For the quarterly period ended March 31, 2005
OR
Commission File Number 001-32389
NTS REALTY HOLDINGS LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
| Delaware | 41-2111139 |
| (State or other jurisdiction of | (I.R.S. Employer Identification No.) |
| incorporation or organization) |
10172 Linn Station Road,
Louisville, Kentucky 40223
(Address of principal executive offices)
(502) 426-4800
(Registrant’s telephone number, including area code)
N/A
(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. Yes [X] No [ ]
Indicate by check mark whether registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of May 9, 2005, there were 11,381,608 limited partnership units outstanding.
| Pages |
| Item 1. | Financial Statements | |||
| Balance Sheets as of March 31, 2005 and December 31, 2004 | 4 | |||
| Statement of Partners' Equity as of March 31, 2005 | 4 | |||
| Statements of Operations for the Three Moonths Ended March 31, 2005 and 2004 | 5-6 | |||
| Statements of Cash Flows for the Three Months Ended March 31, 2005 and 2004 | 7-8 | |||
| Notes to Financial Statements | 9-30 | |||
| Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations |
31-38 | ||
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 39 | ||
| Item 4. | Controls and Procedures | 39 | ||
| Items 1 - 6 | 40-42 | |||
| Signatures | 43 |
2
Some of the statements included in this quarterly report on Form 10-Q, particularly those included in Part I, Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), may be considered “forward-looking statements” because the statements relate to matters which have not yet occurred. For example, phrases such as “we anticipate,” “believe” or “expect” indicate that it is possible that the event anticipated, believed or expected may not occur. If these events do not occur, the result which we expected also may, or may not, occur in a different manner, which may be more or less favorable to us. We do not undertake any obligation to update these forward-looking statements.
Any forward-looking statements included in MD&A, or elsewhere in this report, reflect our managing general partner’s best judgment based on known factors, but involve risks and uncertainties. Actual results could differ materially from those anticipated in any forward-looking statements as a result of a number of factors, including but not limited to those described in our filings with the Securities and Exchange Commission, particularly our registration statement on Form S-4, which became effective on October 27, 2004. Any forward-looking information provided by us pursuant to the safe harbor established by the Private Securities Litigation Reform Act of 1995 should be evaluated in the context of these factors.
3
(UNAUDITED)
---------------------
March 31, 2005 December 31, 2004
--------------------- --------------------
ASSETS
Cash and equivalents $ 15,439,632 $ 2,573,855
Cash and equivalents - restricted 2,874,832 313,255
Accounts receivable, net of allowance for doubtful
accounts of $226,576 at March 31, 2005 and
$125,485 at December 31, 2004 1,940,516 1,609,802
Land, buildings and amenities, net 156,123,646 156,243,048
Other assets 6,312,001 5,807,464
--------------------- --------------------
TOTAL ASSETS $ 182,690,627 $ 166,547,424
===================== ====================
LIABILITIES AND PARTNERS' EQUITY
Mortgages and notes payable $ 127,532,509 $ 112,799,938
Accounts payable and accrued expenses 3,151,096 2,588,663
Accounts payable and accrued expenses - affiliate 502,182 177,879
Security deposits 857,427 676,665
Other liabilities 1,605,702 774,294
--------------------- --------------------
TOTAL LIABILITIES 133,648,916 117,017,439
COMMITMENTS AND CONTINGENCIES (NOTE 11)
PARTNERS' EQUITY 49,041,711 49,529,985
--------------------- --------------------
TOTAL LIABILITIES AND PARTNERS' EQUITY $ 182,690,627 $ 166,547,424
===================== ====================
General Limited
Partner Partners General Limited
Interests Interests Partner Partners Total
-------------------------------------------------------------------------------
PARTNERS' EQUITY
Initial equity 714,491 10,667,117 $ 3,132,821 $ 46,770,445 $ 49,903,266
Net loss prior year - - (23,433) (349,848) (373,281)
Net loss current year - - (30,652) (457,622) (488,274)
-------------------------------------------------------------------------------
Balances on March 31, 2005 714,491 10,667,117 $ 3,078,736 $ 45,962,975 $ 49,041,711
===============================================================================
The accompanying notes to financial statements are an integral part of these statements.
4
REVENUES
Rental income $ 8,044,775
Tenant reimbursements 539,120
---------------------------
TOTAL REVENUES 8,583,895
---------------------------
EXPENSES
Operating expenses 2,094,729
Operating expenses - affiliated 980,391
Management fees 389,475
Real estate taxes 561,838
Professional and administrative expenses 738,633
Professional and administrative expenses - affiliated 352,286
Depreciation and amortization 2,142,464
---------------------------
TOTAL OPERATING EXPENSES 7,259,816
---------------------------
OPERATING INCOME 1,324,079
Interest and other income 44,224
Interest expense (1,827,262)
Loss on disposal of assets (29,315)
---------------------------
Net loss $ (488,274)
===========================
Net loss allocated to limited partners $ (457,622)
===========================
Net loss per limited partnership unit $ (0.04)
===========================
Number of limited partnership units 10,667,117
===========================
The accompanying notes to financial statements are an integral part of these statements.
