Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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R
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended September 30, 2010
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¨
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from __________ to __________
Commission file number 000-53962
Resource Real Estate Investors 7, L.P.
(Exact name of registrant as specified in its charter)
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Delaware
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26-2726308
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(State or other jurisdiction of
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(I.R.S. Employer
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incorporation or organization)
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Identification No.)
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One Crescent Drive, Suite 203, Navy Yard Corporate Center, Philadelphia, PA 19112
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(Address of principal executive offices) (Zip code)
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(215) 231-7050
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(Registrant's telephone number, including area code)
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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. Yes R No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
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¨
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Accelerated filer
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¨
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Non-accelerated filer
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¨
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(Do not check if a smaller reporting company)
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Smaller reporting company
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R
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No R
RESOURCE REAL ESTATE INVESTORS 7, L.P.
ON FORM 10-Q
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PAGE
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PART I
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FINANCIAL INFORMATION
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ITEM 1.
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Financial Statements
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3
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5
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6
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7
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ITEM 2.
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11
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ITEM 3.
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16
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ITEM 4.
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16
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PART II
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OTHER INFORMATION
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ITEM 6.
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17
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18
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PART 1.
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FINANCIAL INFORMATION
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ITEM 1.
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FINANCIAL STATEMENTS
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RESOURCE REAL ESTATE INVESTORS 7, L.P.
(in thousands)
(unaudited)
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September 30,
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December 31,
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|||||||
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2010
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2009
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ASSETS
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Rental property, at cost:
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Land
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$ | 7,717 | $ | 7,717 | ||||
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Buildings and improvements
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47,982 | 47,507 | ||||||
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Personal property
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1,004 | 772 | ||||||
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Construction-in-progress
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− | 401 | ||||||
| 56,703 | 56,397 | |||||||
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Accumulated depreciation and amortization
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(5,230 | ) | (3,705 | ) | ||||
| 51,473 | 52,692 | |||||||
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Cash
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11,481 | 12,424 | ||||||
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Restricted cash
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756 | 822 | ||||||
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Tenant receivables, net
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9 | 12 | ||||||
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Prepaid expenses and other assets
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213 | 126 | ||||||
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Deferred financing costs, net
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1,052 | 1,167 | ||||||
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Total assets
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$ | 64,984 | $ | 67,243 | ||||
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LIABILITIES AND PARTNERS’ CAPITAL
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Liabilities:
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Mortgage notes payable
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$ | 41,215 | $ | 41,225 | ||||
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Accounts payable and accrued expenses
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682 | 917 | ||||||
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Accrued interest
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170 | 175 | ||||||
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Payables to related parties
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682 | 469 | ||||||
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Prepaid rent
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102 | 103 | ||||||
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Security deposits
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161 | 166 | ||||||
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Total liabilities
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43,012 | 43,055 | ||||||
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Partners’ capital
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21,972 | 24,188 | ||||||
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Total liabilities and partners’ capital
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$ | 64,984 | $ | 67,243 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
RESOURCE REAL ESTATE INVESTORS 7, L.P.
(in thousands, except per unit data)
(unaudited)
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Three Months Ended
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Nine Months Ended
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September 30,
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September 30,
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2010
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2009
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2010
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2009
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Revenues:
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Rental income
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$ | 1,868 | $ | 1,845 | $ | 5,618 | $ | 5,490 | ||||||||
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Expenses:
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Rental operating
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860 | 944 | 2,603 | 2,792 | ||||||||||||
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Management fees – related parties
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165 | 169 | 496 | 486 | ||||||||||||
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General and administrative
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127 | 49 | 327 | 251 | ||||||||||||
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Depreciation and amortization
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553 | 883 | 1,525 | 2,543 | ||||||||||||
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Total expenses
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1,705 | 2,045 | 4,951 | 6,072 | ||||||||||||
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Income (loss) before interest expense, net
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163 | (200 | ) | 667 | (582 | ) | ||||||||||
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Interest expense, net
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(504 | ) | (502 | ) | (1,605 | ) | (1,596 | ) | ||||||||
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Net loss
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$ | (341 | ) | $ | (702 | ) | $ | (938 | ) | $ | (2,178 | ) | ||||
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Weighted average limited partner units
outstanding
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3,269 | 3,030 | 3,272 | 2,549 | ||||||||||||
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Net loss per weighted average limited partner unit
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$ | (0.10 | ) | $ | (0.23 | ) | $ | (0.29 | ) | $ | (0.85 | ) | ||||
The accompanying notes are an integral part of these consolidated financial statements.
RESOURCE REAL ESTATE INVESTORS 7, L.P.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010
(in thousands, except units)
(unaudited)
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General Partner
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Limited Partners
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Total
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Amount
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Units
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Amounts
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Amount
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Balance at January 1, 2010
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$ | 1 | 3,274,655 | $ | 24,187 | $ | 24,188 | |||||||||
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Distributions
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− | − | (1,228 | ) | (1,228 | ) | ||||||||||
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Redemption, net
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− | (5,000 | ) | (50 | ) | (50 | ) | |||||||||
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Net loss
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− | − | (938 | ) | (938 | ) | ||||||||||
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Balance at September 30, 2010
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$ | 1 | 3,269,655 | $ | 21,971 | $ | 21,972 | |||||||||
The accompanying notes are an integral part of this consolidated financial statement.
