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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q. - QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended September 30, 2003
------------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from to
--------------------- ---------------
(Amended by Exch Act Rel No. 312905. eff 4/26/93.)
Commission File Number: 0-8952
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SB PARTNERS
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 13-6294787
- ------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1251 Avenue of the Americas, N.Y., N.Y. 10020
- --------------------------------------- -----------------------
(Address of principal executive offices) (Zip Code)
(212) 408-5000
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(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark 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. [X] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. [ ] Yes [ ] No
Not Applicable
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Not Applicable
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SB PARTNERS
INDEX
Part I Financial Information (Unaudited)
Consolidated Balance Sheets as of
September 30, 2003 and December 31, 2002..........................1
Consolidated Statements of Operations
for the three and nine months ended September 30, 2003 and 2002...2
Consolidated Statements of Changes in Partners' Capital
for the nine months ended September 30, 2003......................3
Consolidated Statements of Cash Flows
for the nine months ended September 30, 2003 and 2002.............4
Notes to Consolidated Financial Statements........................5 - 8
Management's Discussion and Analysis of
Financial Condition and Results of Operations................9 - 16
Quantitative and Qualitative Disclosures about Market Risk...........17
Controls and Procedures..............................................17
Part II
Other Information....................................................17
Signatures...........................................................18
Exhibit 31......................................................19 - 20
Exhibit 32...........................................................21
ITEM 1. FINANCIAL STATEMENTS
SB PARTNERS
(A New York Limited Partnership)
------------------------------
CONSOLIDATED BALANCE SHEETS
September 30, 2003 (Unaudited) and December 31, 2002
-----------------------------------------------------
September 30, December 31,
2003 2002
------------- ------------
Assets:
Investments -
Real estate, at cost
Land $ 5,780,842 $ 5,780,842
Buildings, furnishings and improvements 55,942,995 55,557,251
Less - accumulated depreciation (8,370,076) (7,166,894)
----------- -----------
53,353,761 54,171,199
Investment in joint venture 3,214,462 3,385,182
----------- -----------
56,568,223 57,556,381
Other assets -
Cash and cash equivalents 74,444 1,693,069
Cash held by lenders in escrow 1,077,156 590,631
Other 612,962 668,275
----------- -----------
Total assets $58,332,785 $60,508,356
=========== ===========
Liabilities:
Mortgage notes payable $32,680,430 $30,239,203
Accounts payable and accrued expenses 1,055,698 712,056
Tenant security deposits 251,301 245,221
----------- -----------
Total liabilities 33,987,429 31,196,480
----------- -----------
Partners' Capital:
Units of partnership interest without par value;
Limited partners - 7,753 units 24,360,652 29,326,531
General partner - 1 unit (15,296) (14,655)
----------- -----------
Total partners' capital 24,345,356 29,311,876
----------- -----------
Total liabilities and partners' capital $58,332,785 $60,508,356
=========== ===========
See notes to consolidated financial statements.
SB PARTNERS
(A New York Limited Partnership)
------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
-------------------------------------------------
For The Three Months For The Nine Months
Ended September 30, Ended September 30,
----------------------- ------------------------
2003 2002 2003 2002
---------- ----------- ----------- -----------
Revenues:
Base rental income $1,886,173 $ 1,964,658 $ 5,595,543 $ 7,383,366
Other rental income 193,568 138,656 547,430 430,430
Interest on short-term investments 617 7,212 6,661 30,779
---------- ----------- ----------- -----------
Total revenues 2,080,358 2,110,526 6,149,634 7,844,575
---------- ----------- ----------- -----------
Expenses:
Real estate operating expenses 1,003,492 915,913 2,834,832 3,454,595
Interest on mortgage notes payable 545,646 534,561 1,636,014 3,306,067
Depreciation and amortization 418,325 420,522 1,256,378 1,260,885
Real estate taxes 253,035 238,404 761,472 754,873
Management fees 178,049 199,439 531,714 595,643
Other 12,408 7,373 43,867 33,933
---------- ----------- ----------- -----------
Total expenses 2,410,955 2,316,212 7,064,277 9,405,996
---------- ----------- ----------- -----------
Loss from operations (330,597) (205,686) (914,643) (1,561,421)
Equity in net loss of joint venture (10,370) (17,182) (175,127) (30,560)
Net gain on sale of investment in real estate
property, including $379,725 net gain
on sale of water rights 0 0 0 17,480,880
---------- ----------- ----------- -----------
Net income (loss) (340,967) (222,868) (1,089,770) 15,888,899
Income (loss) allocated to general partner (44) (29) (141) 2,049
---------- ----------- ----------- -----------
Income (loss) allocated to limited partners $ (340,923) $ (222,839) $(1,089,629) $15,886,850
========== =========== =========== ===========
Net Income (Loss)
Per Unit of Limited Partnership Interest
(Basic and Diluted) $ (43.98) $ (28.74) $ (140.55) $ 2,049.26
========== =========== =========== ===========
Weighted Average Number of Units of Limited
Partnership Interest Outstanding 7,753 7,753 7,753 7,753
========== =========== =========== ===========
See notes to consolidated financial statements.