5
NTS NTS NTS NTS NTS NTS
Properties Properties Properties Properties Properties Private
III IV V VI VII Group BBC 1A
------------------------------------------------------------------------------------
REVENUES
Rental income $ 845,297 551,512 947,755 2,614,272 385,305 2,167,446 188,197
Tenant reimbursements 88,770 45,696 267,529 387 - 138,410 49,056
------------------------------------------------------------------------------------
TOTAL REVENUES 934,067 597,208 1,215,284 2,614,659 385,305 2,305,856 237,253
------------------------------------------------------------------------------------
EXPENSES
Operating expenses 191,169 123,718 382,607 767,966 104,682 456,859 29,023
Operating expenses - affiliated 87,460 127,371 165,627 413,136 72,941 199,055 11,342
Management fees 42,922 34,333 67,171 132,721 19,450 134,748 14,236
Real estate taxes 52,146 31,354 131,823 125,788 19,908 103,231 13,248
Professional and administrative
expenses 126,610 203,114 278,154 339,749 116,106 34,843 -
Professional and administrative
expenses - affiliated 36,042 37,507 48,030 98,920 33,713 - -
Depreciation and amortization 279,088 126,181 323,631 662,767 102,473 522,366 55,423
------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 815,437 683,578 1,397,043 2,541,047 469,273 1,451,102 123,272
------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) 118,630 (86,370) (181,759) 73,612 (83,968) 854,754 113,981
Interest and other income 2,919 1,882 6,082 2,326 819 3,537 69
Interest expense (101,439) (58,061) (245,123) (599,880) (60,940) (675,178) (25,515)
Loss on disposal of assets (448) - - (103) - (38,598) -
Income from investment in
joint ventures - 24,491 - - 27,747 - -
------------------------------------------------------------------------------------
Income (loss) before minority
interest 19,662 (118,058) (420,800) (524,045) (116,342) 144,515 88,535
Minority interest (loss) income - - (10,364) 5,416 - - -
------------------------------------------------------------------------------------
Net income (loss) $ 19,662 (118,058) (410,436) (529,461) (116,342) 144,515 88,535
====================================================================================
Net income (loss) allocated to
the limited partners $ 31,184 (116,877) (406,332) (524,166) (115,179)
=============================================================
Net income (loss) per limited
partnership unit $ 2.48 (4.85) (13.31) 13.48 (0.21)
=============================================================
Weighted average number of
limited partnership units 12,570 24,109 30,521 38,889 552,236
=============================================================
The accompanying notes to financial statements are an integral part of these statements.
6
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (488,274)
Adjustments to reconcile net loss to net cash used in operating activities:
Loss on disposal of assets 29,315
Depreciation and amortization 2,320,404
Write-off of loan costs 113,102
Changes in assets and liabilities:
Cash and equivalents - restricted (561,577)
Accounts receivable (330,714)
Other assets (1,139,684)
Accounts payable and accrued expenses 562,433
Accounts payable and accrued expenses - affiliate 324,303
Security deposits 180,762
Other liabilities 831,408
----------------------------
Net cash provided by operating activities 1,841,478
----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to land, buildings and amenities (1,644,698)
Cash and equivalents - restricted (2,000,000)
----------------------------
Net cash used in investing activities (3,644,698)
----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from mortgages and notes payable 30,000,000
Principal payments on mortgages and notes payable (281,367)
Payoff of notes payable (14,712)
Payoff of revolving note payable (14,971,350)
Additions to loan costs (63,574)
----------------------------
Net cash provided by financing activities 14,668,997
----------------------------
Net increase in cash and equivalents 12,865,777
----------------------------
CASH AND EQUIVALENTS, beginning of period 2,573,855
----------------------------
CASH AND EQUIVALENTS, end of period $ 15,439,632
============================
The accompanying notes to financial statements are an integral part of these statements.