RESOURCE REAL ESTATE INVESTORS 7, L.P.
(in thousands)
(unaudited)
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For the Nine Months Ended
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September 30,
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2010
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2009
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Cash flows from operating activities:
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Net loss
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$ | (938 | ) | $ | (2,178 | ) | ||
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Adjustments to reconcile net loss to net cash provided
by operating activities:
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Depreciation and amortization
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1,525 | 2,543 | ||||||
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Amortization of deferred financing costs
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115 | 101 | ||||||
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Changes in operating assets and liabilities:
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Restricted cash
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66 | (438 | ) | |||||
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Tenant receivables, net
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3 | 9 | ||||||
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Deposits
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− | (12 | ) | |||||
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Prepaid expense and other assets
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(87 | ) | (136 | ) | ||||
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Accounts payable and accrued expenses
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(235 | ) | 685 | |||||
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Payables to related parties
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213 | 58 | ||||||
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Accrued interest
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(5 | ) | 127 | |||||
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Prepaid rent
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(1 | ) | (86 | ) | ||||
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Security deposits
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(5 | ) | (2 | ) | ||||
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Net cash provided by operating activities
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651 | 671 | ||||||
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Cash flows from investing activities:
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Capital expenditures
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(306 | ) | (2,404 | ) | ||||
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Net cash used in investing activities
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(306 | ) | (2,404 | ) | ||||
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Cash flows from financing activities:
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Capital contributions
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− | 11,554 | ||||||
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Distributions to limited partners
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(1,228 | ) | − | |||||
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Principal payments on mortgage notes payable
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(10 | ) | (9 | ) | ||||
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Redemption, net
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(50 | ) | − | |||||
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Net cash (used in) provided by financing activities
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(1,288 | ) | 11,545 | |||||
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Net (decrease) increase in cash
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(943 | ) | 9,812 | |||||
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Cash at beginning of period
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12,424 | 3,300 | ||||||
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Cash at end of period
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$ | 11,481 | $ | 13,112 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
RESOURCE REAL ESTATE INVESTORS 7, L.P.
SEPTEMBER 30, 2010
(unaudited)
NOTE 1 – NATURE OF BUSINESS AND OPERATIONS
Resource Real Estate Investors 7, L.P. (“R-7” or the “Partnership”) is a Delaware limited partnership which owns and operates multifamily residential rental properties located in Georgia, Maine and Texas. The Partnership also may invest in interests in real estate mortgages and other debt instruments that are secured, directly or indirectly, by multifamily residential rental properties although the Partnership has no such investments as of September 30, 2010. R-7 was formed on March 28, 2008 and commenced operations on June 16, 2008. The General Partner, Resource Capital Partners, Inc. (“RCP” or “the GP”), is in the business of sponsoring and managing real estate investment limited partnerships and tenant in common programs. RCP contributed $1,000 in cash as its minimum capital contribution to the Partnership. In addition, RCP holds a 5.5% limited partnership interest in the Partnership at both September 30, 2010 and December 31, 2009. RCP is an indirect wholly owned subsidiary of Resource America, Inc. (“RAI”), a publicly traded company (NASDAQ: REXI) operating in the real estate, commercial finance and financial fund management sectors.
The Partnership will continue until March 28, 2016, unless terminated earlier in accordance with the First Amended and Restated Agreement of Limited Partnership (the “Agreement”). The GP has the right to extend the Partnership term for one or more periods to a maximum of two years in the aggregate following the initial termination date.
The Agreement provides that income is allocated as follows: first, to the Limited Partners (“LPs”) and the GP (collectively, the “Partners”) in proportion to and to the extent of the deficit balances, if any, in their respective capital accounts; second, to the Partners in proportion to the allocations of Distributable Cash (as defined in the Agreement); and third, 100% to the LPs. All losses are allocated as follows: first, 100% to the LPs until the LPs have been allocated losses equal to the excess, if any, of their aggregate capital account balances over the aggregate Adjusted Capital Contributions (as defined in the Agreement); second, to the Partners in proportion to and to the extent of their respective remaining positive capital account balances, if any; and third, 100% to the LPs.
Distributable cash from operations, payable monthly, as determined by the GP, is first allocated 100% to the LPs until the LP’s have received their Preferred Return (as defined in the Agreement); and thereafter, 80% to the LPs and 20% to the GP.
Distributable cash from capital transactions, as determined by the GP, is first allocated 100% to the LPs until the LPs have received their Preferred Return; second, 100% to the LPs until their Adjusted Capital Contributions have been reduced to zero; and thereafter, 80% to the LPs and 20% to the GP.
