses:
Administrative.............................. 246,266 303,151 536,190 603,048
Depreciation and amortization............... 876,814 801,713 1,731,306 1,597,736
Interest.................................... 1,197,794 1,154,110 2,360,629 2,310,368
Management Fees............................. 206,589 194,035 413,369 388,131
Operating................................... 349,531 406,848 1,006,094 1,046,711
Renting..................................... 76,513 81,102 128,267 121,192
Repairs and Maintenance..................... 661,950 680,453 1,222,261 1,223,295
Taxes and Insurance......................... 475,258 463,120 985,980 960,265
--------- --------- --------- ---------
4,090,715 4,084,532 8,384,096 8,250,746
--------- --------- --------- ---------
Income from Operations........................ 775,688 501,492 1,290,539 916,392
--------- --------- --------- ---------
Other Income (Loss)
Interest income............................. 117,747 38,253 176,069 76,660
Income from investment in partnership and
joint venture............................. 9,299 5,070 14,230 1,948
Unrealized appreciation (depreciation) in
investment................................ (206,594) 5,301 (269,629) (1,176)
Gain on the sale of real estate............. 676,124 -- 676,124 --
--------- --------- --------- ---------
596,576 48,624 596,794 77,432
--------- --------- --------- ---------
Net Income.................................... $1,372,264 $ 550,116 $1,887,333 $ 993,824
--------- --------- --------- ---------
--------- --------- --------- ---------
Net Income per Unit........................... $ 7.92 $ 3.18 $ 10.89 $ 5.74
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted Average Number of Units
Outstanding................................... 173,252 173,252 173,252 173,252
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
(UNAUDITED)
-------------------------
1999 1998
------------ -----------
<S> <C> <C>
Cash Flows from Operating Activities
Net Income..................................................... $ 1,887,333 $ 993,824
------------ -----------
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization.................................. 1,731,306 1,597,736
(Income) loss from investments in partnerships and joint
venture...................................................... (14,230) (1,948)
Gain on the sale of rental property............................ (676,124) --
Unrealized depreciation on short-term investments.............. 269,629 --
Decrease in rents receivable................................... 37,732 135,202
(Increase) in financing and leasing fees....................... (230,149) (10,274)
Increase (Decrease) in accounts payable........................ 235,700 (21,566)
Decrease in real estate tax escrow............................. 21,219 41,228
(Increase) Decrease in prepaid expenses and other assets....... (407,092) 119,039
Increase in advance rental payments and security deposits...... 400,393 106,825
Increase in notes receivable................................... (480,872) --
------------ -----------
Total Adjustments.............................................. 1,563,636 1,966,242
------------ -----------
Net cash provided by operating activities...................... 3,450,969 2,960,066
Cash Flows from Investing Activities
Distribution from joint venture................................ 27,480 --
Purchase and improvement of rental properties.................. (9,213,059) (1,083,933)
Maturity of short-term investments............................. 2,033,832 --
Purchase of short-term investments............................. (4,594,918) (485,169)
Sale of rental property........................................ 850,000 --
------------ -----------
Net cash (used in) investing activities........................ (12,940,827) (1,569,102)
------------ -----------
Cash Flows from Financing Activities
Principal payments and early repayment of mortgages payable.... (482,540) (310,271)
Distributions to partners...................................... (1,401,073) (709,185)
Proceeds from the refinancing.................................. 5,283,025 --
Proceeds from notes payable.................................... 5,244,113 --
------------ -----------
Net cash provided by (used in) financing activities............ 8,643,525 (1,019,456)
------------ -----------
Net Increase in Cash and Cash Equivalents........................ 521,705 371,508
Cash and Cash Equivalents, Beginning............................. 623,078 456,277
------------ -----------
Cash and Cash Equivalents, Ending................................ $ 1,144,783 $ 827,785
------------ -----------
------------ -----------
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' CAPITAL
<TABLE>
<CAPTION>
UNITS
----------------------------------------------
LIMITED GENERAL
--------------------- PARTNERSHIP
CLASS A CLASS B CLASS C TOTAL
---------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Balance, January 1, 1998...................... $2,769,251 $ 661,152 $ 34,827 $3,465,230
Distribution to Partners...................... (567,348) (134,745) (7,092) (709,185)
Net Income.................................... 795,059 188,827 9,938 993,824
---------- --------- ----------- ----------
Balance, June 30, 1998........................ $2,996,962 $ 715,234 $ 37,673 $3,749,869
---------- --------- ----------- ----------
---------- --------- ----------- ----------
Units authorized and issued, net of 6,973
Treasury Units at June 30, 1998............. 138,602 32,918 1,732 173,252
---------- --------- ----------- ----------
---------- --------- ----------- ----------
Balance, January 1, 1999...................... $3,414,571 $ 814,416 $ 42,893 $4,271,880
Distribution to Partners...................... (1,120,858) (266,204) (14,011) (1,401,073)
Net Income.................................... 1,509,866 358,593 18,874 1,887,333
---------- --------- ----------- ----------
Balance, June 30, 1999........................ $3,803,579 $ 906,805 $ 47,756 $4,758,140
---------- --------- ----------- ----------
---------- --------- ----------- ----------
Units authorized and issued, net of 6,973
Treasury Units at June 30, 1999............. 138,602 32,918 1,732 173,252
---------- --------- ----------- ----------
---------- --------- ----------- ----------
</TABLE>
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 also made investments in other
real estate partnerships and has participated in other real estate-related
activities, primarily located in Massachusetts. In connection with the mortgages
referred to in Note 5, a substantial number of NERA's properties were
restructured into separate subsidiary limited partnerships without any change in
the historical cost basis.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of NERA and its subsidiary limited partnerships. NERA has a 99.67%
ownership interest in each of such subsidiary limited partnerships. The
consolidated group is referred to as the "Partnerships." Minority interests are
not recorded since they are insignificant. All significant intercompany accounts
and transactions are eliminated in consolidation. The Partnership accounts for
its investment in a joint venture on the equity method.