SB PARTNERS
(A New York Limited Partnership)
------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN
PARTNERS' CAPITAL For the nine months ended
September 30, 2003 (Unaudited)
-------------------------------------------
Limited Partners:
Units of
Partnership
Interest Cumulative Accumulated
----------- Cash Earnings
Number Amount Distributions (Losses) Total
------ ------------ -------------- ------------ ------------
Balance, January 1, 2003 7,753 $119,968,973 $(100,945,611) $10,303,169 $29,326,531
Cash distributions 0 0 (3,876,250) 0 (3,876,250)
Net loss for the period 0 0 0 (1,089,629) (1,089,629)
----- ------------ ------------- ----------- -----------
Balance, September 30, 2003 7,753 $119,968,973 $(104,821,861) $ 9,213,540 $24,360,652
===== ============ ============= =========== ===========
General Partner:
Units of
Partnership
Interest Cumulative Accumulated
----------- Cash Earnings
Number Amount Distributions (Losses) Total
------ ------------ -------------- ------------ ------------
Balance, January 1, 2003 1 $10,000 $(24,974) $319 $(14,655)
Cash distributions 0 0 (500) 0 (500)
Net loss for the period 0 0 0 (141) (141)
---- ------- -------- ---- --------
Balance, September 30, 2003 1 $10,000 $(25,474) $178 $(15,296)
==== ======= ======== ==== ========
See notes to consolidated financial statements.
SB PARTNERS
(A New York Limited Partnership)
------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
------------------------------------------------
For the Nine Months Ended
September 30,
--------------------------
2003 2002
------------ ------------
Cash Flows From Operating Activities:
Net income (loss) $(1,089,770) $15,888,899
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Net gain on sale of investment in real estate property,
including net gain on sale of water rights 0 (17,480,880)
Equity in net loss of joint venture 175,127 30,560
Depreciation and amortization 1,256,378 1,260,885
Net (increase) decrease in operating assets (484,408) 359,258
Net increase in operating liabilities 349,722 205,618
----------- -----------
Net cash provided by operating activities 207,049 264,340
------------ -----------
Cash Flows From Investing Activities:
Capital additions to real estate owned (385,744) (605,673)
Investment in joint venture (4,407) (3,477,980)
Acquisition of real estate property 0 (4,713,385)
Proceeds from sale of investment in real estate
property including water rights 0 31,389,975
----------- -----------
Net cash provided by (used in) investing activities (390,151) 22,592,937
----------- -----------
Cash Flows From Financing Activities:
Borrowings under revolving credit facility 2,750,000 3,750,000
Repayments of borrowings under revolving
credit facility 0 (4,500,000)
Principal payments on mortgage notes payable (308,773) (466,261)
Retirement of mortgage note payable 0 (19,591,390)
Distributions paid to partners (3,876,750) (775,350)
----------- -----------
Net cash used in financing activities (1,435,523) (21,583,001)
----------- -----------
Net increase (decrease) in cash and cash equivalents (1,618,625) 1,274,276
Cash and cash equivalents at beginning of period 1,693,069 634,029
----------- -----------
Cash and cash equivalents at end of period $ 74,444 $ 1,908,305
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 1,630,385 $ 3,430,451
=========== ===========
See notes to consolidated financial statements.
SB PARTNERS
Notes to Consolidated Financial Statements
(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
SB Partners, a New York limited partnership, and its subsidiaries
(collectively, the "Partnership"), have been engaged since April 1971 in
acquiring, operating, and holding for investment a varying portfolio of real
estate interests. SB Partners Real Estate Corporation (the "General Partner")
serves as the general partner of the Partnership.
The consolidated financial statements included herein are unaudited;
however, the information reflects all adjustments (consisting solely of normal
recurring adjustments) that are, in the opinion of management, necessary to a
fair presentation of the financial position, results of operations and cash
flows for the interim periods. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations, although management
believes that the disclosures are adequate to make the information presented not
misleading. It is suggested that these consolidated financial statements be read
in conjunction with the consolidated financial statements and the notes thereto
included in the Partnership's latest annual report on Form 10-K.
The results of operations for the three and nine month periods ended
September 30, 2003 and 2002 are not necessarily indicative of the results to be
expected for a full year.
The significant accounting and financial reporting policies of the
Partnership are as follows:
(a) The accompanying consolidated financial statements include the
accounts of SB Partners and its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been
eliminated. The consolidated financial statements are prepared
using the accrual basis of accounting in accordance with
accounting principles generally accepted in the United States of
America. Revenues are recognized as earned and expenses are
recognized as incurred. The preparation of financial statements
in conformity with such principles requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
(b) In connection with the mortgage financing on certain of its
properties, the Partnership placed the assets and liabilities of
those properties into single asset limited partnerships, limited
liability companies or land trusts which hold title to the
properties. The Partnership has effective control over such
entities and holds 100% of the beneficial interest. Accordingly,
the financial statements of these subsidiaries are consolidated
with those of the Partnership.
(c) Depreciation of buildings, furnishings and improvements is
computed using the straight-line method of depreciation, based
upon the estimated useful lives of the related properties, as
follows:
Buildings and improvements 5 to 40 years
Furnishings 5 to 7 years
Expenditures for maintenance and repairs are expensed as
incurred. Expenditures for improvements, renewals and
betterments, which increase the useful life of the real estate,
are capitalized. Upon retirement or sale of property, the
related cost and accumulated depreciation are removed from the
accounts. Amortization of deferred financing and refinancing
costs is computed on a straight-line basis over the terms of the
related mortgage notes.
(d) Real estate properties are regularly evaluated on a
property-by-property basis to determine if it is appropriate to
write down carrying values to recognize an impairment of value.