The consolidated financial statements and the information and tables contained in the notes thereto as of September 30, 2010 are unaudited. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). However, in the opinion of management, these interim financial statements include all the necessary adjustments to fairly present the results of the interim periods presented. The unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Partnership’s Registration Statement on Form 10 for the year ended December 31, 2009. The results of operations for the three and nine months ended September 30, 2010 may not necessarily be indicative of the results of operations for the full year ending December 31, 2010.
RESOURCE REAL ESTATE INVESTORS 7, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
SEPTEMBER 30, 2010
(unaudited)
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows:
Principles of Consolidation
The consolidated financial statements include the accounts of the Partnership and its wholly owned subsidiaries, as follows:
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Subsidiary/Apartment Complex
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Leverage
Ratio (1)
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Number
of Units
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Location
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RRE Tamarlane Holdings, LLC, or Tamarlane Apartments (“Tamarlane”)
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68%
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115
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Portland, ME
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RRE Bent Oaks Holdings, LLC, or Bent Oaks Apartments (“Bent Oaks”)
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57%
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146
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Austin, TX
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RRE Cape Cod Holdings, LLC, or Cape Cod Apartments (“Cape Cod”)
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57%
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212
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San Antonio, TX
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RRE Woodhollow Holdings, LLC, or Woodhollow Apartments
(“Woodhollow”)
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60%
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108
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Austin, TX
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RRE Woodland Hills Holdings, LLC, or Woodland Hills Apartments (“Hills”)
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65%
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228
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Decatur, GA
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809
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(1)
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Face value of mortgage divided by total property capitalization, including reserves, escrows, fees and closing costs.
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All material intercompany transactions and balances have been eliminated.
Supplemental Disclosure of Cash Flow Information
During the nine months ended September 30, 2010 and 2009, the Partnership paid $1.6 million and $1.4 million, respectively, in cash for interest.
Advertising
The Partnership expenses advertising costs as they are incurred. Advertising costs, which are included in rental operating expenses, totaled $93,000 and $132,000 for the nine months ended September 30, 2010 and 2009, respectively.
Tenant Receivables, Net
The majority of the Partnership’s receivables are due from tenants. Tenant receivables are stated in the consolidated financial statement at amounts due from tenants net of an allowance for uncollectible receivables. Accounts outstanding longer than the payment terms are considered past due. The Partnership determines its allowance by considering a number of factors, including the length of time receivables are past due, security deposits held, the Partnership’s previous loss history, the tenants’ current ability to pay their obligations to the Partnership, the condition of the general economy and the industry as whole. The Partnership writes off receivables when they become uncollectible. At September 30, 2010 and December 31, 2009, $0 and $94, respectively, is included in the allowance for uncollectible receivables.
NOTE 3 − RESTRICTED CASH
Restricted cash represents escrow deposits with lenders to be used to pay real estate taxes, insurance, and capital improvements. A summary of the components of restricted cash follows (in thousands):
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September 30,
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December 31,
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2010
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2009
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Real estate taxes
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$ | 505 | $ | 633 | ||||
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Insurance
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62 | 80 | ||||||
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Capital improvements
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189 | 109 | ||||||
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Total restricted cash
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$ | 756 | $ | 822 | ||||
RESOURCE REAL ESTATE INVESTORS 7, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
SEPTEMBER 30, 2010
(unaudited)
NOTE 4 – DEFERRED FINANCING COSTS
Deferred financing costs include unamortized costs incurred to obtain financing which are being amortized over the term of the related debt. Accumulated amortization as of September 30, 2010 and December 31, 2009 was $295,000 and $180,000, respectively. Estimated amortization expense of the existing deferred financing costs of the Partnership’s properties for the 12 month periods ending September 30, 2011 through 2015, and thereafter, is as follows (in thousands):
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2011
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$ | 154 | ||
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2012
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153 | |||
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2013
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151 | |||
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2014
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149 | |||
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2015
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147 | |||
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Thereafter
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298 | |||
| $ | 1,052 |
NOTE 5 – MORTGAGE NOTES PAYABLE
The following is a summary of mortgage notes payable (in thousands, except percentages):
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Property
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September 30,
2010
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December 31,
2009
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Maturity Date
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Annual
Interest Rate
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Average
Monthly Debt
Service
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Tamarlane
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$ | 8,906 | $ | 8,906 |
05/01/2015
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4.92% | $ | 37 | (1) | ||||||||
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Tamarlane
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997 | 1,007 |
05/01/2015
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6.12% | $ | 5 | (2) | ||||||||||
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Bent Oaks
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6,120 | 6,120 |
01/01/2019 (7)
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5.99% (7) | $ | 31 | (3) | ||||||||||
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Cape Cod
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6,362 | 6,362 |
01/01/2019 (7)
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5.91% (7) | $ | 32 | (4) | ||||||||||
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Woodhollow
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5,240 | 5,240 |
01/01/2019 (7)
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6.14% (7) | $ | 27 | (5) | ||||||||||
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Hills
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13,590 | 13,590 |
01/01/2016
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variable
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$ | 40 | (6) | ||||||||||
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Total
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$ | 41,215 | $ | 41,225 | |||||||||||||
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(1)
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Interest only through May 1, 2015.
