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| NEN > SEC Filings for NEN > Form 10-Q on 9-Nov-2009 | All Recent SEC Filings |
9-Nov-2009
Quarterly Report
The following discussion should be read in conjunction with the financial statements and notes thereof appearing elsewhere in this Report. This Report, on Form 10-Q, contains forward-looking statements within the meaning of the securities law. Actual results or developments could differ materially from those projected in such statements as a result of certain factors set forth in the section below entitled "Factors That May Affect Future Results" and elsewhere in this Report.
The real estate market in the Greater Boston area has softened, and the Partnership anticipates the climate will remain the same in the foreseeable future. As anticipated, the Partnership has seen an increase in vacancies and an increase in rental concessions in the third quarter. The Partnership believes its present cash reserves as well as anticipated rental revenue will be sufficient to fund its current operations, finance current planned improvements to its properties, and continue distribution payments in the foreseeable future.
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 or selling existing properties if the Partnership's cash reserves are insufficient to repay existing mortgages or if the Partnership needs additional funds for future acquisitions.
Management believes that the financial difficulties experienced since the lending crisis in 2007 have finally shown up in the local economy as evidenced by higher vacancies in the third quarter and concessions necessary to improve occupancy. Management believes that the rental concessions will continue through 2010 but to a lesser degree. Management believes recovery from the national recession and the challenging credit market will continue into 2010 at the local level. The Partnership's primary market, the Greater Boston Metropolitan Area, continues to experience high unemployment levels and continued downsizing by many corporations and municipalities. As such, we do not foresee improvement until mid 2010. Despite the current financial markets, NERA and Hamilton were able to secure a $90 million long term mortgage to finance the acquisition of the 409 unit residential complex discussed in Note 17 of the financial statements.
Despite the increased vacancies and the concessions given in the third quarter of 2009, the Partnership's rental income rose by 3.6% and operating expenses declined by 1.8% for the nine months ended September 30, 2009. Operational successes included managing utility costs, improving efficiency through capital improvements in heating and air conditioning equipment and a concerted effort to keep curb appeal high but keep repair and maintenance expenses in check. Management continues to be effective in reducing operating expenses experiencing increases only in uncontrollable expenses such as real estate taxes and insurance. Management believes that continued efforts to control operating expenses will be effective for the remainder of the year. Bad debt remains at approximately 1% and revenue at the commercial properties has shown no sign of weakness. The market softness in 2009 has required more free rent than in previous seasons which is reflected in the third quarter revenue and Management believes that further concessions will be necessary in the foreseeable future. As the local economy has yet to rebound or demonstrate job growth, Management expects revenue growth for the balance of 2009 and the first two quarters of 2010 to be modest at best.
The Stock Repurchase Program that was initiated in 2007 and expired in August 2009 has purchased 391,424 Depositary Receipts through September 2009.
The Partnership has retained The Hamilton Company ("Hamilton") to manage and administer the Partnership's and Joint Ventures' Properties. Hamilton is a full-service real estate management company, which has legal, construction, maintenance, architectural, accounting and administrative departments. The Partnership's properties represent approximately 40% of the total properties and 70% of the residential properties managed by Hamilton. Substantially all of the other properties managed by Hamilton are owned, wholly or partially, directly or indirectly, by Harold Brown. The Partnership's Second Amended and Restated Contract of Limited Partnership (the "Partnership Agreement") expressly provides that the general partner may employ a management company to manage the properties, and that such management company may be paid a fee of 4% of rental receipts for administrative and management services (the "Management Fee"). The Partnership pays Hamilton the full annual Management Fee, in monthly installments.
At September 30, 2009, Harold Brown, his brother, Ronald Brown and the President of Hamilton, Carl Valeri, collectively own approximately 39% of the Depositary Receipts representing the Partnership Class A Units (including Depositary Receipts held by trusts for the benefit of such persons' family members). Harold Brown also owns 75% of the Partnership's Class B Units 75% of the capital stock of NewReal, Inc. ("NewReal"), the Partnership's sole general partner, and all of the outstanding stock of Hamilton. Ronald Brown also owns 25% of the Partnership's Class B Units and 25% of NewReal's capital stock. In addition, Ronald Brown is the President and director of NewReal and Harold Brown is NewReal's Treasurer and a director. Two of NewReal's other directors, Roberta Ornstein and Conrad DiGregorio, also own immaterial amounts of the Partnership's Class A Units or receipts.