Impairment is determined by calculating the sum of the estimated
undiscounted future cash flows including the projected
undiscounted future net proceeds from the sale of the property.
In the event such sum is less than the net carrying value of the
property, the property is written down to estimated fair value.
Based on the Partnership's long-term hold strategy for its
investments in real estate, the carrying value of its properties
at September 30, 2003 is estimated to be fully realizable.
(e) Real estate held for sale is carried at the lower of cost or
fair value less selling costs. Upon determination that a
property is held for sale, all depreciation of such property is
ceased.
(f) For financial reporting purposes, the Partnership considers all
highly liquid, short-term investments with maturities of three
months or less when purchased to be cash equivalents.
(g) The Partnership accounts for its investment in joint venture
under the equity method of accounting as the Partnership owns a
non-controlling interest in the joint venture.
(h) Tenant leases at the residential properties generally have
terms of one year or less. Rental income at the residential
properties is recognized when earned pursuant to the terms of
the leases. Leases at the industrial flex property have terms
that exceed one year. Rental income at the industrial flex
property is recognized on a straight-line basis over the terms
of the leases.
(i) Gains on sales of investments in real estate are recognized in
accordance with accounting principles generally accepted in the
United States of America applicable to sales of real estate,
which require that the purchaser maintain minimum levels of
initial and continuing investment, and that certain other tests
be met, prior to the full recognition of profit at the time of
the sale.
(j) Each partner is individually responsible for reporting its
share of the Partnership's taxable income or loss. Accordingly,
no provision has been made in the accompanying consolidated
financial statements for Federal, state or local income taxes.
(k) Net income (loss) per unit of partnership interest has been
computed based on the weighted average number of units of
partnership interest outstanding during each period. There were
no potentially dilutive securities outstanding during the
periods presented.
(l) The Partnership is engaged in only one industry segment, real
estate investment, and therefore information regarding industry
segments is not applicable and is not included in these
consolidated financial statements.
(m) On January 1, 2002, the Partnership adopted Statement of
Financial Accounting Standards ("SFAS") No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets" (the
"Statement"). The Statement requires the operations related to
properties that have been sold or properties that are intended
to be sold be presented as discontinued operations in the
statements of operations for all periods presented, and that
properties intended to be sold be designated as "held for sale"
on the balance sheet. However, long-lived assets classified as
held for sale prior to the initial application of the Statement
are required to continue to be accounted for in accordance with
SFAS No. 121.
(n) In April 2002, the Financial Accounting Standards Board
("FASB") issued SFAS No. 145, "Rescission of SFAS No. 4, 22 and
64, Amendment of SFAS No. 13 and Technical Corrections". SFAS
No. 145, among other things, rescinds SFAS No. 4, "Reporting
Gains and Losses from Extinguishment of Debt", and accordingly,
the reporting of gains or losses from the early extinguishment
of debt as extraordinary items will only be required if they
meet the specific criteria for extraordinary items included in
Accounting Principles Board Opinion No. 30, "Reporting the
Results of Operations". Although the rescission of SFAS No. 4
became mandatory as of January 1, 2003, management adopted SFAS
No. 145 prior to that date (See Note 3).
(o) Certain prior year amounts have been reclassified to conform
with the current year presentation.
(2) INVESTMENTS IN REAL ESTATE
As of September 30, 2003, the Partnership owned apartment projects in
St. Louis, Missouri; Greenville, South Carolina; and Holiday and
Orlando, Florida; as well as an industrial flex property in Maple
Grove, Minnesota and 13.9 acres of land in Holiday, Florida. The
following is the cost basis and accumulated depreciation of the real
estate investments owned by the Partnership at September 30, 2003 and
December 31, 2002:
Real Estate at Cost
No.of Year of ------------------------
Type Prop. Acquisition Description 9/30/03 12/31/02
- ---- ----- ----------- ----------- ----------- -----------
Residential properties 4 1991-99 1,042 Apts. $56,917,787 $56,539,616
Industrial flex property 1 2002 60,345 sf 4,761,663 4,754,090
Undeveloped land 1 1978 13.9 Acres 44,387 44,387
----------- -----------
Total cost 61,723,837 61,338,093
Less: accumulated depreciation (8,370,076) (7,166,894)
----------- -----------
Net book value $53,353,761 $54,171,199
=========== ===========
(3) REAL ESTATE TRANSACTIONS
In February 2002, the Partnership sold the water rights at Meadowwood
Apartments for $389,725. As there was no identifiable cost basis for
the rights, the receipt, net of costs incurred in the transaction, has
been recognized as income and is reflected as a component of net gain
on sale of investment in real estate property on the accompanying
consolidated statements of operations for the nine months ended
September 30, 2002.
On April 30, 2002, the Partnership purchased a 75% non-controlling
interest in a partnership that owns Waterview Apartments in West
Chester, Pennsylvania. The Partnership paid approximately $3,270,000 in
cash for this non-controlling interest. The purchase price reflects an
agreed upon value of $18,500,000 for the apartment property, net of a
first mortgage loan of approximately $14,230,000 and certain related
assets and liabilities. Waterview Apartments comprises 203 apartment
units and 6,000 square feet of commercial space.
