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NLP > SEC Filings for NLP > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for NTS REALTY HOLDINGS LP

Form 10-Q for NTS REALTY HOLDINGS LP


9-Nov-2012

Quarterly Report


Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations

Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the financial statements in Item 1 and the cautionary statements below.

Going Private Proposal

On August 31, 2012, the board of directors of our managing general partner received a non-binding proposal from our founder and Chairman, Mr. J.D. Nichols and Mr. Brian F. Lavin, our Chief Executive Officer, for a going private transaction. The proposal contemplates the acquisition of all our limited partnership units not already beneficially owned by Messrs. Nichols and Lavin at a price of $5.25 per share in cash.

The board of directors of our managing general partner appointed independent directors John Daly, Mark D. Anderson, and John S. Lenihan to a special committee (the "Special Committee") empowered to, among other things, consider the proposal or any potential alternative transaction. The Special Committee has retained financial and legal advisors to assist in its review of the proposed transaction. We caution our unit holders that no decision has been made by the Special Committee with respect to its response to the proposal. There can be no assurance that any definitive offer will be made or accepted, that any agreement will be executed or that the proposal or any other transaction will be approved or consummated.

Critical Accounting Policies

A critical accounting policy is one that would materially affect our operations or financial condition, and requires management to make estimates or judgments in certain circumstances. These judgments often result from the need to make estimates about the effect of matters that are inherently uncertain. Critical accounting policies discussed in this section are not to be confused with accounting principles and methods disclosed in accordance with U.S. generally accepted accounting principles ("GAAP"). GAAP requires information in financial statements about accounting principles, methods used and disclosures pertaining to significant estimates. Our critical accounting policies, as previously disclosed in our most recent annual report on Form 10-K, which was filed with the Securities and Exchange Commission on March 23, 2012, discuss judgments known to management pertaining to trends, events or uncertainties which were taken into consideration upon the application of those policies and the likelihood that materially different amounts would be reported upon taking into consideration different conditions and assumptions and remain unchanged during the quarter ended September 30, 2012.

Results of Operations

As of September 30, 2012, we owned wholly, as a tenant in common with an unaffiliated third party or through joint venture investments with both affiliated and unaffiliated third parties, 15 multifamily properties, 7 commercial properties and 2 retail properties. We generate substantially all of our operating income from property operations.

Net losses for the three months ended September 30, 2012 and 2011 were approximately $3.1 million and $3.4 million, respectively. The change in net loss for the three months ended September 30, 2012 as compared to September 30, 2011 was primarily due to a $0.5 million decreased net loss, primarily in our multifamily segment, and a $0.1 million decrease in net loss from our investments in tenants in common. This was partially offset by a $0.2 million decrease in interest and other income and a $0.2 million decrease in net loss attributable to noncontrolling interests. There were no other material offsetting changes in net loss for the three months ended September 30, 2012 and 2011.

Net losses for the nine months ended September 30, 2012 and 2011 were approximately $8.7 and $9.4 million, respectively. The change in net loss for the nine months ended September 30, 2012 as compared to September 30, 2011 was primarily due a $1.5 million decreased net loss, primarily in our multifamily segment. This


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was partially offset by a $0.6 million decrease in interest and other income and a $0.2 million increase in net loss from our investment in joint venture. There were no other material offsetting changes in net loss for the nine months ended September 30, 2012 and 2011.

The following tables include certain selected summarized operating data for the three and nine months ended September 30, 2012 and 2011. This data should be read in conjunction with our financial statements, including the notes attached hereto.