7
NTS NTS NTS NTS NTS NTS
Properties Properties Properties Properties Properties Private
III IV V VI VII Group BBC 1A
-------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 19,662 (118,058) (410,436) (529,461) (116,342) 144,515 88,535
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Loss on disposal of assets 448 - - 103 - 38,598 -
Depreciation and amortization 306,694 135,504 379,944 676,244 103,253 589,156 65,286
Income from investment in joint ventures - (24,491) - - (27,747) - -
Minority interest (loss) income - - (10,364) 5,416 - - -
Changes in assets and liabilities:
Cash and equivalents - restricted (18,483) (23,395) (292,475) (28,044) (425) (93,881) (12,360)
Accounts receivable (72,231) 19,474 21,789 83,752 1,571 4,399 19,430
Other assets (37,472) (777) (17,195) (12,128) 529 (19,998) (364)
Accounts payable and accrued expenses (59,546) (28,697) 136,790 689,931 (48,112) (192,861) 2,252
Security deposits 2,685 50 6,200 991 150 - -
Other liabilities 70,877 23,951 159,106 125,238 20,982 101,757 14,819
-------------------------------------------------------------------------------------
Net cash provided by (used in) operating
activities 212,634 (16,439) (26,641) 1,012,042 (66,141) 571,685 177,598
-------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to land, buildings and amenities (60,567) (3,023) (46,377) (233,015) - (28,867) -
Investment in and advances from (to) joint 10,924
ventures - 30,028 - (14,480) - -
Minority interest - - (5,415) - - - -
-------------------------------------------------------------------------------------
Net cash (used in) provided by investing
activities (60,567) 27,005 (51,792) (247,495) 10,924 (28,867) -
-------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from mortgages and notes payable - - 194,440 - - - -
Principal payments on mortgages and notes
payable (108,485) (158,198) (72,976) (539,843) (39,410) (795,851) (144,083)
Cash distributions - - - - - (134,000) (34,856)
Cash contributions - - - - - 222,000 -
Additions to loan costs (1,000) - (3,116) - - - -
-------------------------------------------------------------------------------------
Net cash (used in) provided by financing
activities (109,485) (158,198) 118,348 (539,843) (39,410) (707,851) (178,939)
-------------------------------------------------------------------------------------
Net increase (decrease) in cash and
equivalents 42,582 (147,632) 39,915 224,704 (94,627) (165,033) (1,341)
CASH AND EQUIVALENTS, beginning of period 180,911 298,240 191,321 125,342 263,655 440,049 33,977
-------------------------------------------------------------------------------------
CASH AND EQUIVALENTS, end of period $ 223,493 150,608 231,236 350,046 169,028 275,016 32,636
=====================================================================================
The accompanying notes to financial statements are an integral part of these statements.
8
The unaudited financial statements included herein should be read in conjunction with NTS Realty Holdings Limited Partnership’s (“NTS Realty”) 2004 annual report on Form 10-K as filed with the Securities and Exchange Commission on March 31, 2005. In the opinion of our managing general partner, all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation have been made to the accompanying financial statements for the three months ended March 31, 2005 and 2004. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year or any other interim period. As used in this quarterly report on Form 10-Q the terms “we,” “us” or “our,” as the context requires, may refer to NTS Realty or its interests in its properties.
A) Organization and Distribution Policy
NTS Realty was organized in the state of Delaware in 2003. Our registration statement on Form S-4 was made effective by the Securities and Exchange Commission (“SEC”) on October 27, 2004 with respect to a proposed merger of NTS-Properties III; NTS-Properties IV; NTS-Properties V, a Maryland limited partnership; NTS-Properties VI, a Maryland limited partnership; and NTS-Properties VII, Ltd. (the “Partnerships”) registered under the Securities Exchange Act of 1934, along with other real estate entities affiliated with their general partners, specifically Blankenbaker Business Center 1A and the NTS Private Group’s assets and liabilities. Certain litigation as described in Note — 11 Commitments and Contingencies was settled in connection with the merger. The merger was completed on December 28, 2004 after a majority of the outstanding limited partnership interests of each Partnership were voted in favor of the merger. As a result of the merger, the Partnerships and Blankenbaker Business Center 1A ceased to exist by operation of law. Concurrent with the merger, ORIG, LLC, a Kentucky limited liability company (“ORIG”), affiliated with the Partnerships’ general partners, contributed substantially all of its assets and liabilities to NTS Realty, including the NTS Private Group properties. We accounted for the merger using the purchase method. All purchase price allocations are final.
The Partnerships, NTS Private Group and Blankenbaker Business Center 1A are referred to as NTS Realty’s Predecessors (the “Predecessors”). NTS Realty did not have significant operations until the merger on December 28, 2004. All operations prior to that are for the Predecessors and are reflected as such in the accompanying Statements of Operations. The Predecessors’ operating results were substantially complete as of December 27, 2004 for the calendar year ended December 31, 2004.
In connection with the merger, we issued 11,381,608 limited partnership units to the former limited and general partners of the Partnerships and to ORIG.
We recently refinanced approximately $94.0 million of debt on the properties contributed by the Partnerships and ORIG with approximately $104.0 million of new debt. Acquisition of the new debt required us to pay yield maintenance premiums on the refinanced debt, which totaled approximately $5.8 million.
9
We are in the business of developing, constructing, owning and operating multifamily properties, commercial and retail real estate and land leases. Following the merger and contribution and as of March 31, 2005, we own thirty-two properties, comprised of: nine multifamily properties; nineteen office and business centers; three retail properties; and one ground lease. The properties are located in and around Louisville (22) and Lexington (3), Kentucky; Orlando (2) and Fort Lauderdale (3), Florida; Indianapolis (1), Indiana and Atlanta (1), Georgia. Our office and business centers aggregate approximately 1.7 million square feet. We own multifamily properties containing approximately 1,350 units and retail properties containing approximately 210,000 square feet of space, as well as one ground lease associated with a 120-space parking lot attached to one of our properties.
The consolidated financial statements of NTS-Properties V and NTS-Properties VI include the accounts of all wholly-owned properties and majority-owned joint ventures. Intercompany transactions and balances have been eliminated.