On May 9, 2002, the Partnership sold Meadowwood Apartments in Reno,
Nevada for $31,350,000 in an all cash transaction. The proceeds from
the sale were used, in part, to retire the mortgage note of
approximately $19,600,000 that had been secured by the property. In
accordance with SFAS No. 145, the Partnership has included the yield
maintenance payment on the mortgage note, approximately $1,056,000, in
interest expense in the consolidated statements of operations for the
three and nine months ended September 30, 2002. The sale of Meadowwood
Apartments resulted in a net gain for financial reporting purposes of
approximately $17,100,000.
On June 12, 2002, the Partnership purchased Eagle Lake Business Center
IV in Maple Grove, Minnesota for approximately $4,700,000 in an all
cash transaction. The property contains approximately 60,000 square
feet of industrial flex space.
(4) MORTGAGE NOTES PAYABLE
Mortgage notes payable consist of the following non-recourse first liens:
Net Carrying Amount
Annual June 30, December 31,
Interest Maturity Installment Amount Due ----------- ------------
Property Rate Date Payments(a) at Maturity 2003 2002
- -----------------------------------------------------------------------------------------
Halton Place(b) 3.070% 09/05 Interest Only $ 3,000,000 $ 3,000,000 $ 250,000
Holiday Park 6.895% 02/08 $ 300,169 3,277,785 3,541,020 3,581,850
Cypress Key 6.605% 01/09 1,322,707 14,772,418 16,230,281 16,413,232
Le Coeur du Monde 7.805% 10/09 890,447 9,075,763 9,909,129 9,994,121
----------- -----------
$32,680,430 $30,239,203
=========== ===========
(a) Annual installment payments include principal and interest.
(b) On March 1, 2001, the Partnership entered into a revolving credit
facility agreement with a bank in the amount of $7,500,000 which is
secured by Halton Place Apartments. The term of the agreement has been
extended to September 1, 2005. Borrowings bear interest at the one-month
LIBOR plus 1.95%. The agreement requires the Partnership to maintain a
ratio of NOI, as defined, to actual debt service, as defined, of not less
than 1.2 to 1. As of September 30, 2003, the Partnership is in compliance
with the covenant. In connection with this credit facility, the
Partnership is subject to market risk relating to potential future
changes in interest rates.
(5) DISTRIBUTIONS
In March 2003, the Partnership paid a cash distribution of $500 per
unit to Unitholders of record as of December 31, 2002, which totaled
$3,876,750 based on 7,753.5 units outstanding.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
AS OF SEPTEMBER 30, 2003 AND FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2003 AND 2002
----------------------------------------------------------------
General
- -------
The consolidated financial statements for the three months ended September
30, 2003 and 2002, reflect the operations of four residential garden apartment
properties, a joint venture interest purchased April 30, 2002 and an industrial
flex property purchased June 12, 2002. The consolidated financial statements for
the nine months ended September 30, 2003 reflect the same composition of the
portfolio, however the financial statements for the nine months ended
September 30, 2002 reflect the operations of five residential garden apartment
properties, including Meadowwood Apartments which was sold on May 9, 2002, as
well as the aforementioned joint venture and industrial flex property from the
dates of purchase through September 30, 2002.
Total revenues for the three months ended September 30, 2003 decreased
$31,000 to approximately $2,080,000 from approximately $2,111,000 for the three
months ended September 30, 2002. Net loss increased $118,000, to approximately
$341,000 for the three months ended September 30, 2003, from approximately
$223,000 for the three months ended September 30, 2002.
Total revenues for the nine months ended September 30,2003 decreased
$1,695,000 to approximately $6,150,000 from approximately $7,845,000 for the
nine months ended September 30, 2002. Net income decreased approximately
$16,979,000, to a net loss of approximately $1,090,000 for the nine months ended
September 30, 2003, from net income of approximately $15,889,000 for the nine
months ended September 30, 2002. Net income for the nine months ended
September 30, 2002 includes a net gain on sale of real estate property of
approximately $17,480,000.
The changes in financial condition, total revenues and net income/loss are
primarily the result of the changes from 2002 to 2003 in the composition of the
portfolio. On April 30, 2002, the Registrant purchased a 75% non-controlling
interest in a partnership that owns Waterview Apartments, a 203-unit apartment
community in West Chester, Pennsylvania. On May 9, 2002, the Registrant sold
Meadowwood Apartments, a 704-unit apartment community in Reno, Nevada, for
$31,350,000 in an all cash transaction, and retired the mortgage note payable
that had been secured by the property. In addition, on June 12, 2002, the
Registrant purchased Eagle Lake Business Center IV, a 60,345 square foot
industrial flex property in Maple Grove, Minnesota, for $4,700,000, in an all
cash transaction.
The changes in total revenues and net income for the three month periods
ended September 30, 2003 and 2002, reflect the changes in the composition of the
portfolio, as well as general changes in market conditions in the areas in which
the Registrant has investments in real estate properties. In the current period,
the Registrant recognized greater recovery of expenses from tenants at the
industrial/flex property than in the comparable period of the prior year. Higher
rates on new and renewing leases were implemented to the extent possible at the
properties, however, additional concessions were required to attract new renters
and retain existing tenants. Total expenses for the three months ended
September 30, 2003 increased approximately $95,000, as additional costs were
incurred for repairs and maintenance, utilities, insurance, interest and real
estate taxes, as compared to the prior year.