                                                           (Unaudited)
                                              Three Months Ended September 30, 2012
                            Multifamily     Commercial       Retail       Partnership        Total
Total revenues              $ 12,522,069    $ 1,854,449    $  154,130    $      (5,774 )  $ 14,524,874
Operating expenses and
operating expenses
reimbursed to affiliate        5,040,296        709,055        27,236                -       5,776,587
Depreciation and
amortization                   3,956,138        467,376        40,629                -       4,464,143
Interest expense              (3,262,541 )     (151,798 )         (13 )        (98,718 )    (3,513,070 )
Net (loss) income             (2,134,564 )      192,715        61,081       (1,180,869 )    (3,061,637 )




                                                           (Unaudited)
                                              Three Months Ended September 30, 2011
                            Multifamily     Commercial       Retail       Partnership        Total
Total revenues              $ 11,808,013    $ 1,874,569    $  151,442    $      (8,439 )  $ 13,825,585
Operating expenses and
operating expenses
reimbursed to affiliate        4,985,143        877,665        40,849                -       5,903,657
Depreciation and
amortization                   3,999,256        442,370        42,828                -       4,484,454
Interest expense              (3,281,792 )     (137,420 )          (2 )       (135,015 )    (3,554,229 )
Net (loss) income             (2,829,325 )       65,033        43,671         (636,103 )    (3,356,724 )




                                                           (Unaudited)
                                               Nine Months Ended September 30, 2012
                            Multifamily     Commercial       Retail       Partnership        Total
Total revenues              $ 36,826,858    $ 5,590,759    $  462,822    $     (17,323 )  $ 42,863,116
Operating expenses and
operating expenses
reimbursed to affiliate       14,528,417      2,125,580        81,714                -      16,735,711
Depreciation and
amortization                  11,857,381      1,380,628       121,888                -      13,359,897
Interest expense              (9,749,584 )     (454,799 )         (37 )       (293,890 )   (10,498,310 )
Net (loss) income             (6,547,273 )      449,709       187,893       (2,745,198 )    (8,654,869 )


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                                                             (Unaudited)
                                                 Nine Months Ended September 30, 2011
                              Multifamily     Commercial       Retail       Partnership        Total
Total revenues                $ 34,591,996    $ 5,558,137    $  487,992    $     (26,245 )  $ 40,611,880
Operating expenses and
operating expenses
reimbursed to affiliate         14,077,686      2,259,235       126,252                -      16,463,173
Depreciation and
amortization                    12,282,464      1,331,583       127,207                -      13,741,254
Interest expense                (9,831,119 )     (428,986 )     (16,034 )       (317,770 )   (10,593,909 )
Net (loss) income               (8,205,500 )      498,780       150,426       (1,856,543 )    (9,412,837 )

Occupancy levels at our properties by segment as of September 30, 2012 and 2011 were as follows:

                                                             2012   2011
Multifamily                                                    97 %   96 %
Multifamily Unconsolidated Investment in Tenants in Common     96 %   95 %
Commercial                                                     79 %   83 %
Commercial Unconsolidated Investment in Joint Venture          77 %  N/A
Retail                                                         90 %   90 %

The average occupancy levels at our properties by segment for the three and nine months ended September 30, 2012 and 2011 were as follows:

                                       Three Months Ended
                                         September 30,           Nine Months Ended September 30,
                                      2012           2011            2012                2011
Multifamily                                97 %           97 %              96 %                96 %
Multifamily Unconsolidated
Investments in Tenants in Common           96 %           95 %              97 %                96 %
Commercial                                 79 %           83 %              80 %                81 %
Commercial Unconsolidated
Investment in Joint Venture                77 %          N/A                46 %               N/A
Retail                                     90 %           90 %              90 %                93 %

We believe the changes in average and period end occupancy from period to period are temporary effects of each property's specific mix of lease maturities and are not indicative of any known trend or uncertainty.

We have on-site leasing staff, who are employees of NTS Development Company, at each of the multifamily properties. The staff handles all on-site visits from potential tenants, coordinates local advertising with NTS Development Company's marketing staff, makes visits to local companies to promote fully furnished apartments and negotiates lease renewals with current residents.

The leasing and renewal negotiations for our commercial and retail properties are primarily handled by leasing agents that are employees of NTS Development Company. All advertising for the commercial and retail properties is coordinated by NTS Development Company's marketing staff located in Louisville, Kentucky.

The following discussion relating to changes in our results of operations includes only material line items within our unaudited condensed consolidated statements of operations or line items for which there was a material change between the three and nine months ended September 30, 2012 and 2011.