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(2)
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Monthly payment including principal and interest totals $5,315, effective since start date of loan.
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(3)
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Interest only through January 1, 2011; monthly payment including principal and interest, effective February 1, 2011, will total $36,653.
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(4)
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Interest only through January 1, 2011; monthly payment including principal and interest, effective February 1, 2011, will total $37,776.
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(5)
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Interest only through January 1, 2011; monthly payment including principal and interest, effective February 1, 2011, will total $31,890.
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(6)
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Interest only through January 1, 2011; monthly payment including principal and interest (approximately $65,000 based on variable rate at the inception date of the loan) will be effective February 1, 2011. Interest is variable and calculated monthly based upon the one month British Bankers Association London Interbank Offered Rate plus 323 basis points, capped at 7% for the term of the loan.
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(7)
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The Partnership has an option to extend the maturity date for an additional one year to January 1, 2020. During the extension period, the interest rate would convert to the Federal Home Loan Mortgage Corporation Bill Index Rate plus 2.5%.
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Annual principal payments on the mortgage notes payable for each of the next five years ending September 30, and thereafter, are as follows (in thousands):
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2011
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$ | 345 | ||
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2012
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526 | |||
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2013
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554 | |||
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2014
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580 | |||
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2015
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10,436 | |||
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Thereafter
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28,774 | |||
| $ | 41,215 |
RESOURCE REAL ESTATE INVESTORS 7, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
SEPTEMBER 30, 2010
(unaudited)
NOTE 5 – MORTGAGE NOTES PAYABLE – (Continued)
The mortgage notes payable are with recourse only to the properties securing them subject to certain limited standard exceptions, as defined in the mortgage notes, which the GP has guaranteed (“carveouts”). These carveouts relate to the total debt and expire as the notes are paid down.
NOTE 6 – RELATED PARTY TRANSACTIONS
In the ordinary course of its business operations, the Partnership has ongoing relationships with several related entities. Payables due to related parties are summarized in the following table (in thousands):
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September 30,
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December 31,
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2010
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2009
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Payables due to related parties:
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RCP (a)
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$ | 537 | $ | 324 | ||||
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Resource Real Estate Management, LLC (“RREML”) (b)
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122 | 106 | ||||||
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Resource Real Estate Management, Inc. (“RREMI”) (c)
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23 | 39 | ||||||
| $ | 682 | $ | 469 | |||||
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(a)
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RCP is entitled to receive an annual investment management fee, payable monthly, equal to 1% of the gross offering proceeds, net of any LP interest owned by RCP. During the term of the Partnership, RCP must subordinate up to 100% of its annual investment management fee to the receipt by the LPs of their Preferred Return. As of September 30, 2010 and December 31, 2009, the LPs had not received their Preferred Return; therefore, the balance includes $535,000 and $320,000, respectively, of cumulative investment management fees, as well as $2,000 and $4,000, respectively, due to RCP for the reimbursement of advances to cover ordinary operating expenses.
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(b)
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RREML is a wholly owned subsidiary of RCP and is entitled to receive property management fees (see footnote 2 to the following table). At September 30, 2010 and December 31, 2009, the balance consists primarily of accrued property management fees.
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(c)
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RREMI is an indirect wholly owned subsidiary of RAI which is engaged by RREML as the manager of the Partnership’s properties. During the ordinary course of business, RREMI advances funds for ordinary operating expenses on behalf of the properties; these advances are repaid within a few days.
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The Partnership is obligated to pay fees and reimbursements of expenses to related parties. These activities are summarized in the following table (in thousands):
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Three Months Ended
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Nine Months Ended
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September 30,
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September 30,
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2010
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2009
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2010
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2009
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RCP:
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Investment management fees (1)
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$ | 72 | $ | 76 | $ | 215 | $ | 215 | ||||||||
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RREML:
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Property management fees (2)
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$ | 93 | $ | 93 | $ | 281 | $ | 271 | ||||||||
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(1)
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RCP is entitled to receive an annual investment management fee, payable monthly, equal to 1% of the gross offering proceeds, net of any LP interest owned by RCP. During the term of the Partnership, RCP must subordinate up to 100% of its annual investment management fee to the receipt by the LPs of their Preferred Return (see footnote (a) to the previous table). For the three and nine months ended September 30, 2010 and 2009, the LPs did not receive their Preferred Return and these fees were subordinated and accrued, but not paid.
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(2)
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RREML is entitled to receive monthly property management fees equal to 5% of the gross operating revenues from the Partnership’s 100% owned properties, for managing the Partnership’s properties or obtaining and supervising third-party managers. RCP may in its discretion, from time to time, defer payment of all or any portion of the fees and accrue the same (see footnote (b) to the previous table).