We pay distributions if and when authorized by our managing general partner. We are required to pay distributions on a quarterly basis, commencing in the first quarter of 2005, equal to sixty-five percent (65%) of our “net cash flow from operations” as this term is defined in regulations promulgated by the Treasury Department under the Internal Revenue Code of 1986, as amended; provided that if a law is enacted or existing law is modified or interpreted in a manner that subjects us to taxation as a corporation or otherwise subjects us to entity level taxation for federal, state or local income tax purposes, we will adjust the amount distributed to reflect our obligation to pay tax. Any distribution other than a distribution with respect to the final quarter of a calendar year shall be made no later than forty-five (45) days after the last day of such quarter based on our estimate of “net cash flow from operations” for the year. Any distribution with respect to the final quarter of a calendar year shall be made no later than ninety (90) days after the last day of such quarter based on actual “net cash flow from operations” for the year, adjusted for any excess or insufficient distributions made with respect to the first three quarters of the calendar year.
“Net cash flow from operations” may be reduced by the amount of reserves as determined by us each quarter. NTS Realty Capital will establish these reserves for, among other things, working capital or capital improvement needs. Therefore, there is no assurance that we will have net cash flow from operations from which to pay distributions in the future. For example, our partnership agreement permits our managing general partner to reinvest sales or refinancing proceeds in new and existing properties or to create reserves to fund future capital expenditures. Because net cash flow from operations is calculated after reinvesting sales or refinancing proceeds or establishing reserves, we may not have any net cash flow from operations from which to pay distributions.
The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires us 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.
10
We own and operate multifamily, commercial and retail properties and a land lease in Louisville and Lexington, Kentucky, Fort Lauderdale and Orlando, Florida, Indianapolis, Indiana and Atlanta, Georgia.
Our financial instruments that are exposed to concentrations of credit risk consist of cash and equivalents. We maintain our cash accounts primarily with banks located in Kentucky. The total cash balances are insured by the FDIC up to $100,000 per bank account. We may at times, in certain accounts, have deposits in excess of $100,000.
Cash and equivalents include cash on hand and short-term, highly liquid investments with initial maturities of three months or less. We have a cash management program which provides for the overnight investment of excess cash balances. Under an agreement with a bank, excess cash is invested in a mutual fund for U.S. government and agency securities each night. As of March 31, 2005, approximately $2,441,000 of our overnight investment was included in cash and equivalents.
Cash and equivalents — restricted represents cash on hand and short-term, highly liquid investments with initial maturities of three months or less which have been escrowed with certain mortgage companies and banks for property taxes, insurance and tenant improvements in accordance with certain loan and lease agreements and certain security deposits.
Land, buildings and amenities are stated at cost. Costs directly associated with the acquisition, development and construction of a project are capitalized. Depreciation is computed using the straight-line method over the estimated useful lives of the assets which are 5-30 years for land improvements, 5-30 years for buildings and improvements and 5-30 years for amenities. Tenant improvements are generally depreciated over the life of the current term of the respective tenant lease.
11
Depreciation expense for the three months ended March 31, 2005 and 2004 was as follows:
(UNAUDITED)
-------------------------------------------
Three Months Ended
March 31,
-------------------------------------------
2005 2004
--------------------- --------------------
NTS Realty $ 1,734,785
=====================
NTS-Properties III $ 273,715
NTS-Properties IV 126,181
NTS-Properties V 323,631
NTS-Properties VI 662,767
NTS-Properties VII 102,472
NTS Private Group 498,741
Blankenbaker Business Center 1A 55,423
--------------------
$ 2,042,930
====================
Statement of Financial Accounting Standards No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets,” specifies circumstances in which certain long-lived assets must be reviewed for impairment. If the carrying amount of an asset exceeds the sum of its expected future cash flows, the asset’s carrying value must be written down to fair value. In determining the value of an investment property and whether the investment property is impaired, management considers several factors such as projected rental and vacancy rates, property operating expenses, capital expenditures and interest rates. The capitalization rate used to determine property valuation is based on the market in which the investment property is located, length of leases, tenant financial strength, the economy in general, demographics, environment, property location, visibility, age and physical condition among others. All of these factors are considered by management in determining the value of any particular investment property. The value of any particular investment property is sensitive to the actual results of any of these factors, either individually or taken as a whole. If the actual results differ from management’s judgment, the valuation could be negatively or positively affected. Application of this standard during the three months ended March 31, 2005 and 2004 did not result in an impairment loss.
12
Mortgages and notes payable consist of the following:
(UNAUDITED)
--------------------
March 31, December 31,
2005 2004
-------------------- ---------------------
Note payable to a bank with interest payable in monthly installments, at a
variable rate based on LIBOR one-month rate plus 1.75%, due June 28, 2005.
The note was refinanced in March 2005, as discussed below. $ - $ 14,971,350
Mortgage payable to an insurance company in monthly installments, bearing
interest at 5.07%, maturing on March 15, 2015, secured by certain land and
buildings, with a carrying value of $25,775,613. 30,000,000 -
Mortgage payable to a bank in monthly installments, bearing interest at a
variable rate based on LIBOR one-month rate plus 2.50%, currently 5.36%, due
January 1, 2008, secured by certain land and buildings, with a carrying value
of $17,179,258. The mortgage is guaranteed by Mr. Nichols (75%) and Mr.
