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NEN > SEC Filings for NEN > Form 10-Q on 14-Nov-2011All Recent SEC Filings

Show all filings for NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP

Form 10-Q for NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP


14-Nov-2011

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward Looking Statements

Certain information contained herein includes forward looking statements, which are made pursuant to the safe harbor provisions of the Private Securities Liquidation Reform Act of 1995 (the "Act"). Forward looking statements in this report, or which management may make orally or in written form from time to time, reflect management's good faith belief when those statements are made, and are based on information currently available to management. Caution should be exercised in interpreting and relying on such forward looking statements, the realization of which may be impacted by known and unknown risks and uncertainties, events that may occur subsequent to the forward looking statements, and other factors which may be beyond the Partnership's control and which can materially affect the Partnership's actual results, performance or achievements for 2011 and beyond. Should one or more of the risks or uncertainties mentioned below materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. We expressly disclaim any responsibility to update our forward looking statements, whether as a result of new information, future events or otherwise. Accordingly, investors should use caution in relying on past forward looking statements, which are based on results and trends at the time they are made, to anticipate future results or trends.

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. If available acquisitions do not meet the Partnership's criteria, the Partnership may purchase additional depositary receipts. The Partnership will consider the sale or refinancing existing properties if the Partnership's cash reserves are insufficient to repay existing mortgages or if the Partnership needs additional funds for future acquisitions.

The general real estate market in the Greater Boston area has stabilized and multifamily housing is enjoying strong demand. Supply side growth is limited as local building permits for multifamily housing are at or are near a seven year low. Lower demand for home ownership and positive local employment growth continue to point to positive trends in the Greater Boston rental housing market. Vacancies at the majority of the Partnership's properties continue to be at historic lows. The Partnership has experienced modest revenue increases across all sectors of the portfolio. As anticipated, higher occupancy levels and fewer turnovers of tenants resulted in improved revenue growth. The limited supply of housing has helped eliminate rental concessions and has resulted in decreased leasing commissions. The Greater Boston Metro area has a reported average vacancy rate of 4.3% (as reported by ARA Research) which is above the Partnership's vacancy rate of 2.2% . Management anticipates that the upward pressure on rental rates will continue for the next 18-36 months. Additionally, operating expense increases are expected to be outpaced by revenue growth. Management is confident that 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. Management believes that the continued improvement in the local unemployment rate, 6.3% vs. 9% at the national level as of October 2011, general stabilization of housing prices and stability in Massachusetts's major industries will support a stronger multifamily market for the foreseeable future.

The Partnership's revenues are forecasted to exceed core 2010 revenues by over $1,000,000 or 4%. For 2011, Management expects net operating income before depreciation and amortization for the year to be $17.5 million or 7% higher than 2010. These results reflect nine months of performance where total revenue exceeded 2010 by 5% and total operating expenses grew by only 3% despite the extraordinary increases in snow removal costs. Improved collections and a steady decline in free rent, approximately $74,000 in 2011 and rental commissions, approximately $160,000 in 2011, assisted in keeping 2011 operating expenses in line. The majority of leases signed, approximately 58%, during the nine months ended September 30, 2011 were for renewals of existing leases. Tenant improvements were approximately $750,000 for the nine months ended September 30, 2011. As in previous quarters, occupancy continues to remain above the competition. Management is satisfied with staff efforts to balance tenant retention, improve curb appeal and monitor the profitability of the properties while mitigating growth in the other expense categories.

The 2008 refinancing round significantly reduced debt maturity exposure for the next 15 years with $65 million of the $139 million having been extended. The next significant round of refinancing, approximately $50,000,000, will occur in 2013 and 2014. Management will continue to monitor the debt markets to determine the approximate time to refinance the 2013 and 2014 mortgage maturities within the portfolio. Management may capitalize on the historic low interest rate environment despite some upfront costs associated with prepayment penalties during the 2012 calendar year.

As more fully described in the Form 8-K filed on September 13, 2011, the Partnership received a letter from the NYSE Amex dated September 9, 2011, notifying the Partnership that it was not in compliance with the continued listing standards of the exchange. In our October 4, 2011 response to the NYSE, the Partnership demonstrated how it will be in compliance with its listing requirements. Management anticipates that it's comprehensive response will be received favorably and the Partnership will retain the listing on NYSE. Management expects to receive a formal response from the NYSE in the fourth quarter of 2011.


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As Management reviews property performance, it takes into consideration opportunities for property dispositions. The Partnership recently sold Avon Street and purchased Battle Green. For additional information, see Note 2 and Note 16 to the financial statements.