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
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AND RESULTS AND OPERATIONS (unaudited)
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This report contains certain forward-looking statements. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “could,” “estimate,” “expects,” “intend,” “may,” “plan,” “potential,” “project,” “should,” “will” and “would” or the negative of these terms or other comparable terminology. Such statements are subject to the risks and uncertainties more particularly described in Item 1A, under the caption “Risk Factors,” in our Registration Statement on Form 10 for the year ended December 31, 2009 and in other of our public filings with the Securities and Exchange Commission. These risks and uncertainties could cause actual results to differ materially. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances after the date of this report, except as may be required under applicable law.
Overview
We are a Delaware limited partnership that was formed on March 28, 2008 and commenced operations on June 16, 2008. Through wholly owned subsidiaries, we own in fee, operate and invest in multifamily residential rental properties located in Georgia, Maine and Texas which we refer to as our Properties. We also may invest in interests in real estate mortgages and other debt instruments that are secured, directly or indirectly, by a multifamily residential rental property or an interest in an entity that directly owns such a property. As of June 30, 2010, we did not own any real estate debt investments.
As of September 30, 2010, we own five multifamily residential rental properties through our 100% owned subsidiaries, as follows:
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Subsidiary / Apartment Complex
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Purchase
Date
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Leverage
Ratio (1)
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Number of
Units
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Property
Location
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RRE Tamarlane Holdings, LLC, or Tamarlane
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07/31/08
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68%
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115
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Portland, ME
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RRE Bent Oaks Holdings, LLC, or Bent Oaks
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12/10/08
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57%
|
146
|
Austin, TX
|
||||
|
RRE Cape Cod Holdings, LLC, or Cape Cod
|
12/10/08
|
57%
|
212
|
San Antonio, TX
|
||||
|
RRE Woodhollow Holdings, LLC, or Woodhollow
|
12/12/08
|
60%
|
108
|
Austin, TX
|
||||
|
RRE Woodland Hills Holdings, LLC, or Hills
|
12/19/08
|
65%
|
228
|
Decatur, GA
|
||||
|
809
|
|
(1)
|
Face value of mortgage divided by total property capitalization, including reserves, escrows, fees and closing costs.
|
The following tables set forth operating statistics about our multifamily residential rental properties:
|
Apartment Complex
|
Average
Occupancy Rate (1)
|
Average Effective Rent
per Square Foot (2)
|
Ratio of Operating
Expense to Revenue (3)
|
|||||||||||||||||||||
|
Three Months Ended September 30,
|
2010
|
2009
|
2010
|
2009
|
2010
|
2009
|
||||||||||||||||||
|
Tamarlane
|
98.0% | 92.8% | $ | 1.14 | $ | 1.05 | 44% | 50% | ||||||||||||||||
|
Bent Oaks
|
93.8% | 92.2% | $ | 0.96 | $ | 0.90 | 64% | 67% | ||||||||||||||||
|
Cape Cod
|
95.4% | 95.8% | $ | 0.84 | $ | 0.82 | 51% | 63% | ||||||||||||||||
|
Woodhollow
|
95.1% | 95.7% | $ | 0.84 | $ | 0.86 | 65% | 64% | ||||||||||||||||
|
Hills
|
96.6% | 94.4% | $ | 0.69 | $ | 0.68 | 55% | 47% | ||||||||||||||||
|
Apartment Complex
|
Average
Occupancy Rate (1)
|
Average Effective Rent
per Square Foot (2)
|
Ratio of Operating
Expense to Revenue (3)
|
|||||||||||||||||||||
|
Nine Months Ended
September 30,
|
2010
|
2009
|
2010
|
2009
|
2010
|
2009
|
||||||||||||||||||
|
Tamarlane
|
96.5% | 92.8% | $ | 1.12 | $ | 1.10 | 45% | 50% | ||||||||||||||||
|
Bent Oaks
|
95.0% | 90.3% | $ | 0.97 | $ | 0.89 | 63% | 69% | ||||||||||||||||
|
Cape Cod
|
95.1% | 93.8% | $ | 0.83 | $ | 0.81 | 62% | 66% | ||||||||||||||||
|
Woodhollow
|
95.8% | 94.1% | $ | 0.86 | $ | 0.87 | 66% | 69% | ||||||||||||||||
|
Hills
|
96.2% | 93.2% | $ | 0.69 | $ | 0.66 | 52% | 50% | ||||||||||||||||
|
(1)
|
Number of occupied units divided by total units adjusted for any unrentable units.
|
|
(2)
|
Average rental revenue divided by total rentable square footage. We calculate average rental revenue by dividing gross rental revenue by the number of months in the period.
|
|
(3)
|
Rental operating expenses, excluding certain one-time expenses funded from reserves for capital expenditures, and general and administrative expenses, excluding asset management fees, as a percentage of rental income, excluding any adjustment for concessions.
|
Results of Operations
We generate our income from the net revenues we receive from our Properties. We also may, in the future, generate funds from the sale or refinancing of our Properties. Because we acquired our Properties in 2008, we do not expect that we will sell or refinance our Properties for at least the next year. Should the current recession continue or intensify, we could experience lower occupancy and lower rental revenues and higher operating costs all of which could harm our operations and financial condition, reduce the value of our Properties and adversely affect the distributions to our limited partners.