Rental Income and Tenant Reimbursements

Rental income and tenant reimbursements for the three months ended September 30, 2012 and 2011 were approximately $14.5 million and $13.8 million, respectively. Rental income and tenant reimbursement for the nine months ended September 30, 2012 and 2011 were approximately $42.9 million and $40.6 million, respectively. The increase of $0.7 million, or 5%, for the three months ended September 30, 2012 and 2011 was primarily the result of a $0.7 million increase in rental income across the multifamily segment primarily related to an increase in the average monthly unit rental to $1,039 from $982 for the three months ended September 30, 2012 and 2011, respectively. The increase of $2.3 million, or 6%, for the nine months ended September 30, 2012 and 2011 was primarily the result of a $2.2 million increase in rental income across the multifamily segment primarily related to an increase in the average monthly unit rental to $1,024 from $963 for the nine months ended September 30, 2012 and 2011, respectively. In addition, there was also a $0.1 million increase in tenant reimbursements across the


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commercial segment. There were no other material offsetting charges in rental income and tenant reimbursements for the three and nine months ended September 30, 2012 and 2011.

Operating Expenses and Operating Expenses Reimbursed to Affiliate

Operating expenses for the three months ended September 30, 2012 and 2011 were approximately $4.1 million and $4.3 million, respectively. Operating expenses for the nine months ended September 30, 2012 and 2011 were approximately $12.0 million and $11.9 million, respectively. The decrease of $0.2 million, or 5%, for the three months ended September 30, 2012 and 2011 was primarily the result of a $0.2 million decrease in operating expenses across the commercial segment primarily related to less parking lot repair expense. The increase of $0.1 million, or 1%, for the nine months ended September 30, 2012 and 2011 was primarily the result of a $0.3 million increase in operating expenses across the multifamily segment primarily related to additional landscaping expense partially offset by a $0.1 million decrease in operating expenses across the commercial segment primarily related to less parking lot repair expense. There were no other material offsetting changes in operating expenses for the three and nine months ended September 30, 2012 and 2011.

Operating expenses reimbursed to affiliate for each of the three months ended September 30, 2012 and 2011 were approximately $1.6 million. Operating expenses reimbursed to affiliate for the nine months ended September 30, 2012 and 2011 were approximately $4.7 million and $4.5 million, respectively. The increase of $0.2 million, or 4%, for the nine months ended September 30, 2012 and 2011 was primarily the result of a $0.2 million increase in operating expenses reimbursed to affiliate across the multifamily segment. There were no other material offsetting changes in operating expenses reimbursed to affiliate for the three and nine months ended September 30, 2012 and 2011.

We do not have any employees. Pursuant to our various management agreements, NTS Development employs the individuals who provide services necessary to operate our properties and conduct our business. NTS Development provides employees that may also perform services for other properties and business enterprises. In the situation where a particular employee benefits multiple operations, the employee's cost is proportionately charged out to the entity receiving the services. We only reimburse charges from NTS Development for actual costs of employee services incurred for our benefit. The cost of services provided to us by NTS Development's employees are classified in our condensed consolidated statements of operations as operating expenses reimbursed to affiliate. The services provided by others are classified as operating expenses.

Operating expenses reimbursed to affiliate are for services performed by employees of NTS Development, an affiliate of our general partner. These employee services include property management, leasing, maintenance, security and other services necessary to manage and operate our business.

Operating expenses reimbursed to affiliate consisted approximately of the following:

                                                (Unaudited)                               (Unaudited)
                                      Three Months Ended September 30,          Nine Months Ended September 30,
                                         2012                 2011                 2012                 2011
Property                           $       1,066,000    $       1,068,000    $       3,088,000    $       3,030,000
Multifamily leasing                          208,000              211,000              618,000              582,000
Administrative                               318,000              254,000              868,000              773,000
Other                                         36,000               55,000              115,000              145,000

Total                              $       1,628,000    $       1,588,000    $       4,689,000    $       4,530,000

Management Fees

Management fees for each of the three months ended September 30, 2012 and 2011 were approximately $0.7 million. Management fees for the nine months ended September 30, 2012 and 2011 were approximately $2.1 million and $2.0 million, respectively. The increase of $0.1 million, or 5%, for the nine months ended September 30, 2012 and 2011 was primarily the result of an increase in management fees across the multifamily segment primarily related to increased rental income. There were no other material offsetting changes in management fees for the three and nine months ended September 30, 2012 and 2011.