ACCOUNTING ESTIMATES: The preparation of the financial statements is in
accordance with generally accepted accounting principles (GAAP) requiring
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reported period. Accordingly, actual results could differ
from those estimates.
REVENUE RECOGNITION: Rental income from residential and commercial
properties is recognized over the term of the related lease. Amounts sixty days
in arrears are charged against income. Certain leases of the commercial
properties provide for increasing stepped minimum rents, which are accounted for
on a straight-line basis over the term of the lease.
RENTAL PROPERTIES: Rental properties are stated at cost less accumulated
depreciation. Maintenance and repairs are charged to expense as incurred;
improvements and additions are capitalized. When assets are retired or otherwise
disposed of, the cost of the asset and related accumulated depreciation is
eliminated from the accounts, and any gain or loss on such disposition is
included in income. Rental properties are depreciated on the straight-line
method over their estimated useful lives. In the event that facts and
circumstances indicate that the carrying value of rental properties may be
impaired, an analysis of recoverability is performed. The estimated future
undiscounted cash flows are compared to the asset's carrying value to determine
if a write-down to fair value or discounted cash flow value is required.
FINANCING AND LEASING FEES: Financing fees are capitalized and amortized,
using the interest method, over the life of the related mortgages. Leasing fees
are capitalized and amortized on a straight-line basis over the life of the
related lease.
INCOME TAXES: The financial statements have been prepared under the basis
that NERA and its subsidiaries are entitled to tax treatment as partnerships.
Accordingly, no provision for income taxes on income has been recorded.
CASH EQUIVALENTS: The Partnerships consider cash equivalents to be all
highly liquid instruments purchased with a maturity of three months or less.
6
<PAGE>
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SHORT-TERM INVESTMENTS: The Partnership accounts for short-term investments
in accordance with Statement of Financial Accounting Standards No. 115
"Accounting for Certain Investments in Debt and Equity Securities". The
Partnerships consider short term investments to be mutual funds and bank
certificates of deposit, Treasury obligations, or commercial paper with initial
maturities between three and twelve months. These investments are considered to
be trading account securities and are carried at fair value with unrealized
holding gains or losses reflected in earnings.
CONCENTRATION OF CREDIT RISKS; FINANCIAL INSTRUMENTS: The Partnerships'
tenants are located in New England, and the Partnerships are subject to the
general economic risks related thereto. No single tenant accounted for more than
5% of the Partnerships' revenues in 1999 or 1998. The Partnerships make their
temporary cash investments with high credit quality financial institutions or
purchase money market accounts invested in U.S. Government securities. At June
30, 1999 approximately $900,000 of cash and cash equivalents exceeded federally
insured amounts. The mutual fund investment is subject to price volatility
associated with any interest-bearing investment. Fluctuations in actual interest
rates affect the value of these investments.
ADVERTISING EXPENSE: Advertising is expensed as incurred. Advertising
expense was $30,409 and $45,842 for the six months ended June 30, 1999 and 1998,
respectively.