Our operating results and cash flows from our Properties are affected by four principal factors:
|
|
·
|
occupancy and rental rates,
|
|
|
·
|
property operating expenses,
|
|
|
·
|
interest rates on the related financing, and
|
|
|
·
|
capital expenditures.
|
The amount of rental revenues from our Properties depends upon the occupancy rate and concessions granted. Our Properties experienced an overall increase in their average occupancy rate during the nine months ended September 30, 2010 of approximately 2.9% to 95.7% from 92.8% for the prior year period. Unemployment among our resident base will often result in higher bad debt expenses as well as higher turnover costs due to tenants moving out of apartment units prior to the expiration of their lease terms. In particular, two of our properties, Bent Oaks and Cape Cod, experienced higher than expected turnover costs in 2009 as a result of higher than normal move-outs, due in part, to the transition from prior ownership as well as general economic and real estate market conditions in Texas.
The aggressive property-level programs that have been deployed by our Properties have led to the increase in occupancy rates experienced during the nine months ended September 30, 2010, including, in particular, our lease assurance program and our lease rent optimizer, or LRO, program which includes rent concessions and a planned program of substantial capital improvements. Under our lease assurance program, we market our apartment units to current and potential tenants who are worried about incurring substantial lease breakage penalties if they lose their jobs. The program allows tenants who sign new or renew leases to terminate their leases without penalty within 45 days after they provide proof of an involuntary job loss. Under our LRO program, we seek to price our rents for apartment units on a daily basis, based upon inventory in the marketplace and competitors’ pricing.
We seek to control operating expenses through our General Partner’s automated purchase order system that compares actual to budgeted expenses and requires management approval of variances, and through the use of third-party service providers to seek best available pricing.
With the exception of one mortgage note, our existing financing is at fixed rates of interest and, accordingly, our interest cost has remained relatively stable during the period of our ownership of the Properties. Based upon current economic conditions and their effect on interest rates, and because our existing financing extends through periods ranging from 2015 to 2019, we expect that our financing costs will remain relatively stable during substantially all of the expected term on these notes. However, should interest rates change materially, the interest component of our variable rate financing, which is based upon the one-month British Banker Association London Interbank Offered Rate plus 323 basis points, and is capped at 7%, could change. A hypothetical 100 basis point of variance would change our annual interest expense by approximately $136,000.
Under our capital improvements program, more particularly described in “Liquidity and Capital Resources,” we anticipate that we will spend approximately $5.7 million over our remaining life for property improvements intended to increase the Properties’ appeal to tenants. As we implement planned improvements to our Properties, we seek to increase our occupancy rates, and, potentially, our rental rates, thereby increasing our cash flow from operating activities.
The following table sets forth the results of our operations for the three months ended September 30, 2010 (in thousands, except per unit data):
|
September 30,
|
Increase (Decrease)
|
|||||||||||||||
|
2010
|
2009
|
Dollars
|
Percent
|
|||||||||||||
|
Revenues:
|
||||||||||||||||
|
Rental income
|
$ | 1,868 | $ | 1,845 | $ | 23 | 1% | |||||||||
|
Expenses:
|
||||||||||||||||
|
Rental operating
|
860 | 944 | (84 | ) | (9)% | |||||||||||
|
Management fees – related parties
|
165 | 169 | (4 | ) | (2)% | |||||||||||
|
General and administrative
|
127 | 49 | 78 | 159% | ||||||||||||
|
Depreciation and amortization
|
553 | 883 | (330 | ) | (37)% | |||||||||||
|
Total expenses
|
1,705 | 2,045 | (340 | ) | (17)% | |||||||||||
|
Income (loss) before interest expense, net
|
163 | (200 | ) | 363 | 182% | |||||||||||
|
Interest expense, net
|
(504 | ) | (502 | ) | (2 | ) | − | |||||||||
|
Net loss
|
$ | (341 | ) | $ | (702 | ) | $ | 361 | 51% | |||||||
|
Weighted average limited partner units
outstanding
|
3,269 | 3,030 | ||||||||||||||
|
Net loss per weighted average limited partner unit
|
$ | (0.10 | ) | $ | (0.23 | ) | ||||||||||
Revenues – Three Months Ended September 30, 2010 Compared to Three Months Ended September 30, 2009
We attribute the 1% increase in revenues principally to an increase of 1.6% in the weighted average occupancy rate for our Properties over the prior year period.