The change in revenues and net income for the nine-month period ended
September 30, 2003 are primarily a result of the changes in the composition of
the portfolio. During the nine month period ended September 30, 2002, rental
revenues collected at Meadowwood Apartments totaled approximately $1,780,000,
and the property incurred approximately $977,000 of operating expenses. In
addition, the property incurred interest expense of approximately $1,675,000,
including a yield maintenance payment of approximately $1,056,000 which was paid
at the time of the sale to retire the mortgage note that had been secured by the
property. In 2003, there were no revenues from Meadowwood Apartments. Partially
offsetting the lack of revenues from the apartment property were the revenues
collected from the industrial flex property, Eagle Lake Business Center IV,
which totaled approximately $667,000 for the nine months ended September 30,
2003. Expenses incurred at the industrial flex property totaled approximately
$317,000 for the nine months ended September 30, 2003 as compared to $95,000 for
the nine months ended September 30, 2002.
Revenues generated by the apartment property owned by the partnership in which
the Registrant has a 75% non-controlling joint venture interest are not included
in total revenues, nor are the expenses from this investment included in total
expenses. However, the equity in net loss of joint venture is net of the
revenues collected and expenses incurred by Waterview Apartments for the three
and nine months ended September 30, 2003 and 2002.
For additional analysis, please refer to the discussions of the individual
properties below.
This report on Form 10-Q includes statements that constitute "forward
looking statements" within the meaning of Section 27(A) of the Securities Act of
1933 and Section 21(E) of the Securities Exchange Act of 1934 and that are
intended to come within the safe harbor protection provided by those sections.
By their nature, all forward looking statements involve risks and uncertainties
as further described in the Registrant's latest annual report on Form 10-K.
Actual results may differ materially from those contemplated by the forward
looking statements.
CRITICAL ACCOUNTING POLICIES
- ----------------------------
The Partnership's critical accounting policies are described in its Annual
Report on Form 10-K for the year ended December 31, 2002; there were no
significant changes to such policies in 2003.
Liquidity and Capital Resources
- -------------------------------
As of September 30, 2003, the Registrant had cash and cash equivalents of
approximately $74,444 in addition to approximately $1,077,000 of deposits held
in escrow by certain lenders for the payment of insurance, real estate taxes and
certain capital and maintenance costs. These balances are approximately
$1,132,000 less than the cash, cash equivalents and deposits held in escrow on
December 31, 2002. After adding approximately $487,000 to deposits held in
escrow, operating activities generated approximately $207,000 of cash flow
during the nine months ended September 30, 2003. During the same period, the
Registrant borrowed an additional $2,750,000 under the revolving credit facility
that is secured by Halton Place Apartments. Uses of cash during the period
included distributions amounting to approximately $3,877,000 that were paid to
Unitholders of record as of December 31, 2002, capital additions to existing
real estate properties of approximately $386,000, and principal payments of
approximately $309,000 made on mortgage notes payable.
Total outstanding debt at September 30, 2003 consisted of approximately
$29,680,000 of long-term non-recourse first mortgage notes, and $3,000,000 under
a revolving credit facility, all secured by real estate owned by the Registrant
(see Note 4 to the Consolidated Financial Statements). The maturity date of the
credit facility has been extended to September 1, 2005. Scheduled maturities
through regularly scheduled monthly payments will be approximately $107,000 for
the remainder of 2003. The terms of certain mortgage notes require monthly
escrow of estimated annual real estate tax, insurance, and reserves for repairs,
maintenance and improvements to the secured property, in addition to the payment
of principal and interest. The Registrant has no other debt except normal trade
accounts payable and accrued interest on mortgage notes payable.
Inflation and changing prices during the current period did not
significantly affect the markets in which the Registrant conducts its business,
or the Registrant's business overall.
In March 2003, the Registrant made a distribution of $500 per unit to
Unitholders of record as of December 31, 2002. This is the fifth consecutive
annual distribution since the repositioning of the portfolio in the late 1990's.
However, there is no requirement to make such distributions, nor can there be
any assurance that future operations will generate cash available for
distributions.
The Registrant's properties are expected to generate sufficient cash flow
to cover operating, financing, capital improvement costs, and other working
capital requirements of the Registrant for the foreseeable future.
Holiday Park Apartments (Holiday, Florida)
- -----------------------
Total revenues for the three months ended September 30, 2003 increased
$14,000 to $349,000 from $335,000 for the three months ended September 30, 2002.
Net income, which includes deductions for depreciation and mortgage interest
expense, for the three months ended September 30, 2003 decreased $9,000 to
$30,000 from $39,000 for the three months ended September 30, 2002. Higher
revenues were due primarily to an increase in average occupancy of approximately
5.4%, to 94.9% from 89.5% for the three months ended September 30, 2002, which
added approximately $17,000 to revenues. Higher rental rates on new and renewing
leases added approximately $13,000 to revenues. However, rental concessions
lowered revenues approximately $7,000, and additional collection losses reduced
revenues $9,000. Lower net income was primarily the result of a $23,000 increase
in expenses. Replacement costs drove repairs and maintenance $8,000 higher in
the current period, and utilities, administrative costs, professional fees and
insurance expense were each approximately $3,000 higher in 2003. Depreciation
and real estate taxes were each approximately $2,000 higher.