NOTE 2--RENTAL PROPERTIES
Rental properties consist of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, USEFUL
1999 1998 LIFE
------------- ------------- -------------
<S> <C> <C> <C>
Land................................................................ $ 12,974,908 $ 9,710,733 --
Buildings........................................................... 48,501,096 43,627,173 25-31 years
Building improvements............................................... 13,069,674 12,610,196 15-31 years
Kitchen cabinets.................................................... 1,223,296 1,138,588 5-10 years
Carpets............................................................. 1,244,869 1,176,261 5-10 years
Air conditioning.................................................... 281,777 281,776 7-10 years
Land improvements................................................... 747,635 684,850 10-31 years
Laundry equipment................................................... 58,791 58,081 5-7 years
Elevators........................................................... 133,211 57,952 20 years
Swimming pools...................................................... 42,450 42,450 10 years
Equipment........................................................... 732,014 649,370 5-7 years
Motor vehicles...................................................... 65,926 65,926 5 years
Fences.............................................................. 30,495 18,624 5-10 years
Furniture and fixtures.............................................. 402,793 390,209 5-7 years
Smoke alarms........................................................ 19,705 17,817 5-7 years
------------- -------------
79,528,640 70,530,006
------------- -------------
Less accumulated depreciation....................................... 21,132,268 19,661,624
------------- -------------
$ 58,396,372 $ 50,868,382
------------- -------------
------------- -------------
</TABLE>
7
<PAGE>
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--RENTAL PROPERTIES (CONTINUED)
On May 27, 1999 the Partnership purchased a 39,600 square feet commercial
property known as Staples Plaza, located in Framingham, Massachusetts. The
purchase price was $8,200,000. The Partnership assumed an 8% mortgage on the
property of $5,267,949 which matures in June 2017.
On April 30, 1999, the Partnership sold the Willard Street apartments
located in Quincy, Massachusetts for $850,000. The purchaser paid $85,000 in
cash, assumed the existing mortgage of approximately $285,000 and gave to the
Partnership a mortgage note for the remaining $480,000. This 7.5% mortgage note
is collateralized by other real estate owned by the purchaser and matures at the
earlier of the refinancing of the purchased property or July 31, 2005, the
maturity date of the assumed mortgage
NOTE 3--RELATED PARTY TRANSACTIONS
The Partnerships' properties are managed by an entity which is owned by the
majority shareholder of the General Partner. The management fee is equal to 4%
of rental revenue and laundry income. Total fees paid were $413,369 and $388,131
for the six months ended June 30, 1999 and 1998, respectively. Advance rental
payments and security deposits are held in escrow by the management company (see
Note 6). The management company also receives a mortgage servicing fee equal to
an annual rate of 1/2% of the monthly outstanding balance of mortgages
receivable resulting from the sale of property. There were no mortgage servicing
fees paid in the six months ended June 30, 1999 and the year ended December 31,
1998.
The Partnership Agreement also permits the General Partner or management
company to charge the costs of professional services (such as counsel,
accountants, and contractors that otherwise would be charged by third party
vendors) to NERA. During the six months ended June 30, 1999 and 1998,
approximately $241,000 and $248,000 was charged to NERA for legal, maintenance,
architectural services and supervision of capital improvements. Approximately
$66,000 and $96,000 was capitalized during the six months ended June 30, 1999
and 1998 in leasehold improvements. Included in the 1999 expenses referred to
above, approximately $95,000 is recorded in repairs and maintenance, and $80,000
in administrative expense. Included in the 1998 expenses referred to above,
approximately $75,000 is recorded in repairs and maintenance, and approximately
$77,000 is included in administrative expenses. Additionally in each of the six
months ended June 30, 1999 and 1998 the Partnership paid to the management
company $31,250 and $30,000 respectively for accounting services previously
provided by an outside company. The Partnership Agreement entitles the General
Partner or a management company to receive certain commissions upon the sale of
Partnership property only to the extent that total commissions do not exceed 3%.
No such commissions were paid in 1999 or 1998.
In 1996, an individual employed by the management company performed asset
management consulting services for NERA and the management company and
subsequently was appointed President of the management company. This individual
continues to receive asset management fees from NERA, receiving $15,150 during
the six months ended June 30, 1999 and $31,200 during the year ended December
31, 1998.
Included in prepaid expenses and other assets were amounts due from related
parties of $646,420 at June 30, 1999 and $534,357 at December 31, 1998
representing Massachusetts tenant security and prepaid rent deposits which are
held for the Partnerships by another entity also owned by one of the
shareholders of the General Partner (see Note 6).
8
<PAGE>
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--RELATED PARTY TRANSACTIONS (CONTINUED)
See Note 9 for rental arrangements with Timpany Plaza joint venture. As
described in Note 4, the Partnership had interests in certain entities in which
the majority shareholder of the General Partner is also involved.