Lavin (25%). 13,956,000 14,000,000
Mortgage payable to an insurance company in monthly installments, bearing
interest at 5.98%, maturing January 15, 2015, secured by certain land and
buildings, with a carrying value of $73,944,001. 74,849,728 75,000,000
Mortgage payable to a bank in monthly installments, bearing interest at
9.00%, maturing August 1, 2010, secured by certain land and a building, with
a carrying value of $3,001,274. 2,785,451 2,806,142
Mortgage payable to an insurance company in monthly installments, bearing
interest at 8.45%, maturing November 1, 2015, secured by certain land and a
building, with a carrying value of $2,648,158. 3,057,595 3,101,366
Mortgage payable to an insurance company in monthly installments, bearing
interest at 8.375%, maturing December 1, 2010, secured by certain land,
buildings and amenities, with a carrying value of $2,769,632. 2,883,735 2,905,604
Note payable to a finance company in monthly installments, bearing interest
at 8.50%, due July 15, 2006, secured by equipment. The note was paid in full
in January 2005. - 15,476
-------------------- ---------------------
$ 127,532,509 $ 112,799,938
==================== =====================
Based on the borrowing rates currently available to us for loans with similar terms and average maturities, the fair value of long-term debt on March 31, 2005 was approximately $119,626,000.
The note payable to a bank was paid from the proceeds of a $30 million mortgage payable to an insurance company in March 2005. The mortgage payable bears interest at a fixed rate of 5.07%, maturing on March 15, 2015 and is secured by certain land and buildings, with a carrying value of $25,775,613.
Our mortgages may be prepaid but are generally subject to a yield-maintenance premium.
13
Accounts payable and accrued expenses — affiliate includes amounts owed to NTS Development Company for reimbursement of salary and overhead expenses.
NTS Realty is externally managed under an agreement with NTS Development Company (“NTS Devco”), an affiliate of NTS Realty’s general partners. NTS Devco is paid a management fee pursuant to the terms of an agreement entered into with NTS Realty. NTS Devco is also reimbursed its actual costs for services rendered to NTS Realty.
We were charged the following amounts pursuant to an agreement with NTS Devco for the three months ended March 31, 2005. These charges include items which have been expensed as operating expenses — affiliated or professional and administrative expenses — affiliated and items which have been capitalized as other assets or as land, buildings and amenities.
(UNAUDITED)
------------------------------
Three Months Ended
March 31, 2005
------------------------------
Property management fees $ 389,475
------------------------------
Property management 611,852
Leasing 50,790
Administrative - operating 296,783
Other 20,966
------------------------------
Total operating expenses - affiliated 980,391
------------------------------
Professional and administrative expenses - affiliated 352,286
------------------------------
Related party transactions capitalized -
------------------------------
Total related party transactions $ 1,722,152
==============================
During the three months ended March 31, 2005, we were charged $15,161 for property maintenance fees from an affiliate of NTS Devco.
NTS Devco leased 20,368 square feet in one of our properties, NTS Center, at a rental rate of $14.50 per square foot. We received rental payments of approximately $74,000, or 8% of our total rental income, from NTS Devco during the three months ended March 31, 2005.
NTS Devco leased 1,604 square feet in Commonwealth Business Center Phase I, at a rental rate of $5.50 per square foot. We received rental payments of approximately $2,000 from NTS Devco during the three months ended March 31, 2005.
14
Prior to the merger and pursuant to an agreement with NTS-Properties III (“NTS-III”), NTS Devco, an affiliate NTS-III’s general partner, received property management fees on a monthly basis. The fees were paid in an amount equal to 5% of the gross receipts from our properties. Also pursuant to an agreement, NTS Devco received a repair and maintenance fee equal to 5.9% of costs incurred which related to capital improvements. These repair and maintenance fees were capitalized as part of land, buildings and amenities.
NTS-III was charged the following amounts pursuant to an agreement with NTS Devco for the three months ended March 31, 2004. These charges included items which were expensed as operating expenses — affiliated or professional and administrative expenses — affiliated and items which were capitalized as other assets or as land, buildings and amenities.
(UNAUDITED)
------------------------------
Three Months Ended
March 31, 2004
------------------------------
Property management fees $ 42,922
------------------------------
Property management 54,487
Leasing 15,291
Administrative - operating 15,653
Other 2,029
------------------------------
Total operating expenses - affiliated 87,460
------------------------------
Professional and administrative expenses - affiliated 36,042
------------------------------
Repairs and maintenance fees 1,890
Leasing commissions 3,303
------------------------------
Total related party transactions capitalized 5,193
------------------------------
Total related party transactions $ 171,617
==============================
During the three months ended March 31, 2004, NTS-III was charged $1,828 for property maintenance fees from an affiliate of NTS Devco.
During the three months ended March 31, 2004, NTS Devco leased 20,368 square feet in NTS Center at a rental rate of $14.50 per square foot. NTS-III received rental payments of approximately $74,000, or 8% of their total rental income, from NTS Devco during the three months ended March 31, 2004.