Total revenues for the nine months ended September 30, 2003 increased
$27,000 to $1,054,000 from $1,027,000 for the nine months ended September 30,
2002. Net income, which includes deductions for depreciation and mortgage
interest expense, for the nine months ended September 30, 2003 remained
unchanged from the prior year at $125,000. Increased revenue is due to higher
average occupancy at the property and increases in rental rates on new and
renewing leases. Average occupancy rose 4.9%, to 95.7% from 90.8% for the nine
months ended September 30, 2002, which increased revenues approximately $35,000,
and a rise in rental rates implemented at the property on new and renewing
leases added $30,000 to revenues. However, more rental concessions were needed
in the current year, which lowered revenues $40,000. Expenses were $27,000
higher in the current year, fully offsetting the additional revenues from the
property. Insurance expense increased $20,000 as higher insurance premiums were
paid for coverage in the current period, reflecting a general rise in rates
charged by the insurance industry. Real estate taxes were $6,000 higher during
the period in the current year.
Cypress Key Apartments (Orlando, Florida)
- ----------------------
Total revenues for the three months ended September 30, 2003 decreased
$14,000 to $719,000 from $733,000 for the three months ended September 30, 2002.
Net loss, which includes deductions for depreciation and mortgage interest
expense, for the three months ended September 30, 2003 increased $61,000 to
$154,000 from $93,000 for the three months ended September 30, 2002. More tenant
concessions were needed in 2003 to attract new renters and retain existing
tenants. The additional tenant concessions reduced revenues $62,000 from the
same period in the prior year. However, average occupancy rose 3.4%, to 93.6%
from 90.2% for the three months ended September 30, 2002, which added $32,000 to
revenues. In addition, rental rates were raised on some new and renewing leases,
which added $12,000 to revenues. The increase in net loss from the three-month
period in the prior year resulted from the reduction in revenues, and an
increase in expenses incurred during the period in the current year. Repairs and
maintenance costs increased $32,000 primarily due to higher replacement costs,
insurance expense was $6,000 higher, utilities were $4,000 higher, and
administrative costs were $3,000 higher.
Total revenues for the nine months ended September 30, 2003 decreased
$104,000 to $2,109,000 from $2,213,000 for the nine months ended September 30,
2002. Net loss, which includes deductions for depreciation and mortgage interest
expense, for the nine months ended September 30, 2003 increased $140,000 to
$420,000 from $280,000 for the nine months ended September 30, 2002. Greater
concessions were needed to attract prospective renters and induce renewing
tenants to enter into leases, resulting in a decrease in rental revenues of
$105,000 from the nine-month period in the prior year. Average occupancy
decreased 1.2%, to 89.7% from 90.9% for the comparable period in 2002, which
reduced revenues $21,000, and collection losses increased, which lowered
revenues $18,000. Rental rates on new and renewing leases were raised, adding
$31,000 to revenues, and application fee income was $7,000 higher in the current
year. The increase in net loss was a result of lower revenues, and an increase
of $37,000 in expenses. Insurance expense rose $32,000, reflecting a general
increase in insurance rates in the insurance industry. Repairs and maintenance
costs increased $20,000, primarily as a result of higher apartment turnover
costs in the current period. Expenses for utilities were $11,000 higher in the
current year, reflecting both usage and rate increases. However, payroll costs
were $22,000 lower in the current period, as certain positions on the staff were
unfilled for brief periods during 2003, and administrative costs were $7,000
lower.
Halton Place Apartments (Greenville, South Carolina)
- -----------------------
Total revenues for the three months ended September 30, 2003 decreased
$43,000 to $351,000 from $394,000 for the three months ended September 30, 2002.
Net income, which includes deductions for depreciation and interest expense, for
the three months ended September 30, 2003 decreased $75,000 to $5,000 from
$80,000 for the three months ended September 30, 2002. The decrease in revenues
is due primarily to lower occupancy and a increase in tenant concessions at the
property. Average occupancy for the three months ended September 30, 2003
decreased 8.1%, to 82.9% from 91.0% for the three months ended
September 30, 2002, which reduced revenues $40,000. In addition, greater tenant
concessions reduced revenues $8,000. Increases in rental rates on new and
renewing leases added $4,000 to revenues. Lower revenues and an increase in
expenses of $32,000 resulted in the decrease in net income. Interest expense
increased $18,000, as average borrowings under the revolving credit facility
rose in 2003. Repairs and maintenance costs increased $12,000, primarily as a
result of higher costs for painting vacated units in preparation for new
tenants.
Total revenues for the nine months ended September 30, 2003 decreased
$129,000 to $1,045,000 from $1,174,000 for the nine months ended September 30,
2002. Net income, which includes deductions for depreciation and interest
expense, for the nine months ended September 30, 2003 decreased $208,000 to
$31,000 from $239,000 for the nine months ended September 30, 2002. Average
occupancy decreased 5.0%, to 82.3% from 87.3% for the comparable period in 2002,
which lowered revenues $77,000. Greater tenant concessions resulted in a
decrease in revenues of $65,000. Rental rates were raised marginally, which
added $11,000 to revenue. The decrease in net income was a result of lower
revenues and a $80,000 increase in expenses. Interest expense increased $25,000,
as borrowings under the revolving credit facility were higher on average in
2003. Payroll expense increased $19,000 as a full-time groundskeeper was hired
in late 2002, filling a position that had been open in the prior year.
Additional insurance costs of $18,000 resulted from higher premiums charged by
the insurance industry. Utility expense increased $15,000 due to usage and rate
increases.
Le Coeur du Monde Apartments (St. Louis, Missouri)
- ----------------------------
Total revenues for the three months ended September 30, 2003 decreased
$41,000 to $423,000 from $464,000 for the three months ended September 30, 2002.