NOTE 4--OTHER ASSETS
Short-term investments are considered to be trading securities per FAS 115
and are carried on the balance sheet at their fair value. At June 30, 1999
mutual funds with a cost of $5,414,481 was recorded at its market value of
$5,144,852. At June 30, 1998 a mutual fund with a cost of $2,541,774 was
recorded at its market value of $2,540,598. The unrealized (loss) of ($269,629)
and ($1,176) is included in other income (loss) at June 30, 1999 and 1998
respectively.
Included in prepaid expenses and other assets at June 30, 1999 and December
31, 1998, is approximately $788,000 and $567,000 respectively held in escrow to
pay future capital improvements (See Note 5).
The carrying value of the Partnership's 50% interest in the Timpany Plaza
joint venture, at equity, is $45,660 and $58,910 at June 30, 1999 and December
31, 1998 respectively. In 1998, the Partnership disposed of a 10% ownership
interest in a real estate partnership accounted for by the equity method and
reduced to a carrying value of zero. Losses in excess of cost in limited
partnerships had not been recorded as the Partnership is not liable for such
amounts. This sale did not result in any proceeds to the Partnership. The
majority shareholder of the General Partner was also the majority owner of this
partnership.
NOTE 5--MORTGAGES PAYABLE
At June 30, 1999 and December 31, 1998, the mortgages payable consisted of
various loans, substantially all of which were secured by first mortgages on
properties referred to in Note 2. At June 30, 1999 the interest rate on these
loans ranged from 7.07% to 9.25% payable in monthly installments aggregating
approximately $495,000 including interest, to various dates through 2017.
Although the majority of loans mature within ten years, they are being amortized
on a basis between 25 and 27.5 years. The carrying amounts of the Partnerships'
mortgages payable approximate their fair value.
The Partnerships have pledged tenant leases as additional collateral for
certain of these mortgages.
Approximate annual maturities are as follows:
<TABLE>
<S> <C>
2000--current maturities........................................ 985,000
2001............................................................ 1,068,000
2002............................................................ 1,158,000
2003............................................................ 1,256,000
2004............................................................ 1,362,000
Thereafter...................................................... 55,386,000
---------
61,215,000
---------
---------
</TABLE>
On March 24, 1999, the Partnership refinanced the outstanding mortgage on
the Westgate Apartments located in Woburn, Massachusetts. The new loan is
$12,000,000 with an interest rate of 7.07%, and a term of 15 years, amortized
over 25 years. The net cash of approximately $5,000,000 from this refinancing
will be used for future acquisitions and redevelopment of the Westgate
Apartments.
9
<PAGE>
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--ADVANCE RENTAL PAYMENTS AND SECURITY DEPOSITS
The lease agreements for certain properties require tenants to maintain a
one-month advance rental payment plus security deposits. The funds are held in
escrow by another entity owned by the majority shareholder of the General
Partner (see Note 3).
NOTE 7--PARTNERS' CAPITAL
The Partnership has two categories of limited partners (Class A and B) and
one category of General Partner (General Partner). Under the terms of the
Partnership Agreement, Class B units and General Partnership units must
represent 19% and 1% respectively of the total units outstanding. All classes
have equal profit-sharing and distribution rights in proportion to their
ownership interests.
In March 1999, the Partnership declared a regular semi-annual dividend of
$4.60 and a special dividend of $3.50 per unit. In March 1998, the Partnership
declared a regular semi-annual dividend of $4.10 per unit.
The Partnership has entered into a deposit agreement with an agent to
facilitate public trading of limited partners' interests in Class A units. Under
the terms of this agreement, the holders of Class A units have the right to
exchange each Class A unit for ten Depositary Receipts. The following is
information on the net income per Depositary Receipt:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
<S> <C> <C>
1999 1998
--------- ---------
Net Income per Depositary Receipt............................................. $ 1.09 $ .57
--------- ---
--------- ---
</TABLE>
NOTE 8--COMMITMENTS AND CONTINGENCIES
From time to time, the Partnerships are involved in various ordinary routine
litigation incidental to their business. The Partnerships are not involved in
any material pending legal proceedings.
NOTE 9--RENTAL INCOME
During the six months ended June 30, 1999, approximately 86% of rental
income was related to residential apartments and condominium units with leases
of one year or less. The remaining 14% was related to commercial properties
which have minimum future rental income on noncancellable operating leases as
follows:
<TABLE>
<CAPTION>
COMMERCIAL
PROPERTY
LEASES LAND LEASES TOTAL
------------ ------------ ------------
<S> <C> <C> <C>
2000................................................ 2,532,000 140,000 2,672,000
2001................................................ 2,279,000 150,000 2,429,000
2002................................................ 2,130,000 150,000 2,280,000
2003................................................ 1,976,000 150,000 2,126,000
2004................................................ 1,851,000 150,000 2,001,000
Thereafter.......................................... 10,655,000 875,000 11,530,000
------------ ------------ ------------
21,423,000 1,655,000 23,038,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
10
<PAGE>
NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--RENTAL INCOME (CONTINUED)
In August 1988, the Partnership entered into a land lease agreement with an
existing tenant of the Timpany Plaza Shopping Center in Gardner, Massachusetts.