In addition to the Management Fee, the Partnership Agreement further provides for the employment of outside professionals to provide services to the Partnership and allows NewReal to charge the Partnership for the cost of employing professionals to assist with the administration of the Partnership's properties. Additionally, from time to time, the Partnership pays Hamilton for repairs and maintenance services, legal services, construction services and accounting services. The costs charged by Hamilton for these services are at the same hourly rate charged to all entities managed by Hamilton, and management believes such rates are competitive in the marketplace.
Hamilton accounted for approximately 10% of the repair and maintenance expense paid for by the Partnership in the nine months ended September 30, 2009 and 5% for the year ended December 31, 2008. Of the funds paid to Hamilton for this purpose, the great majority was to cover the cost of services provided by the Hamilton maintenance department, including plumbing, electrical, carpentry services, and snow removal for those properties close to Hamilton's headquarters. However, several of the larger Partnership properties have their own maintenance staff. Further, those properties that do not have their own maintenance staff and are located more than a reasonable distance from Hamilton's headquarters in Allston, Massachusetts are generally serviced by local, independent companies.
Hamilton's legal department handles most of the Partnership's eviction and collection matters. Additionally, it prepares most long-term commercial lease agreements and represents the Partnership in selected purchase and sale transactions. Overall, Hamilton provided approximately 76% of the legal services paid for by the Partnership during the nine months ended September 30, 2009 and approximately 50% for the year ended December 31, 2008.
Additionally, as described in Note 3 to the consolidated financial statements, The Hamilton Company receives similar fees from the Investment Properties.
R. Brown Partners, which is owned by Ronald Brown, managed the condominium association containing five condominium units which were sold in 2008 located in Brookline, Massachusetts. That entity received annual management fees from the five units of approximately $1,500, and Hamilton reduced its management fees to approximately 2%, so that the total management fee will not exceed the 4% allowed by the Partnership's Partnership Agreement.
The Partnership requires that three bids be obtained for construction contracts in excess of $5,000. Hamilton may be one of the three bidders on a particular project and may be awarded the contract if its bid and its ability to successfully complete the project are deemed appropriate. For contracts that are not awarded to Hamilton, Hamilton charges the Partnership a construction supervision fee equal to 5% of the contract amount. Hamilton's architectural department also provides services to the Partnership on an as-needed basis. During the nine months ended September 30, 2009, Hamilton provided construction and architectural services paid for by the Partnership totaling approximately $35,000.
Prior to 1991, the Partnership employed an outside, unaffiliated company to perform its bookkeeping and accounting functions. Since that time, such services have been provided by Hamilton's accounting staff, which consists of approximately 14 people. During the nine months ended September 30, 2009, Hamilton charged the Partnership $93,750 ($125,000 per year) for bookkeeping and accounting services.
For more information on related party transactions, see Note 3 to the Consolidated Financial Statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of the consolidated financial statements, in accordance with accounting principles generally accepted in the United States of America, requires the Partnership to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. The Partnership regularly and continually evaluates its estimates, including those related to acquiring, developing and assessing the carrying values of its real estate properties and its investments in and advances to joint ventures. The Partnership bases its estimates on historical experience, current market conditions, and on various other assumptions that are believed to be reasonable under the circumstances. However, because future events and their effects cannot be determined with certainty, the determination of estimates requires the exercise of judgment. The Partnership's critical accounting policies are those which require assumptions to be made about such matters that are highly uncertain. Different estimates could have a material effect on the Partnership's financial results. Judgments and uncertainties affecting the application of these policies and estimates may result in materially different amounts being reported under different conditions and circumstances. See Note 1 to the Consolidated Financial Statements, Principles of Consolidation.