The Stock Repurchase Program that was initiated in 2007 has purchased 398,320 Depositary Receipts through September 2011 or 29% of the outstanding class A Depositary Receipts. 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 up to 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, 2011, Harold Brown, his brother, Ronald Brown and the President of Hamilton, Carl Valeri, collectively own approximately 39.50% 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. One of NewReal's directors, Roberta Ornstein also owns immaterial amounts of the Partnership's Class A receipts.

On March 31, 2011 the Hamilton Company Charitable Foundation (the "Foundation") purchased 8,000 Depositary Receipts of the Partnership at a price of $66.75 for a total cost of $534,000. The Foundation was formed under Sec. 501 (3) of the Internal Revenue Code. There are five trustees of the Foundation, all of whom are family members or associates of Harold Brown. Neither Harold Brown nor the Foundation's Trustees have any economic interest in the Foundation.

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 5% of the repair and maintenance expense paid for by the Partnership in the nine months ended September 30, 2011 compared to approximately 6.5% for the nine months ended September 30, 2010. 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 71% and 76% of the legal services paid for by the Partnership during the nine months ended September 30, 2011 and 2010, respectively.

Additionally, as described in Note 3 to the consolidated financial statements, The Hamilton Company receives similar fees from the Investment Properties.

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, 2011 and 2010, Hamilton provided the Partnership approximately $44,000 and $21,000, respectively, in construction and architectural services.


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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. In 2011, Hamilton charges the Partnership $31,250 per quarter for bookkeeping and accounting services ($125,000 per year).

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. Contingent rent for commercial properties are received from tenants for certain costs as provided in lease agreements. The costs generally include real estate taxes, utilities, insurance, common area maintenance and recoverable costs. Concessions made on residential leases are also accounted for on the straight-line basis.

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. Fully depreciated assets are removed from the accounts. Rental properties are depreciated by both straight-line and accelerated methods over their estimated useful lives. Upon acquisition of rental property, the Partnership estimates the fair value of acquired tangible assets, consisting of land, building and improvements, and identified intangible assets and liabilities assumed, generally consisting of the fair value of (i) above and below market leases, (ii) in-place leases and (iii) tenant relationships. The Partnership allocated the purchase price to the assets acquired and liabilities assumed based on their fair values. The Partnership records goodwill or a gain on bargain purchase (if any) if the net assets acquired/liabilities assumed exceed the purchase consideration of a transaction. In estimating the fair value of the tangible and intangible assets acquired, the Partnership considers information obtained about each property as a result of its due diligence and marketing and leasing activities, and utilizes various valuation methods, such as estimated cash flow projections utilizing appropriate discount and capitalization rates, estimates of replacement costs net of depreciation, and available market information. The fair value of the tangible assets of an acquired property considers the value of the property as if it were vacant.

Other intangible assets acquired include amounts for in-place lease values and tenant relationship values, which are based on management's evaluation of the specific characteristics of each tenant's lease and the Partnership's overall relationship with the respective tenant. Factors to be considered by management in its analysis of in-place lease values include an estimate of carrying costs during hypothetical expected lease-up periods considering current market conditions, and costs to execute similar leases at market rates during the expected lease-up periods, depending on local market conditions. In estimating costs to execute similar leases, management considers leasing commissions, legal and other related expenses. Characteristics considered by management in valuing tenant relationships include the nature and extent of the Partnership's existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant's credit quality and expectations of lease renewals. The value of in-place leases are amortized to expense over the remaining initial terms of the respective leases. The value of tenant relationship intangibles are amortized to expense over the anticipated life of the relationships.

In the event that facts and circumstances indicate that the carrying value of a rental property may be impaired, an analysis of the value is prepared. The estimated future undiscounted cash flows are compared to the asset's carrying value to determine if a write-down to fair value is required.


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Impairment: On an annual basis management assesses whether there are any indicators that the value of the Partnership'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 Partnership'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 40%-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 Unconsolidated Joint Ventures 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

Three Months Ended September 30, 2011 and September 30, 2010

The Partnership and its Subsidiary Partnerships earned income before interest expense, loss from investments in unconsolidated joint ventures and other income and income of approximately $2,983,000 during the three months ended September 30, 2011 compared to income of approximately $2,348,000 for the three months ended September 30, 2010, an increase in income of approximately $635,000 (27.0%).