The minimum annual rents are $110,000 per year for the first five years
increasing each subsequent five-year period, with the average being $137,500 per
year for the minimum twenty-year term. Included in rents receivable at June 30,
1999 and December 1998 is $201,875 and $167,500 respectively, representing the
deferred rental income from this lease. There are also contingent rents based
upon sales volume, common area maintenance, and other charges. This lease also
provides for six extension periods of five years each at increased rents. The
minimum rents pertaining to this agreement are reflected in the foregoing table.
Concurrently, the Partnership entered into a joint venture with this same
tenant relating to the space formerly leased by the tenant. Under this
arrangement, the two parties have agreed to relet the space and divide the net
income or loss after paying to the Partnership an annual minimum rent of
$84,546. The Partnership's share of income is $14,230 and $1,948 for the six
months ended June 30, 1999 and 1998 respectively. The aggregate minimum future
rental income does not include contingent rentals which may be received under
various leases in connection with percentage rents, common area charges, and
real estate taxes. Aggregate contingent rentals were approximately $442,000 and
$483,000 for the six months ended June 30, 1999 and 1998 respectively.
Rents receivable are net of allowances for doubtful accounts of $98,738 at
June 30, 1999 and $135,559 at December 31, 1998.
NOTE 10--CASH FLOW INFORMATION
During the six months ended June 30, 1999 and 1998, cash paid for interest
was $2,325,525 and $2,278,529 respectively.
NOTE 11--FAIR VALUE OF FINANCIAL INSTRUMENTS
The Partnership considers the fair value of its financial instruments to
approximate their carrying values because conditions pertaining to the historic
carrying values approximate those in the current market.
11
<PAGE>
RESULTS OF OPERATIONS
New England Realty Associates Limited Partnership and its Subsidiary
Partnerships earned income from operations of $775,688 for the three months
ended June 30, 1999, compared to $501,492 for the three months ended June 30,
1998 an increase of $274,196. For the six months ended June 30, 1999, income
from operations was $1,290,539 compared to $916,392 for the six months ended
June 30, 1998, an increase of $374,147.
The rental activity is summarized as follows:
<TABLE>
<CAPTION>
OCCUPANCY DATE
------------------------
JUNE 30, JUNE 30,
1999 1998
----------- -----------
<S> <C> <C>
RESIDENTIAL
Units............................................... 1652 1668
Vacancies........................................... 28 37
Vacancy rate........................................ 1.7% 2.2%
COMMERCIAL
Total square feet................................... 496,700 457,700
Vacancy............................................. 70,000 93,000
Vacancy rate........................................ 14% 20%
</TABLE>
<TABLE>
<CAPTION>
RENTAL INCOME
(IN THOUSANDS)
--------------------
1999 1998
--------- ---------
<S> <C> <C>
Total rents................................................. $ 9,603 $ 9,082
Residential percentage...................................... 86% 89%
Commercial percentage....................................... 14% 11%
Contingent rentals.......................................... $ 271 $ 483
</TABLE>
Rental income for the three months ended June 30, 1999 was $4,824,390
compared to $4,545,545 for the three months ended June 30, 1998, an increase of
$278,845 (6.1%). Rental income for the six months ended June 30, 1999 was
$9,602,588, compared to $9,081,735 for the six months ended June 30, 1998, an
increase of $520,853 (5.7%).
Rental income increased at the commercial properties approximately $63,000
during the six months ended June 30, 1999 due to the acquisition of the Staples
Plaza in Framingham, Massachusetts. The rental income from the Staples Plaza
since the acquisition on May 27, 1999 was $84,292. Rental income from the
Partnership's existing properties decreased slightly due to vacancies at 62
Boylston Street. One major tenant and several smaller tenants moved out in late
1998 and the space remained vacant during the first six months of 1999. At June
30, 1999, the Partnership has obtained signed leases for the previously vacant
space at 62 Boylston Street. Rental income increased at the residential
properties approximately $458,000 during the six months ended June 30, 1999,
compared to the six months ended June 30, 1998. The demand for residential
apartments remains very strong in the greater Boston area. As a result,
vacancies have decreased to 28 at June 30, 1999 compared to 37 at June 30, 1998.
Rental rates at the residential properties have also increased 6-7% at June 30,
1999 compared to June 30, 1998.