Revenue Recognition: Rental income from residential and commercial properties is recognized over the term of the related lease. For residential tenants, amounts 60 days in arrears are charged against income. The commercial tenants are evaluated on a case by case basis. 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. Concessions made on residential leases are accounted for on the straight-line basis.
Real Estate and Depreciation: Real estate assets are stated at the lower of cost or fair value, less accumulated depreciation. Costs related to the acquisition, development, construction and improvement of properties are capitalized, including interest, wages and benefits, real estate taxes and insurance. Capitalization usually begins with commencement of
development activity and ends when the property is ready for leasing. Replacements and improvements, such as HVAC equipment, structural replacements, windows, appliances, flooring, carpeting and kitchen/bath replacements and renovations, are capitalized and depreciated over their estimated useful lives as follows:
† Depreciation is computed on the straight-line and accelerated methods over the estimated useful lives of the related assets. In assessing estimated useful lives, the Partnership makes assumptions based on historical experience acquired from both within and outside the Partnership. These assumptions have a direct impact on the Partnership's net income.
† Ordinary repairs and maintenance, such as unit cleaning and painting and appliance repairs, are expensed.
Impairment: On an annual basis management assesses whether there are any indicators that the value of the Company's rental properties may be impaired. A property's value is impaired only if management's estimate of the aggregate future cash flows (undiscounted and without interest charges) to be generated by the property is less than the carrying value of the property. To the extent impairment has occurred, the loss shall be measured as the excess of the carrying amount of the property over the fair value of the property. The Company's estimates of aggregate future cash flows expected to be generated by each property are based on a number of assumptions that are subject to economic and market uncertainties including, among others, demand for space, competition for tenants, changes in market rental rates, and costs to operate each property. As these factors are difficult to predict and are subject to future events that may alter management's assumptions, the future cash flows estimated by management in its impairment analyses may not be achieved. The Partnership has not recognized an impairment loss since 1995.
Rental Property Held for Sale and Discontinued Operations: When assets are identified by management as held for sale, the Partnership discontinues depreciating the assets and estimates the sales price, net of selling costs, of such assets. If, in management's opinion, the net sales price of the assets which have been identified as held for sale is less than the net book value of the assets, a valuation allowance is established. Properties identified as held for sale and/or sold are presented in discontinued operations for all periods presented.
Investments in Partnerships: The Partnership accounts for its 50% ownership in the Investment Properties under the equity method of accounting, as it exercises significant influence over, but does not control these entities. These investments are recorded initially at cost, as Investments in Partnerships, and subsequently adjusted for the Partnership's share in earnings, cash contributions and distributions. Under the equity method of accounting, our net equity is reflected on the consolidated balance sheets, and our share of net income or loss from the Partnership is included on the consolidated statements of income.
With respect to investments in and advances to the Investment Properties, the Partnership looks to the underlying properties to assess performance and the recoverability of carrying amounts for those investments in a manner similar to direct investments in real estate properties. An impairment charge is recorded if management's estimate of the aggregate future cash flows (undiscounted and without interest charges) to be generated by the property is less than the carrying value of the property.
Legal Proceedings: The Partnership is subject to various legal proceedings and claims that arise, from time to time, in the ordinary course of business. These matters are frequently covered by insurance. If it is determined that a loss is likely to occur, the estimated amount of the loss is recorded in the financial statements. Both the amount of the loss and the point at which its occurrence is considered likely can be difficult to determine.
RESULTS OF OPERATIONS
Comparison of the three months ended September 30, 2009 to the three months ended September 30, 2008 (as adjusted for discontinued operations)
The Partnership and its Subsidiary Partnerships earned income before other income and discontinued operations of approximately $2,588,000 during the three months ended September 30, 2009, compared to approximately $2,370,000 for the three months ended September 30, 2008, an increase of approximately $218,000 (9%).