15
Prior to the merger and pursuant to an agreement with NTS-Properties IV (“NTS-IV”), NTS Devco, an affiliate of NTS-IV’s general partner, received property management fees on a monthly basis. The fees were paid in an amount equal to 5% of the gross receipts from the multifamily property and 6% of the gross receipts from the commercial properties. Also pursuant to an agreement, NTS Devco received a repair and maintenance fee equal to 5.9% of costs incurred which related to capital improvements. These repair and maintenance fees were capitalized as part of land, buildings and amenities.
NTS-IV was charged the following amounts pursuant to an agreement with NTS Devco for the three months ended March 31, 2004. These charges included items which were expensed as operating expenses — affiliated or professional and administrative expenses — affiliated and items which were capitalized as other assets or as land, buildings and amenities.
(UNAUDITED)
------------------------------
Three Months Ended
March 31, 2004
------------------------------
Property management fees $ 34,333
------------------------------
Property management 76,752
Leasing 20,787
Administrative - operating 27,906
Other 1,926
------------------------------
Total operating expenses - affiliated 127,371
------------------------------
Professional and administrative expenses - affiliated 37,507
------------------------------
Repairs and maintenance fees -
Leasing commissions 5,788
------------------------------
Total related party transactions capitalized 5,788
------------------------------
Total related party transactions $ 204,999
==============================
During the three months ended March 31, 2004, NTS Devco leased 1,604 square feet in Commonwealth Business Center Phase I at a rental rate of $5.50 per square foot. NTS-IV received rental payments of approximately $2,000 from NTS Devco during the three months ended March 31, 2004.
16
Prior to the merger and pursuant to an agreement with NTS-Properties V (“NTS-V”), NTS Devco, an affiliate of NTS-V’s general partner, received property management fees on a monthly basis. The fees were paid in an amount equal to 5% of the gross receipts from the multifamily property and 6% of the gross receipts from the commercial properties. Also pursuant to an agreement, NTS Devco received a repair and maintenance fee equal to 5.9% of costs incurred which related to capital improvements. These repair and maintenance fees were capitalized as part of land, buildings and amenities.
NTS-V was charged the following amounts pursuant to an agreement with NTS Devco for the three months ended March 31, 2004. These charges included items which were expensed as operating expenses — affiliated or professional and administrative expenses — affiliated and items which were capitalized as other assets or as land, buildings and amenities.
(UNAUDITED)
------------------------------
Three Months Ended
March 31, 2004
------------------------------
Property management fees $ 67,171
------------------------------
Property management 118,629
Leasing 11,192
Administrative - operating 34,368
Other 1,438
------------------------------
Total operating expenses - affiliated 165,627
------------------------------
Professional and administrative expenses - affiliated 48,030
------------------------------
Repairs and maintenance fees 1,702
Leasing commissions -
------------------------------
Total related party transactions capitalized 1,702
------------------------------
Total related party transactions $ 282,530
==============================
17
Prior to the merger and pursuant to an agreement with NTS-Properties VI (“NTS-VI”), NTS Devco, an affiliate of NTS-VI’s general partner, received property management fees on a monthly basis. The fees were equal to 5% and 6% of the gross revenues from the multifamily properties and the commercial property, respectively. Also pursuant to an agreement, NTS Devco received a repair and maintenance fee equal to 5.9% of costs incurred which related to capital improvements and major repair and renovation projects. These repair and maintenance fees were capitalized as part of land, buildings and amenities.
NTS-VI was charged the following amounts pursuant to an agreement with NTS Devco for the three months ended March 31, 2004. These charges included items which were expensed as operating expenses — affiliated or professional and administrative expenses — affiliated and items which were capitalized as other assets or as land, buildings and amenities.
(UNAUDITED)
------------------------------
Three Months Ended
March 31, 2004
------------------------------
Property management fees $ 132,721
------------------------------
Property management 261,601
Leasing 36,060
Administrative - operating 110,267
Other 5,208
------------------------------
Total operating expenses - affiliated 413,136
------------------------------
Professional and administrative expenses - affiliated 98,920
------------------------------
Repairs and maintenance fees 12,197
Leasing commissions 4,538
------------------------------
Total related party transactions capitalized 16,735
------------------------------
Total related party transactions $ 661,512
==============================
During the three months ended March 31, 2004, NTS-V was charged $7,006 for property maintenance fees from an affiliate of NTS Devco.
18
Prior to the merger and pursuant to an agreement with NTS-Properties VII (“NTS-VII”), NTS Devco, an affiliate of NTS-VII’s general partner, received property management fees on a monthly basis. The fees were equal to 5% of the gross revenues from our multifamily properties. Also pursuant to an agreement, NTS Devco received a repair and maintenance fee equal to 5.9% of costs incurred which related to capital improvements and major repair and renovation projects. These repair and maintenance fees were capitalized as part of land, buildings and amenities.
NTS-VII was charged the following amounts pursuant to an agreement with NTS Devco for the three months ended March 31, 2004. These charges included items which were expensed as operating expenses — affiliated or professional and administrative expenses — affiliated and items which were capitalized as other assets or as land, buildings and amenities.