Expenses for the three months ended June 30, 1999 were $4,090,715 compared
to $4,084,532 for the three months ended June 30, 1998, an increase of $6,183.
Interest expense increased $43,684 from $1,154,110 for the three months ended
June 30, 1998 to $1,197,794 for the three months ended June 30, 1999. The
Partnership incurred additional debt of $5,200,000 during the three months ended
June 30, 1999 due to the acquisition of the Staples Plaza in May 1999. In
addition, the Partnership refinanced the Westgate Apartments in March 1999,
resulting in additional debt of $5,300,000.
12
<PAGE>
Management believes that its reserves are sufficient to service the the new debt
of $10,500,000. Management fees increased $12,554 from $194,035 for the three
months ended June 30, 1998 to $206,589 for the three months ended June 30, 1999.
This increase is due to the increase in rental income. Taxes and insurance
increased $12,138 from $463,120 for the three months ended June 30, 1998 to
$475,258 for the six months ended June 30, 1999. This increase is due to an
increase in the real estate taxes in 1999 compared to the same period in 1998.
These increases are offset by a decrease in administrative expenses of $56,885
from $303,151 for the three months ended June 30, 1998 to $246,266 for the three
months ended June 30, 1999. This decrease is due to significant accounting costs
incurred in 1998 due to special projects done in 1998 which are not recurring
costs in 1999. Operating expenses decreased $57,317 from $406,848 for the six
months ended June 30, 1998 to $349,531 for the six months ended June 30, 1999.
This decrease is due to lower utility costs in 1999 as a result of a milder
winter in 1999 compared to 1998. Repairs and maintenance expenses decreased
$18,503 from $680,453 for the three months ended June 30, 1998 to $661,950 for
the three months ended June 30, 1999. This increase is due to the significant
repairs done to the Partnership properties in 1998.
Expenses for the six months ended June 30, 1999 were $8,384,096 compared to
$8,250,746 for the six months ended June 30, 1998, an increase of $133,350. This
increase in expenses includes increases of $50,261 in interest expense; an
increase of $25,715 in taxes and insurance; and an increase of $25,238 in the
management fees. These increases are offset by a decrease of $66,858 in
administrative expenses, and a decrease of $40,617 in operating expenses. An
explanation of these fluctuations is described in the preceding paragraph.
Interest income was $117,747 for the three months ended June 30, 1999
compared to $38,253 for the three months ended June 30, 1998, an increase of
$79,494. Interest income was $176,069 for the six months ended June 30, 1999
compared to $76,660 for the six months ended June 30, 1998 an increase of
$99,409. These increases are due to an increase in the cash available for
investment in 1999.
The Partnership is a partner in a joint venture with a tenant at the Timpany
Plaza Shopping Center in Gardner, Massachusetts. Under the terms of the
agreement, the two parties have agreed to relet the space formerly leased by the
tenant, and divide the net income or loss after paying to the Partnership an
annual rent of approximately $84,000. The Partnership's investment in the
Timpany Plaza joint venture represents less than 1% of the Partnership's assets.
The Partnership's share of income for the three months ended June 30, 1999
in the joint venture at the Timpany Plaza Shopping Center was $9,299 compared to
$5,070 for the three months ended June 30, 1998, a fluctuation of $4,229. For
the six months ended June 30, 1999, income from the joint venture was $14,230
compared to $1,948 for the six months ended June 30, 1998, an increase of
$12,282. These increases in income at the joint venture are due to a rental rate
increase in 1999 from a significant tenant.
Included in other income (loss) during the three and six months ended is a
gain of $676,124 on the sale of the Williard Street Apartments. This property
was sold for $850,000 in April 1999.
Also included in other income (loss) during three months ended June 30, 1999
and June 30, 1998 is ($206,594) and $5,301 respectively in unrealized
(depreciation) appreciation in the Partnership's short-term investments. For the
six months ended June 30, 1999 and June 30, 1998 the unrealized (depreciation)
in the Partnership's investment was ($269,629) and ($1,176) respectively.
As a result of the changes discussed above, net income for the three months
ended June 30, 1999 was $1,372,264 compared to $550,116 for the three months
ended June 30, 1998, an increase of $822,148. Net income for the six months
ended June 30, 1999 was $1,887,333 compared to $993,824 for the six months ended
June 30, 1998, an increase of $893,509. The significant increases in net income
for both of these periods is due primarily to the gain of approximately $676,000
on the sale of the Williard Street property.