Net loss, which includes deductions for depreciation and mortgage interest
expense, for the three months ended September 30, 2003 increased $32,000 to
$75,000 from $43,000 for the three months ended September 30, 2002. Average
occupancy decreased 7.1%, to 87.3% from 94.4% for the same period in 2002, which
reduced revenues $36,000. In addition, additional tenant concessions reduced
revenues $29,000. Partially offsetting the decrease in income were additional
revenues of $17,000 resulting from reduced collection losses, and $8,000 of
revenues from higher rental rates on new and renewing leases. The increase in
net loss was a result of lower revenues, partially offset by a decrease of
$9,000 in expenses. Repairs and maintenance costs were reduced $13,000,
primarily due to lower apartment turnover costs. Partially offsetting the
reduction in repairs and maintenance costs were additional costs for insurance
of $3,000.
Total revenues for the nine months ended September 30, 2003 decreased
$136,000 to $1,263,000 from $1,399,000 for the nine months ended September 30,
2002. Net loss, which includes deductions for depreciation and mortgage interest
expense, for the nine months ended September 30, 2003 increased $136,000 to
$216,000 from $80,000 for the nine months ended September 30, 2002. The average
occupancy rate declined 8.5%, to 86.5% in the current year from 95.0% for the
same period in the prior year, which lowered revenues $125,000, and tenant
concessions were increased, which reduced revenues $50,000. Partially offsetting
the decrease in income were additional revenues of $19,000 resulting from
reduced collection losses, and $21,000 of revenues from higher rental rates on
new and renewing leases. The increase in net loss was a result of lower revenues
as overall expenses were approximately the same as the prior year. Although
insurance costs were $14,000 higher resulting from increased premiums charged
when the policies were renewed, repairs and maintenance costs were $11,000
lower, partially offsetting the cost of insurance.
Eagle Lake Business Center IV (Maple Grove, Minnesota)
- -----------------------------
On June 12, 2002, the Registrant purchased Eagle Lake Business Center IV,
a 60,345 square foot industrial flex property located in Maple Grove, Minnesota,
for $4,700,000 in an all cash transaction. The property is currently fully
leased and has been 100% occupied since it was purchased.
Total revenues for the three months ended September 30,2003 increased
$59,000 to $235,000 from $176,000 for the three months ended September 30,2002.
Net income, which includes a deduction for depreciation, for the three months
ended September 30, 2003 increased $32,000, to $131,000 from $99,000 for the
three months ended September 30,2002. Real estate tax recoveries for the period
ending September 30,2003 increased $28,000, and operating escalation income
increased $17,000 over the same period in the prior year. The increase in net
income resulted from the increase in revenues, partially offset by a $27,000
increase in expenses. Real estate taxes were $17,000 higher, project
administration costs were $6,000 higher, and utilities expense was $5,000 higher
during the period in the current year.
Revenues for the nine months ended September 30,2003 increased $454,000 to
$667,000 from $213,000, for the period of ownership ended September 30,2002. Net
income, which includes a deduction for depreciation, for the nine months ended
September 30, 2003 increased $232,000 to $350,000 from $118,000 for the period
of ownership ended September 30, 2002. As the Property was purchased by the
Registrant on June 12,2002, revenue and net income figures for the period in the
prior year represent only three and one-half months of ownership.
Total revenue for the nine months ended September 30, 2003 was comprised
of rental revenue of approximately $410,000 and escalation income of
approximately $230,000. Expenses for the nine months ended September 30, 2003,
related primarily to real estate taxes of approximately $133,000, depreciation
expense of approximately $82,000, repairs and maintenance expenses of
approximately $31,000, payroll expense of approximately $10,000, insurance
expense of approximately $8,800, and other miscellaneous expenses which totaled
approximately $61,000.
Investment in Joint Venture (West Chester, Pennsylvania)
- ---------------------------
On April 30, 2002, the Registrant purchased a 75% non-controlling interest
in a partnership that owns Waterview Apartments in West Chester, Pennsylvania.
Waterview Apartments comprises 203 apartment units and 6,000 square feet of
commercial space.
Equity in net loss of joint venture for the three months ended
September 30, 2003 decreased $7,000 to $10,000 from $17,000 for the three months
ended September 30, 2002. Equity in net loss of joint venture is net of $102,000
and $88,000, for the periods ended September 30, 2003 and 2002, respectively,
that is the Registrant's portion of depreciation charged on the books of the
joint venture. A lower net loss was primarily due to a decrease in property
operating expenses as compared to the period a year earlier. Payroll expense was
$23,000 lower in the current period than the comparable period in the prior
year, partially offset by greater deductions for depreciation and real estate
taxes. The Registrant's portion of depreciation expense was $14,000 higher, and
real estate expense was $4,000 higher than the period in the prior year.
Equity in net loss of joint venture for the nine months ended
September 30, 2003 increased $144,000 to $175,000 from $31,000 for the period of
investment ended September 30, 2002. Equity in net loss of joint venture is net
of $279,000 and $147,000, for the periods ended September 30, 2003 and 2002,
respectively, that is the Registrant's portion of depreciation charged on the
books of the joint venture. As the interest in the joint venture was purchased
by the Registrant on April 30,2002, equity in net loss for the period in 2002
represents only five months of ownership.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
AS OF AND FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003
----------------------------------------------------------------
On March 1, 2001, the Registrant entered into a revolving credit facility
agreement with a bank under which interest incurred is determined based on
current market rates that fluctuate with LIBOR. As such, the Registrant has
market risk to the extent interest rates fluctuate during the term of the credit
facility and funds are advanced by the bank under the agreement. Based on the
weighted average outstanding balance under the credit facility for the nine
months ended September 30, 2003, a 1% change in LIBOR would impact the
Registrant's net loss and cash flows by approximately $25,300.