Pursuant to our various management agreements, NTS Development Company and/or its affiliate, NTS Management Company, (collectively referred to as "NTS Development") receives property management fees equal


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to 5% of the gross collected revenue from our properties. This includes our wholly-owned properties, our consolidated and unconsolidated joint venture properties and properties owned by our eight wholly-owned subsidiaries financed through FHLMC. NTS Development receives property management fees from our unconsolidated properties owned as a tenant in common with an unaffiliated third party equal to 3.5% of their gross collected revenue under separate management agreements. We are the beneficiary of a preferential ownership interest, disproportionately greater than our initial cash investment in each property owned as a tenant in common with an unaffiliated third party. NTS Development has agreed to accept a lower management fee for the properties we own as a tenant in common with an unaffiliated third party in exchange for a larger potential disposition fee. Disposition fees of up to 6% of the gross sales price may be paid to NTS Development for the sale of one of our properties owned as a tenant in common with an unaffiliated third party. Management fees are calculated as a percentage of cash collections and are recorded on the accrual basis. As a result, the fluctuations in revenue between years will differ from the fluctuations of management fee expense.

Property Taxes and Insurance

Property taxes and insurance for the three months ended September 30, 2012 and 2011 were approximately $1.8 million and $1.9 million, respectively. Property taxes and insurance for the nine months ended September 30, 2012 and 2011 were approximately $5.4 million and $5.0 million, respectively. The decrease of $0.1 million, or 5%, for the three months ended September 30, 2012 and 2011 was primarily the result of a $0.1 million decrease in property taxes across the multifamily segment primarily due to additional property taxes incurred in the third quarter of 2011 at one of our Orlando, Florida properties without similar expense in the third quarter of 2012. The increase of $0.4 million, or 8%, for the nine months ended September 30, 2012 and 2011 was primarily the result of a $0.4 million increase in property taxes across the multifamily segment primarily due to refunds received in 2011 from the successful appeal of Indianapolis properties' real estate tax without similar refunds in 2012. There were no other material offsetting changes in property taxes and insurance for the three and nine months ended September 30, 2012 and 2011.

Professional and Administrative Expenses and Professional and Administrative Expenses Reimbursed to Affiliate

Professional and administrative expenses for the three months ended September 30, 2012 and 2011 were approximately $0.5 million and $0.3 million, respectively. Professional and administrative expenses for the nine months ended September 30, 2012 and 2011 were approximately $0.9 million and $0.8 million, respectively. The increases of $0.2 million, or 67%, and $0.1 million, or 13%, for the three and nine months ended September 30, 2012 and 2011, respectively, were primarily the result of increased deferred compensation expense primarily due to increased unit prices. There were no other material offsetting changes in professional and administrative expenses for the three and nine months ended September 30, 2012 and 2011.

Professional and administrative expenses reimbursed to affiliate for the three months ended September 30, 2012 and 2011 were approximately $0.5 million and $0.4 million, respectively. Professional and administrative expenses reimbursed to affiliate for the nine months ended September 30, 2012 and 2011 were approximately $1.4 million and $1.2 million, respectively. The increases of $0.1 million, or 25%, and $0.2 million, or 17%, for the three and nine months ended September 30, 2012 and 2011, respectively, were primarily due to increased personnel costs and compensation reimbursed to NTS Development Company. There were no other material offsetting changes in professional and administrative expenses reimbursed to affiliate for the three and nine months ended September 30, 2012 and 2011.

We do not have any employees. Pursuant to our various management agreements, NTS Development employs the individuals who provide services necessary to operate our properties and conduct our business. NTS Development provides employees that may also perform services for other properties and business enterprises. In the situation where a particular employee benefits multiple operations, the employee's cost is proportionately charged out to the entity receiving the services. We only reimburse charges from NTS Development for actual costs of employee services incurred for our benefit. The cost of services provided to us by NTS Development's employees are classified in our condensed consolidated statements of operations as professional and administrative expenses reimbursed to affiliate. The services provided by others are classified as professional and administrative expenses.