The rental activity is summarized as follows:
Occupancy Date
October 26, 2009 October 27, 2008
Residential
Units-exclusive of available for sale units 2,269 2,265
Vacancies 111 49
Vacancy rate 4.9 % 2.1 %
Commercial
Total square feet 114,395 90,848
Vacancy 0 0
Vacancy rate 0 % 0 %
Rental Income (in thousands)
Three Months Ended September 30,
2009 2008
Total Continuing Total Continuing
Operations Operations Operations Operations
Total rents $ 8,090 $ 8,090 $ 7,959 $ 7,981
Residential percentage 90 % 90 % 92 % 92 %
Commercial percentage 10 % 10 % 8 % 8 %
Contingent rentals $ 136 $ 136 $ 134 $ 134
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Three Months Ended September 30, 2009 Compared to Three Months Ended
September 30, 2008:
Three Months Ended September 30,
Dollar Percent
2009 2008 Change Change
Revenues:
Rental income $ 8,089,673 $ 7,981,479 $ 108,194 1.3 %
Laundry and sundry income 119,893 95,907 23,986 25.0 %
8,209,566 8,077,386 132,180 1.6 %
Expenses
Administrative 416,398 424,363 (7,965 ) (1.9 )%
Depreciation and amortization 1,591,668 1,655,560 (63,892 ) (3.9 )%
Management fees 334,745 327,079 7,666 2.3 %
Operating 689,871 784,581 (94,710 ) (12.1 )%
Renting 262,234 218,896 43,338 19.9 %
Repairs and maintenance 1,435,264 1,429,528 5,736 0.4 %
Taxes and insurance 891,239 867,119 24,120 2.8 %
5,621,419 5,707,126 (85,707 ) (1.5 )%
Income Before Other Income and
Discontinued Operations 2,588,147 2,370,260 217,887 9.2 %
Other Income (Loss)
Interest expense (1,978,591 ) (1,930,302 ) 48,289 2.5 %
Interest income 15,270 39,357 (24,087 ) (61.2 )%
Gain (loss) on the sale of
equipment 93 - 93 NA
Mortgage prepayment penalties - - - -
(Loss) from investment in
unconsolidated joint ventures (325,614 ) (300,352 ) 25,262 8.4 %
(2,288,842 ) (2,191,297 ) 97,545 4.5 %
(Loss) income from Continuing
Operations 299,305 178,963 120,342 67.2 %
Discontinued Operations:
Income (loss) from discontinued
operations - (22,229 ) 22,229 (100.0 )%
Gain on sale of real estate from
discontinued operations - 67,650 (67,650 ) (100.0 )%
- 45,421 (45,421 ) (100.0 )%
Net Income $ 299,305 $ 224,384 $ 74,921 33.3 %
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Rental income from continuing operations for the three months ended September 30, 2009 was approximately $8,089,000 compared to approximately $7,981,000 for the three months ended September 30, 2008, an increase of approximately $108,000 (1.3%). Rental income from Cypress Street in Brookline, acquired in 2008, was approximately
$202,000. A number of properties experienced decreases in rental income for the three months ended September 30, 2009 including; 1131 Commonwealth Ave with a decrease of approximately $21,000; North Beacon Street with a decrease of approximately $41,000; 62 Boylston Street with a decrease of approximately $69,000; Redwood Hills with a decrease of approximately $28,000; and Westgate Apartments with a decrease of approximately $22,000. These decreases are due primarily to increases in vacancies as well as rental concessions granted to tenants in an effort to maintain occupancy. Rental concessions for the three months ended September 30, 2009 were approximately $275,000 compared to approximately $69,000 for the three months ended September 30, 2008, an increase of approximately $206,000. Rental concessions for the second quarter of 2009 were approximately $75,000. The concessions are accounted for on a straight-line basis where appropriate.
Expenses from continuing operations for the three months ended September 30, 2009 were approximately $5,621,000 compared to approximately $5,707,000 for the three months ended September 30, 2008, a decrease of approximately $86,000 (1.5%). The most significant factor contributing to this decrease was a decrease in depreciation and amortization expense of approximately $64,000 (3.9%) due to assets being fully depreciated at September 30, 2009; a decrease in administrative expenses of approximately $8,000 (1.9%) due to significant legal and accounting fees paid in 2008 in connection with the stock buyback program; and a decrease in operating expenses of approximately $95,000 (12.1%) due to a decrease in utility costs.