ITEM 4. CONTROLS AND PROCEDURES
-----------------------
(a) The President and the Chief Financial Officer of the general
partner of SB Partners have evaluated the disclosure controls
and procedures relating to the Registrant's Quarterly Report
on Form 10-Q for the period ended September 30, 2003 as filed
with the Securities and Exchange Commission and have judged
such controls and procedures to be effective.
(b) There have been no changes in the Registrant's internal
controls during the quarter ended September 30, 2003 that
could significantly affect those controls subsequent to the
date of evaluation.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
Exhibit 31 - Incorporated herein.
Exhibit 32 - Incorporated herein.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SB PARTNERS
-----------------------------
(Registrant)
By: SB PARTNERS REAL ESTATE CORPORATION
---------------------------------------
General Partner
Dated: November 14, 2003 By:/s/ John H. Streicker
---------------------
John H. Streicker
President
Dated: November 14, 2003 By:/s/ Elizabeth B. Longo
----------------------
Elizabeth B. Longo
Chief Financial Officer
(Principal Financial Officer)
Dated: November 14, 2003 By:/s/ George N. Tietjen III
-------------------------
George N. Tietjen III
Vice President
(Principal Accounting Officer)
Exhibit 31
- ----------
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT 0F 2002
I, John H. Streicker, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of SB
Partners;
(2) Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
(3) Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this
quarterly report;
(4) The Registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the Registrant and have:
(a) designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material
information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by
others within those entities, particularly during the
period in which this quarterly report is being
prepared;
(b) designed such internal control over financial
reporting, or caused such internal control over
financial reporting to be designed under our
supervision, to provide reasonable assurance regarding
the reliability of financial reporting and the
preparation of financial statements for external
purposes in accordance with generally accepted
accounting principles;
(c) evaluated the effectiveness of the Registrant's
disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end
of the period covered by this report based on such
evaluation; and
(d) disclosed in this quarterly report any change in the
Registrant's internal control over financial reporting
that occurred during the Registrant's most recent
fiscal quarter (the Registrant's fourth fiscal quarter
in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect,
the Registrant's internal control over financial
reporting; and
(5) The Registrant's other certifying officer and I have
disclosed, based on our most recent evaluation over internal
control over financial reporting, to the Registrant's auditors
and the audit committee of the Registrant's board of directors
(or persons performing the equivalent function):
(a) all significant deficiencies and material weaknesses in
the design or operation of internal control over
financial reporting which are reasonably likely to
adversely affect the Registrant's ability to record,
process, summarize and report financial information;
and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the Registrant's internal control over
financial reporting.
Date: November 14, 2003 /s/ John H. Streicker
---------------------
John H. Streicker
President
I, Elizabeth B. Longo, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of SB
Partners;
(2) Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
(3) Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this
quarterly report.
(4) The Registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the Registrant and have:
(a) designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material
information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by
others within those entities, particularly during the
period in which this quarterly report is being
prepared;
(b) designed such internal control over financial
reporting, or caused such internal control over
financial reporting to be designed under our
supervision, to provide reasonable assurance regarding
the reliability of financial reporting and the
preparation of financial statements for external
purposes in accordance with generally accepted
accounting principles;
(c) evaluated the effectiveness of the Registrant's
disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end
of the period covered by this report based on such
evaluation; and
(d) disclosed in this quarterly report any change in the
Registrant's internal control over financial reporting
that occurred during the Registrant's most recent
fiscal quarter (the Registrant's fourth fiscal quarter
in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect,
the Registrant's internal control over financial
reporting;
(5) The Registrant's other certifying officer and I have
disclosed, based on our most recent evaluation over internal
control over financial reporting, to the Registrant's auditors
and the audit committee of the Registrant's board of directors
(or persons performing the equivalent function):
(a) all significant deficiencies and material weaknesses in
the design or operation of internal control which are
reasonably likely to adversely affect the Registrant's
ability to record, process, summarize and report
financial information; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the Registrant's internal control over
financial reporting.
Date: November 14, 2003 /s/ Elizabeth B. Longo
-----------------------
Elizabeth B. Longo
Chief Financial Officer
Exhibit 32
- ----------
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of SB Partners (the "Partnership") on
Form 10-Q for the period ended September 30, 2003 as filed with the Securities
and Exchange Commission on the date hereof we hereby certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that to my knowledge:
(1) The report fully complies with the requirements of section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and (2) The information contained in the
report fairly presents, in all material respects, the financial condition and
results of operations of the Partnership.
Date: November 14, 2003 /s/ John H. Streicker
---------------------
John H. Streicker
President
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of SB Partners (the "Partnership") on
Form 10-Q for the period ended September 30, 2003 as filed with the Securities
and Exchange Commission on the date hereof we hereby certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that to my knowledge:
(3) The report fully complies with the requirements of section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and (4) The information contained in the
report fairly presents, in all material respects, the financial condition and
results of operations of the Partnership.
Date: November 14, 2003 /s/ Elizabeth B. Longo
----------------------
Elizabeth B. Longo
Chief Financial Officer