Professional and administrative expenses reimbursed to affiliate are for the services performed by employees of NTS Development, an affiliate of our general partner. These employee services include legal, financial and other services necessary to manage and operate our business.


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Professional and administrative expenses reimbursed to affiliate consisted approximately of the following:

                                           (Unaudited)                         (Unaudited)
                                        Three Months Ended
                                          September 30,              Nine Months Ended September 30,
                                       2012           2011              2012                 2011
Finance                             $   158,000    $   100,000    $         378,000    $         309,000
Accounting                              201,000        176,000              580,000              550,000
Investor relations                      100,000         64,000              250,000              201,000
Human resources                           7,000          5,000               17,000               15,000
Overhead                                 73,000         38,000              185,000              155,000

Total                               $   539,000    $   383,000    $       1,410,000    $       1,230,000

Depreciation and Amortization

Depreciation and amortization for each of the three months ended September 30, 2012 and 2011 was approximately $4.5 million. Depreciation and amortization for the nine months ended September 30, 2012 and 2011 was approximately $13.4 million and $13.7 million, respectively. The decrease of $0.3 million, or 2%, for the nine months ended September 30, 2012 and 2011 was primarily due to a decrease in depreciation and amortization of approximately $0.4 million spread across the multifamily segment. There were no other material offsetting changes in depreciation and amortization for the three and nine months ended September 30, 2012 and 2011.

Interest and Other Income

Interest and other income for the three months ended September 30, 2012 and 2011 was approximately $14,000 and $0.2 million, respectively. Interest and other income for the nine months ended September 30, 2012 and 2011 was approximately $0.1 million and $0.6 million, respectively. The decreases of $0.2 million, or 93%, and $0.5 million, or 83%, for the three and nine months ended September 30, 2012 and 2011, respectively, were primarily due to a decrease in interest income earned on notes receivable. There were no other material offsetting changes in interest and other income for the three and nine months ended September 30, 2012 and 2011.

Interest Expense

Interest expense for the three months ended September 30, 2012 and 2011 was approximately $3.5 million and $3.6 million, respectively. Interest expense for the nine months ended September 30, 2012 and 2011 was approximately $10.5 million and $10.6 million, respectively. The decreases of $0.1 million, or 3%, and $0.1 million, or 1%, for the three and nine months ended September 30, 2012 and 2011, respectively, were primarily due to a decrease in interest expense spread across the multifamily segment. There were no other material offsetting changes in interest expense for the three and nine months ended September 30, 2012 and 2011.

Loss on Disposal of Assets

The loss on disposal of assets for the three and nine months ended September 30, 2012 and 2011 can be attributed to assets that were not fully depreciated at the time of replacement spread primarily amongst the multifamily and commercial properties.

Loss from Investment in Joint Venture

Loss from investment in joint venture for the three and nine months ended September 30, 2012 and 2011 includes net operating loss attributable to our investment in a joint venture with an unaffiliated third party. The property is 600 North Hurstbourne. There were no other material offsetting changes in loss from investment in joint venture for the three and nine months ended September 30, 2012 and 2011.

Loss from Investments in Tenants in Common

Loss from investments in tenants in common for the three and nine months ended September 30, 2012 and 2011 includes net operating losses attributable to our investments in tenants in common with an unaffiliated third party. The properties are The Overlook at St. Thomas Apartments and Creek's Edge at Stony Point Apartments.


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There were no other material offsetting changes in loss from investments in tenants in common for the three and nine months ended September 30, 2012 and 2011.

The continuing net losses of The Overlook at St. Thomas Apartments reduced our investment to zero. We have recognized the losses in excess of our investment and recorded the resulting liability on our unaudited condensed consolidated balance sheets.

Liquidity and Capital Resources

Our most liquid asset is our cash and equivalents, which consist of cash and short-term investments, but do not include any restricted cash. Operating income generated by the properties is the primary source from which we generate cash. Other sources of cash include the proceeds from our mortgage loans and revolving note payable. Our main uses of cash relate to capital expenditures, required payments of mortgages and notes payable, distributions and property taxes.

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