Expenses – Three Months Ended September 30, 2010 Compared to Three Months Ended September 30, 2009
We attribute the $340,000 decrease in expenses primarily to the following:
|
|
·
|
a $330,000 decrease in depreciation and amortization due to all properties having fully amortized the value of their respective in-place leases; the decrease was partially offset by an increase in depreciation resulting from capital expenditures we have made; and
|
|
|
·
|
an $84,000 decrease in rental operating expenses principally due to one-time costs incurred at Woodland Hills, Cap Cod, Bent Oaks and Woodhollow which were necessary to stabilize these properties in 2009; offset in part by
|
|
|
·
|
a $78,000 increase in general and administrative expense due principally to an increase in audit, tax, and legal fees as a result of increased reporting requirements in 2010.
|
The following table sets forth the results of our operations for the nine months ended September 30, 2010 (in thousands):
|
September 30,
|
Increase (Decrease)
|
|||||||||||||||
|
2010
|
2009
|
Dollars
|
Percent
|
|||||||||||||
|
Revenues:
|
||||||||||||||||
|
Rental income
|
$ | 5,618 | $ | 5,490 | $ | 128 | 2% | |||||||||
|
Expenses:
|
||||||||||||||||
|
Rental operating
|
2,603 | 2,792 | (189 | ) | (7)% | |||||||||||
|
Management fees – related parties
|
496 | 486 | 10 | 2% | ||||||||||||
|
General and administrative
|
327 | 251 | 76 | 30% | ||||||||||||
|
Depreciation and amortization
|
1,525 | 2,543 | (1,018 | ) | (40)% | |||||||||||
|
Total expenses
|
4,951 | 6,072 | (1,121 | ) | (18)% | |||||||||||
|
Income (loss) before interest expense, net
|
667 | (582 | ) | 1,249 | (215)% | |||||||||||
|
Interest expense, net
|
(1,605 | ) | (1,596 | ) | (9 | ) | − | |||||||||
|
Net loss
|
$ | (938 | ) | $ | (2,178 | ) | $ | 1,240 | 57% | |||||||
|
Weighted average limited partner units outstanding
|
3,272 | 2,549 | ||||||||||||||
|
Net loss per weighted average limited partner unit
|
$ | (0.29 | ) | $ | (0.85 | ) | ||||||||||
Revenues – Nine Months Ended September 30, 2010 Compared to Nine Months Ended September 30, 2009
We attribute the 2% increase in revenues principally to an increase of 2.9% in the weighted average occupancy rate for our Properties over the prior year period.
Expenses – Nine Months Ended September 30, 2010 Compared to Nine Months Ended September 30, 2009
We attribute the $1.1 million decrease in expenses primarily to the following:
|
|
·
|
a $1.0 million decrease in depreciation and amortization due to all properties having fully amortized the value of their respective in-place leases; the decrease was partially offset by an increase in depreciation resulting from capital expenditures we have made; and
|
|
|
·
|
a $189,000 decrease in rental operating expenses principally due to one-time costs incurred at Woodland Hills, Cape Cod, Bent Oaks and Woodhollow which was necessary to stabilize the properties in 2009; offset in part by
|
|
|
·
|
a $76,000 increase in general and administrative expense due principally to an increase in audit, tax, and legal fees as a result of increased reporting requirements in 2010.
|
Liquidity and Capital Resources
During 2008 and 2009, we raised approximately $32.5 million through the issuance of limited partnership interests, including $1.6 million from our General Partner. After payment of our organizational and offering costs, the funds were used principally to purchase five properties and as reserves for capital expenditures.
The following table sets forth our sources and uses of cash (in thousands, unaudited):
|
September 30,
|
||||||||
|
2010
|
2009
|
|||||||
|
Provided by operating activities (1)
|
$ | 651 | $ | 671 | ||||
|
Used in investing activities
|
(306 | ) | (2,404 | ) | ||||
|
(Used in) provided by financing activities
|
(1,288 | ) | 11,545 | |||||
|
Net (decrease) increase in cash
|
$ | (943 | ) | $ | 9,812 | |||
|
(1)
|
Including changes in operating assets and liabilities.
|
Our liquidity needs consist principally of capital to pay the Properties’ debt service, operating expenses, capital expenditures and monthly distributions to the limited partners. Our ability to meet our liquidity needs will be subject to our ability to generate cash from operations as well as the amount of our cash reserves and working capital. The ability to generate cash from operations will depend on the occupancy rates, rates charged to tenants compared with competing properties in the area and the ability of tenants to pay rent. Occupancy rates can fluctuate based on changes in local market conditions where the Properties are located such as: excessive building resulting in an oversupply of similar properties, deterioration of surrounding areas, a decrease in market rent rates, or local economic conditions, including unemployment rates. The rates charged to tenants compared to competing properties can be affected by a lack of perceived safety, convenience and attractiveness of a property.