The rental activity is summarized as follows:

                              Occupancy Date
                    October 24, 2011   October 26, 2010
Residential
Units                          2,270              2,288
Vacancies                         50                 69
Vacancy rate                     2.2 %              3.0 %
Commercial
Total square feet            110,949            110,949
Vacancy                            0                  0
Vacancy rate                       0 %                0 %


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                                        Rental Income (in thousands)
                                      Three Months Ended September 30,
                                     2011                          2010
                            Total         Continuing       Total        Continuing
                          Operations      Operations     Operations     Operations
Total rents              $      8,544    $      8,544   $      8,120   $      7,902
Residential percentage             90 %            90 %           90 %           90 %
Commercial percentage              10 %            10 %           10 %           10 %
Contingent rentals       $        168    $        168   $        175   $        175

Three months ended September 30, 2011 compared to three months ended September 30, 2010:

                                         Three Months Ended September 30,         Dollar       Percent
                                            2011                 2010             Change        Change
Revenues:
Rental income                         $       8,543,908    $       7,902,310    $   641,598         8.1 %
Laundry and sundry income                       104,618              100,396          4,222         4.2 %
                                              8,648,526            8,002,706        645,820         8.0 %
Expenses
Administrative                                  411,836              394,735         17,101         4.3 %
Depreciation and amortization                 1,603,529            1,475,936        127,593         8.6 %
Management fees                                 347,833              332,580         15,253         4.6 %
Operating                                       774,998              771,397          3,601         0.5 %
Renting                                          63,482              201,883       (138,401 )     (68.6 )%
Repairs and maintenance                       1,421,084            1,460,994        (39,910 )      (2.7 )%
Taxes and insurance                           1,042,470            1,016,862         25,608         2.5 %
                                              5,665,232            5,654,387         10,845         0.2 %
Income Before Other Income and
Discontinued Operations                       2,983,294            2,348,319        634,975        27.0 %
Other Income (Loss)
Interest income                                     895                1,898         (1,003 )     (52.8 )%
Interest expense                             (2,033,082 )         (2,032,278 )         (804 )         -
(Loss) from investment in
unconsolidated joint ventures                  (491,128 )         (1,151,355 )      660,227       (57.3 )%
                                             (2,523,315 )         (3,181,735 )      658,420       (20.7 )%
Net income (loss)                     $         459,979    $        (833,416 )  $ 1,293,395      (155.2 )%
Discontinued operations
Gain (loss) on the sale of real
estate from discontinued
operations                                         (808 )                  -           (808 )       N/A
Income (loss) from discontinued
operations                                       (2,245 )             51,925        (54,170 )    (104.3 )%
                                                 (3,053 )             51,925        (54,978 )    (105.8 )%
Net Income (loss)                     $         456,926    $        (781,491 )  $ 1,238,417       158.5 %

Excluding discontinued operations, rental income from continuing operations for the three months September 30, 2011 was approximately $8,544,000, compared to approximately $7,902,000 for the three months ended September 31, 2010, an increase of approximately $642,000 (8.1%). The increase in rental income is due primarily to approximately $240,000 from the Battle Green Apartments for the three months ended September 30, 2011 and increases in rental rates, lower vacancies levels, and the decrease in the free rent incentives granted to tenants in 2010. The amortization of free rent was approximately $33,000 for the three months ended September 30, 2011 compared to approximately $214,000 for the three months ended September 30, 2010, a decrease of approximately $168,000. In addition the Partnership has seen bad debt expense of approximately $62,000 for the three months ended September 30, 2011, compared to approximately $97,000 for the three months ended September 30, 2010, a decrease of approximately $35,000. These factors have resulted in an increase in rental income for the three months ended September 30, 2011 compared to the same period in 2010.


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Excluding discontinued operations, operating expenses from continuing operations for the three months ended September 30, 2011 were approximately $5,665,000 compared with approximately $5,654,000 for the three months ended September 30, 2010, an increase of approximately $11,000 (0.2%). The most significant factors contributing to this increase is an increase in depreciation and amortization expenses of approximately $128,000 (8.6%) due to the acquisition of the Battle Green Apartments in June 2011 as well as improvements to other Partnership properties. Total expenses of Battle Green were approximately $100,000 excluding interest expense and depreciation and amortization. Other expenses with increases include administrative expenses of approximately $17,000 (4.3%) due to increased professional fees; an increase in taxes and insurance of approximately $26,000 (2.5%) due to an increase in real estate taxes; and an increase in the management fee of approximately $15,000 (4.6%) due to the increase in rental income.

These increases are offset by a decrease in renting expenses of approximately $138,000 (68.6%) due to a decrease in rental commissions due to the strong . . .

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