(UNAUDITED)
------------------------------
Three Months Ended
March 31, 2004
------------------------------
Property management fees $ 19,450
------------------------------
Property management 40,979
Leasing 6,758
Administrative - operating 24,646
Other 558
------------------------------
Total operating expenses - affiliated 72,941
------------------------------
Professional and administrative expenses - affiliated 33,713
------------------------------
Related party transactions capitalized -
------------------------------
Total related party transactions $ 126,104
==============================
19
Prior to the merger, NTS Devco, an affiliate of NTS Private Group (the “Group”), received property management fees on a monthly basis. The fees were equal to 6% of the gross revenues from commercial and retail properties and $100 monthly for each commercial land lease. Also pursuant to an agreement, NTS Devco received a repair and maintenance fee equal to 5% of costs incurred which related to capital improvements and major repair and renovation projects. These repair and maintenance fees were capitalized as part of land, buildings and amenities.
The Group was charged the following amounts by NTS Devco for the three months ended March 31, 2004. These charges included items which were expensed as operating expenses — affiliated and items which were capitalized as other assets or as land, buildings and amenities.
(UNAUDITED)
------------------------------
Three Months Ended
March 31, 2004
------------------------------
Property management fees $ 134,748
------------------------------
Property management 122,265
Leasing 31,658
Administrative - operating 41,298
Other 3,834
------------------------------
Total operating expenses - affiliated 199,055
------------------------------
Professional and administrative expenses - affiliated -
------------------------------
Repairs and maintenance fees 1,941
Leasing commissions 909
------------------------------
Total related party transactions capitalized 2,850
------------------------------
Total related party transactions $ 336,653
==============================
During the three months ended March 31, 2004 the Group was charged $8,452 for property maintenance fees from an affiliate of NTS Devco.
20
Prior to the merger and pursuant to an agreement with the partnerships which formed the Blankenbaker Business Center Joint Venture, NTS Devco, an affiliate of the general partners of the partnerships, received property management fees on a monthly basis. The fee was equal to 6% of the gross revenues from the partnerships’ commercial properties. Also permitted by an agreement, NTS Devco received a repair and maintenance fee equal to 5.9% of costs incurred which related to capital improvements. These repair and maintenance fees were capitalized as part of land, buildings and amenities.
The Blankenbaker Business Center Joint Venture was charged the following amounts pursuant to an agreement with NTS Devco for the three months ended March 31, 2004. These charges included items which were expensed as operating expenses — affiliated and items which were capitalized as other assets or as land, buildings and amenities.
(UNAUDITED)
------------------------------
Three Months Ended
March 31, 2004
------------------------------
Property management fees $ 14,236
------------------------------
Property management 8,120
Leasing -
Administrative - operating 3,066
Other 156
------------------------------
Total operating expenses - affiliated 11,342
------------------------------
Professional and administrative expenses - affiliated -
------------------------------
Related party transactions capitalized -
------------------------------
Total related party transactions $ 25,578
==============================
During the three months ended March 31, 2004, we were charged an immaterial fee for property maintenance fees from an affiliate of NTS Devco.
We, as an owner of real estate, are subject to various environmental laws of federal, state and local governments. Our compliance with existing laws has not had a material adverse effect on our financial condition and results of operations. However, we cannot predict the impact of new or changed laws or regulations on our current properties or on properties that we may acquire in the future.
We do not believe there is any litigation threatened against us other than routine litigation arising out of the ordinary course of business, some of which is expected to be covered by insurance, none of which is expected to have a material effect on our combined financial position or results of operations.
21
Litigation
On May 6, 2004, the Superior Court of the State of California for the County of Contra Costa granted its final approval of the settlement agreement jointly filed by the general partners (the “General Partners”) of the Partnerships, along with certain of their affiliates, with the class of plaintiffs in the action originally captioned Buchanan, et al. v. NTS-Properties Associates, et al. (Case No. C 01-05090) on December 5, 2003. At the final hearing, any member of the class of plaintiffs was given the opportunity to object to the final approval of the settlement agreement, the entry of a final judgment dismissing with prejudice the Buchanan litigation, or an application of an award for attorneys’ fees and expenses to plaintiffs’ counsel. The Superior Court’s order provided, among other things, that: (1) the settlement agreement, and all transactions contemplated thereby, including the merger of the Partnerships into us, are fair, reasonable and adequate, and in the best interests of the class of plaintiffs; (2) the plaintiffs’ complaint and each and every cause of action and claim set forth therein is dismissed with prejudice; (3) each class member is barred from transferring, selling or otherwise disposing of (other than by operation of law) their interests until the earlier of the closing date of the merger, the termination of the settlement or June 30, 2004; and (4) each class member who requested to be excluded from the settlement released their claims in the Bohm litigation.
On June 11, 2004, Joseph Bohm and David Duval, class members who objected to the settlement agreement but whose objections were overruled by the Superior Court (the “Appellants”), filed an appeal in the Court of Appeals of the State of California, First Appellate District. The Appellants filed their opening appellate brief on October 22, 2004. The General Partners and the Partnerships, as well as the class representatives, filed their respective responses on February 14, 2005, and Appellants filed their reply. The appellate court is in the process of scheduling oral arguments on this matter.