During the nine month periods ended September 30, 2010 and 2009 we incurred net losses; our net income or loss is substantially affected by non-cash expenses, principally depreciation and amortization expense, as is common for entities that own real properties. Our net loss for the nine month periods ended September 30, 2010 and 2009 of $938,000 and $2.2 million, respectively, included $1.5 million and $2.5 million, respectively, of non-cash depreciation and amortization expense. Our operations generated $702,000 and $466,000, respectively, of positive adjusted cash flow from operations for the nine month periods ended September 30, 2010 and 2009. We define adjusted cash flow from operations, a non-GAAP liquidity measure, as net cash provided by operating activities adjusted for net changes in assets and liabilities. Management views adjusted cash flow from operations as a useful and appropriate supplement to cash provided by operating activities, since distributions to limited partners depend upon this measure. Unless our properties are affected by the factors referred to above in this discussion and in “-Results of Operations,” we anticipate that we will generate a similar amount of positive adjusted cash flow from operations for the twelve months ended December 31, 2010.
The following table reconciles net cash provided by operating activities to adjusted cash flow from operations as described in the paragraph above (in thousands):
|
September 30,
|
||||||||
|
2010
|
2009
|
|||||||
|
Net cash provided by operating activities
|
$ | 651 | $ | 671 | ||||
|
Net changes in operating assets and liabilities
|
51 | (205 | ) | |||||
|
Adjusted cash flow from operations
|
$ | 702 | $ | 466 | ||||
As of September 30, 2010, we had $11.2 million in cash reserves and $254,000 in working capital. Accordingly, we believe we will be able to meet our liquidity needs for the foreseeable future. During the nine months ended September 30, 2010, we have spent $306,000 on capital expenditures such as exterior paint projects, roof replacements, landscaping upgrades, parking lot paving, and turnover costs and anticipate future discretionary expenditures, as follows by property (in thousands):
|
Apartment Complex
|
Capital
Expenditures
|
Future Discretionary
Capital Expenditures
|
||||||
|
Tamarlane
|
$ | 48 | $ | 600 | ||||
|
Bent Oaks
|
96 | 1,660 | ||||||
|
Cape Cod
|
76 | 1,939 | ||||||
|
Woodhollow
|
41 | 820 | ||||||
|
Hills
|
45 | 1,894 | ||||||
|
Total
|
$ | 306 | $ | 6,913 | ||||
Although our capital expenditures were nominal during the nine months ended September 30, 2010, we have planned a series of major capital projects for our Properties, including further landscaping, parking lot paving, signage upgrades, construction of a clubhouse (at the Hills), upgrades to exterior structures, replacing the HVAC condensing units and replacing water heaters. Our planned expenditures of $6.9 million are a reduction from the $11.3 million we previously reported, since we do not believe that, under current market conditions, expenditures above the currently planned $6.9 million will allow us to increase occupancy and rental rates sufficiently to provide an acceptable return on the capital that would have been invested. The reductions principally involve interior upgrades such as cabinets, appliances, light fixtures and countertops. We review future expenditures periodically and adjust them based on both operating results and local market conditions. If market conditions improve, we will consider restoring the interior upgrade program. We cannot assure you that we will complete projects currently planned or that we will not change our plans in response to changes in market conditions. Pending future reviews of our capital projects program, we intend to use the reserves not needed for the program to fund increased debt service requirements, which begin in early 2011.
Critical Accounting Policies
For a discussion on our critical accounting policies and estimates, see the discussion in our registration statement on Form 10 under “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates.”
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
Omitted as permitted under rules applicable to smaller reporting companies.
|
CONTROLS AND PROCEDURES
|
Disclosure Controls
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our General Partner, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our General Partner recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Under the supervision of our General Partner’s principal executive officer and principal financial officer, we have carried out an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our General Partner’s principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting that occurred during the three months ended September 30, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
|
EXHIBITS
|
|
Exhibit No.
|
Description
|
|
|
3.1
|
Amended and Restated Agreement of Limited Partnership. (1)
|
|
|
3.2
|
Certificate of Limited Partnership. (1)
|
|
|
4.1
|
Forms of letters sent to limited partners confirming their investment. (1)
|
|
|
31.1
|
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
31.2
|
Certification of Principal Financial and Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
32.1
|
Certification of Principal Executive Officer pursuant to Section 1350 18 U.S.C., as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
32.2
|
Certification of Principal Financial and Accounting Officer pursuant to Section 1350 18 U.S.C., as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
(1)
|
Filed previously as an exhibit to the Partnership’s registration statement on Form 10 and by this reference incorporated herein.
|
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
RESOURCE REAL ESTATE INVESTORS 7, L.P.
|
|
|
By: Resource Capital Partners, Inc., its general partner
|
|
|
November 10, 2010
|
By: /s/ Kevin M. Finkel
|
|
Kevin M. Finkel
|
|
|
President
|
|
|
(Principal Executive Officer)
|
|
November 10, 2010
|
By: /s/ Steven R. Saltzman
|
|
Steven R. Saltzman
|
|
|
Vice President – Finance
|
|
|
(Principal Financial and Accounting Officer)
|
18