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's principal source of cash during 1999 and 1998 was the
collection of rents and the refinancing of a Partnership property. The majority
of cash and cash equivalents of $1,144,783 at June 30, 1999 and $623,078 at
December 31, 1998 was held in an interest bearing account. The Partnership's
short-term investments are $5,144,852 at June 30, 1999 of which $1,886,591 is
invested in a Massachusetts Municipal Bond Fund and $3,258,261 is invested in a
U.S. Treasury Fund. At December 31, 1998 the Partnerships short-term investments
were $3,060,373, of which $1,921,123 was invested in a Massachusetts Municipal
Bond Fund and approximately $1,139,250 was invested in a U.S. Treasury Fund.
On April 30, 1999, the Partnership sold the Willard Street Apartments
located in Quincy, Massachusetts. The sale price was $850,000. The buyer assumed
the first mortgage of approximately $285,000, and the Partnership took back a
mortgage of approximately $480,000 at a rate of 7.5%. The net cash from the sale
of this property was approximately $85,000. The mortgage matures at the earlier
of the refinancing of the property or July 31, 2005.
On March 24, 1999, the Partnership refinanced the Westgate Apartments
located in Woburn, Massachusetts. The new loan is $12,000,000 with an interest
rate of 7.07%, and a term of 15 years, amortized over 25 years. The net cash of
approximately $5,000,000 from this refinancing will be used for future
acquisitions and redevelopment of the Westgate Apartments.
On May 27, 1999, the Partnership purchased a 39,600 square foot commercial
property known as Staples Plaza, located in Framingham, Massachusetts. The
purchase price was $8,200,000. The Partnership assumed an 8% mortgage on the
property of $5,267,949 which matures in 2017 and the balance of $2,932,051 was
funded from the Partnership's cash reserves, which were adequate to support this
purchase.
During the second quarter of 1999, the Partnership and its Subsidiary
Partnerships completed certain improvements to their properties at a total cost
of approximately $669,000. These improvements were funded from cash reserves
which were adequate to support these improvements. The most significant
improvements were made at the property located at 62 Boylston Street, for a
total cost of approximately $285,000. These improvements were made due to the
new tenants who have occupied the space at 62 Boylston Street. Significant
improvements were also made at Timpany Plaza in Gardner, Massachusetts for a
total cost of approximately $120,000. The Partnership signed a ten year lease
with a new tenant at the Timpany Plaza Shopping Center and the improvements made
during the second quarter of 1999 were made to the newly occupied space. The
Partnership also made improvements of approximately $56,000, $34,000 and $31,000
to the apartments at Westgate Woburn, 1144 Commonwealth Avenue, and Executive
Apartments.
In addition to the improvements made in the second quarter of 1999, the
Partnership and its Subsidiary Partnerships plan to invest approximately
$1,400,000 in capital improvements, the majority of which will be done at the
residential properties. These improvements will be funded from escrow accounts
as well as from the Partnership's cash reserves.
The Partnership anticipates that cash from operations and interest-bearing
investments and mortgage refinancings will be sufficient to fund its current
operations and to finance current improvements to its properties. The
Partnership's net income and cash flow may fluctuate dramatically from year to
year as a result of the sale of properties, unanticipated increases in expenses,
or the loss of significant tenants.
Since the Partnership's long-term goals include the acquisition of
additional properties, a portion of the proceeds from the refinancing and sale
of properties is reserved for this purpose. The Partnership will consider
refinancing existing properties if insufficient funds exist from cash reserves
to repay existing mortgages or if funds for future acquisitions are not
available.
14
<PAGE>
Factors That May Affect Future Results
The discussions above contain information based upon management's belief and
forward-looking statements that involve a number of risks, uncertainties, and
assumptions. There can be no assurances that actual results will not differ
materially as a result of various factors, including but not limited to the
following:
A major tenant of the Lewiston Mall LP in Lewiston, Maine, which paid
approximately $169,000 during the first six months of 1999 and $329,000 in 1998,
can terminate its lease with nine months notice, effective January 1, 1997. The
Partnership is currently negotiating to obtain a long term lease. The
Partnership, at this time, cannot make any assurances that the tenant will renew
its lease for this space.
Readiness for Year 2000
The Year 2000 problem arises because older or noncompliant computer systems
are unable either to process data with accuracy, or to operate building systems
correctly, by reason of the inability of either software or elements of hardware
contained within such systems correctly to process dates after December 31,
1999. The Partnership has considered the Year 2000 problem as it relates to the
business of the Partnership in three areas: Partnership operations, problems
with vendors, and problems with tenants.
Operations
Partnership operations have been considered in two areas: financial
operations and building operations.