These decreases are offset by an increase in renting expenses of approximately $43,000 (19.9%) due to rental commissions paid in an effort to maintain occupancy; and an increase in taxes and insurance of approximately $24,000 (2.8%) due to real estate tax increases as well as the acquisition of Cypress Street in October 2008.
Interest expense increased approximately $48,000 (2.5%) due to the refinancing of Partnership properties in 2008 resulting in a higher level of debt offset by lower interest rates.
During the three months ended September 30, 2008, the Partnership sold the last two condominium units at Harvard 45. The gain on the sale of these units is approximately $68,000 and is included in discontinued operations.
At September 30, 2009, the Partnership has a 50% ownership interest in eight Investment Properties. See a description of these properties included in Note 14 to the Consolidated Financial Statements for a detail of the financial information of each Investment Property.
As described in Note 14 to the Consolidated Financial Statements, the Partnership's share of the net loss from the 50% owned Investment Properties was approximately $326,000 and $300,000 for the three months ended September 30, 2009 and 2008 respectively, an increase of approximately $26,000. Included in the loss for the three months ended September 30, 2009 and 2008 is a gain of approximately $1,500 and $68,000 respectively, on the sale of units.
Interest income for the three months ended September 30, 2009 was approximately $15,000 compared to approximately $39,000 for the three months ended September 30, 2008, a decrease of approximately $24,000. This decrease is due to a drop in interest rates as well as less cash available for investment.
As a result of the changes discussed above, net income for the three months ended September 30, 2009 was $299,305 compared to $224,384 for the three months ended September 30, 2008, an increase of $74,921(33.3%).
Comparison of the nine months ended September 30, 2009 to the nine months ended September 30, 2008
The Partnership and its subsidiary Partnerships earned income before other income and discontinued operations of $8,318,963 for the nine months ended September 30, 2009, compared to $7,145,416 for the nine months ended September 30, 2008, an increase of $1,173,547(16.4%). The following is a summary of the Partnership's operations for the nine months ended September 30, 2009 and 2008.
Nine Months Ended September 30,
Dollar Percent
2009 2008 Change Change
Revenues:
Rental income $ 24,634,345 $ 23,778,488 $ 855,857 3.6 %
Laundry and sundry income 312,263 304,905 7,358 2.4 %
24,946,608 24,083,393 863,215 3.6 %
Expenses
Administrative 1,277,745 1,305,968 (28,223 ) (2.2 )%
Depreciation and amortization 4,513,165 4,846,979 (333,814 ) (6.9 )%
Management fees 1,011,531 978,507 33,024 3.4 %
Operating 3,064,201 3,117,155 (52,954 ) (1.7 )%
Renting 406,363 405,761 602 0.1 %
Repairs and maintenance 3,580,895 3,653,203 (72,308 ) (2.0 )%
Taxes and insurance 2,773,745 2,630,404 143,341 5.4 %
16,627,645 16,937,977 (310,332 ) (1.8 )%
Income Before Other Income and
Discontinued Operations 8,318,963 7,145,416 1,173,547 16.4 %
Other Income (Loss)
Interest expense (5,885,831 ) (5,725,270 ) (160,561 ) 2.8 %
Interest income 47,861 119,979 (72,118 ) (60.0 )%
Mortgage prepayment penalties - (4,487,706 ) 4,487,706 (100.0 )%
(Loss) on sale of equipment (2,726 ) - (2,726 ) NA
(Loss) from investment in
unconsolidated joint ventures (880,902 ) (765,370 ) (115,532 ) 15.1 %
(6,721,598 ) (10,858,367 ) 4,136,769 (38.0 )%
Income(Loss) from Continuing
Operations 1,597,365 (3,712,951 ) 5,310,316 (143.0 )%
Discontinued Operations:
Gain on sale of real estate
from discontinued operations - 10,054,392 10,054,392 (100.0 )%
(Loss) from discontinued
. . .
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