With respect to financial operations, all of the accounting and management
functions of the Partnership are discharged for the Partnership by its
contracted property manager, The Hamilton Company. The Partnership has been
advised by The Hamilton Company that, as part of routine computer software and
hardware updates which are presently in process, The Hamilton Company will be
able to continue to perform the financial operations of the Partnership in the
ordinary course. The costs of such compliance will be borne as operating costs
by The Hamilton Company and will not be a charge to the earnings of the
Partnership. The Partnership believes that the management fee paid by the
Partnership to The Hamilton Company will be adequate to support The Hamilton
Company's effort in this regard, which understanding has been confirmed to the
Partnership by The Hamilton Company.
Specifically, The Hamilton Company has advised the Partnership as follows:
that it has retained professional Year 2000 consulting services to provide
advice concerning the installation of new hardware and software; that the newly
installed systems are used as standard systems by many real estate management
companies, and such systems are Year 2000 compliant; that of a total estimated
cost of $150,000 associated with the replacement of hardware and software by The
Hamilton Company, which replacement will address all Year 2000 compliance
issues, approximately $140,000 has already been incurred; that such expenses
include and will include the cost of training of employees and staff and all
fees and expenses of consultants; that The Hamilton Company during the last
quarter of 1998 began validating the processes of its newly installed computer
hardware and software systems to assure reliability and provide testing and
verification; that as of July 31, 1999, the new computer systems are believed by
the Partnership to be Year 2000 compliant and operational, however testing of
such systems has not been but should be completed by September 30, 1999; and
that the Partnership will obtain appropriate assurances in such regard from The
Hamilton Company.
The Partnership and its manager believe that its Year 2000 initiative will
adequately prepare the Partnership with respect to Year 2000 issues; the
Partnership has not developed any contingency plan for financial operations
should the current initiative prove to be unsuccessful, and believes that there
15
<PAGE>
would be adequate time to effect a different and compliant systems installation
if the September 30, 1999 testing date is not met.
With respect to building operations, the Partnership has completed its
review of all computerized systems which are operant in the Partnership's real
estate holdings.
Vendors
The Partnership further has reviewed its relationship with principal
vendors. The Partnership is soliciting written assurance that its third party
vendors which process the rents and deposits received from tenants, and its bank
of deposit and account, are Year 2000 compliant. During 1999, the Partnership
has been confirming such compliance, and believes that alternate servicing
arrangements of a compliant nature would be available to the Partnership in the
event any noncompliance is experienced.
Tenants
Finally, the Partnership's entire income is derived from the payment of
rents, and the impact of Year 2000 problems on the viability and credit
worthiness of tenants could pose a significant economic threat to the income and
profitability of the Partnership. However, approximately 86% of the
Partnership's tenants are residential and are not subject to the same magnitude
of risk that might be incurred in a tenant mix which was more commercially
oriented. Further, no commercial tenant accounts for more than 2% of the gross
rental income of the Partnership, and the Partnership therefore does not
consider its gross income or profitability to be materially at risk by reason of
possible impact of the Year 2000 problem on its tenant population. On or before
September 30, 1999, the Partnership intends to use best efforts to complete the
seeking of written assurance of substantial compliance by its largest commercial
tenants with Year 2000 issues, both on the part of such tenants and their
respective essential third party trading partners.
Risks Summarized
Failure of the Partnership adequately to provide for Year 2000 compliance
with respect to its financial operations could result in an inability to
collect, credit or track rental income. Failure to bring computerized
operational systems within its real estate holdings into compliance might cause
liability on the part of the Partnership for economic or physical loss to its
tenants and the invitees of those tenants in excess of applicable insurance
coverages, which coverages (typically) expressly exclude damages caused by Year
2000 issues. The failure of third-party vendors to provide adequate financial
support to rental collection and crediting function could have a significant
negative impact on the gross income and net profit of the Partnership, and the
inability of the Partnership's tenants to sustain financial health would, in
turn, result in a reduction of gross rentals received by the Partnership.
16
<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 13, 1999
NEW ENGLAND REALTY ASSOCIATES
LIMITED PARTNERSHIP
By: NEWREAL, INC.,
its General Partner*
By: /s/ RONALD BROWN
-----------------------------------------
Ronald Brown, President
* Functional equivalent of Chief Executive
Officer, Principal Financial Officer and
Principal Accounting Officer.
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,144,783
<SECURITIES> 5,144,852
<RECEIVABLES> 472,182
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,635,262
<PP&E> 79,528,640
<DEPRECIATION> 21,132,268
<TOTAL-ASSETS> 69,421,139
<CURRENT-LIABILITIES> 3,447,765
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 4,758,140
<TOTAL-LIABILITY-AND-EQUITY> 69,421,139
<SALES> 9,602,588
<TOTAL-REVENUES> 9,674,635
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 6,023,467
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,360,629
<INCOME-PRETAX> 1,887,333
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,887,333
<EPS-BASIC> 10.89
<EPS-DILUTED> 10.89
</TABLE>