On February 27, 2003, two individuals filed a class and derivative action in the Circuit Court of Jefferson County, Kentucky captioned Bohm, et al. v. J.D. Nichols, et al. (Case No. 03-CI-01740) against certain of the General Partners and several individuals and entities affiliated with us. The complaint was amended to include the general partner of NTS-Properties III and the general partner of NTS-Properties Plus Ltd., which is no longer in existence. In the amended complaint, the plaintiffs purport to bring claims on behalf of a class of limited partners and derivatively on behalf of us and the Partnerships based on alleged overpayment of fees, prohibited investments, improper failures to make distributions, purchases of limited partnerships interests at insufficient prices and other violations of the limited partnership agreements. The plaintiffs are seeking, among other things, compensatory and punitive damages in an unspecified amount, an accounting, the appointment of a receiver or liquidating trustee, the entry of an order of dissolution against the Partnerships, a declaratory judgment and injunctive relief. No amounts have been accrued for the settlement of this action in our financial statements. The General Partners and their legal counsel believe that this action is without merit and are vigorously defending it.
On March 2, 2004, the General Partners filed a motion to dismiss the Bohm litigation. After the motion to dismiss was fully briefed, the settlement agreement in the Buchanan litigation received final court approval. The Circuit Court of Jefferson County, Kentucky, instructed the plaintiffs in the Bohm litigation to file an amended complaint in light of the approved settlement of the Buchanan litigation. The plaintiffs in the Bohm litigation filed a corrected second amended complaint on August 11, 2004. The General Partners, along with all defendants, filed a motion to strike the corrected second amended complaint. On February 9, 2005, the Circuit Court instructed the defendants to file a responsive pleading only as to direct claims asserted by the individual plaintiffs. On March 9, 2005, the General Partners, along with all of the defendants, filed: (1) a motion to dismiss and (2) a joint motion to dismiss
22
the “corrected” second amended complaint. A hearing on these motions is scheduled for July 15, 2005. The General Partners believe that the claims asserted in the “corrected” second amended complaint have no merit.
Our reportable operating segments include – Multifamily, Commercial, Retail and Land Real Estate Operations. The following unaudited financial information of the operating segments has been prepared using a management approach, which is consistent with the basis and manner in which our management internally disaggregates financial information for the purpose of assisting in making internal operating decisions. We evaluate performance based on stand-alone operating segment net income or loss. Expenses at the Partnership level are represented in the non-segment column.
Three Months Ended March 31, 2005
---------------------------------------------------------------------------------------
Multifamily Commercial Retail Land Non Segment Total
--------------------------------------------- -----------------------------------------
Rental income $ 3,582,597 $ 4,200,896 $ 341,392 $ 9,042$ (89,152) $ 8,044,775
Tenant reimbursements - 525,907 13,213 - - 539,120
--------------------------------------------- -----------------------------------------
Total revenues 3,582,597 4,726,803 354,605 9,042 (89,152) 8,583,895
Operating expenses and operating
expenses - affiliated 1,610,597 1,433,427 30,961 135 - 3,075,120
Management fees 177,905 198,119 13,451 - - 389,475
Real estate taxes 242,130 311,727 7,578 403 - 561,838
Professional and administrative
expenses and professional and
administrative expenses
- affiliated - - - - 1,090,919 1,090,919
Depreciation and amortization 834,219 1,232,765 74,828 652 - 2,142,464
--------------------------------------------- -----------------------------------------
Total operating expenses 2,864,851 3,176,038 126,818 1,190 1,090,919 7,259,816
Operating income (loss) 717,746 1,550,765 227,787 7,852 (1,180,071) 1,324,079
Interest and other income 1,987 17,657 12 - 24,568 44,224
Interest expense (584,332) (849,857) (91,251) - (301,822) (1,827,262)
Loss on disposal of assets (21,881) (7,434) - - - (29,315)
--------------------------------------------- -----------------------------------------
Net income (loss) $ 113,520 $ 711,131 $ 136,548 $ 7,852$ (1,457,325) $ (488,274)
============================================= =========================================
NTS-III’s reportable operating segments included only one segment — Commercial Real Estate Operations.
23
NTS-IV’s reportable operating segments included — Multifamily and Commercial Real Estate Operations. The multifamily operations represented NTS-IV’s ownership and operating results relative to a multifamily community known as The Willows of Plainview Phase I. The commercial operations represented NTS-IV’s ownership and operating results relative to suburban commercial office space known as Commonwealth Business Center Phase I and Plainview Point Office Center Phases I and II.
The following unaudited financial information of the operating segments was prepared using a management approach, which was consistent with the basis and manner in which NTS-IV’s management internally reported financial information for the purposes of assisting in making internal operating decisions. NTS-IV’s management evaluated performance based on stand-alone operating segment net income or loss. Professional and administrative expenses, depreciation and amortization, interest and other income, interest expense and joint venture income or loss incurred at the Partnership level were not allocated to the operating segments.
Three Months Ended March 31, 2004
-------------------------------------------------------------
Multifamily Commercial Total
------------------- ------------------- -------------------
Rental income $ 286,589 $ 264,923 $ 551,512
Tenant reimbursements - 45,696 45,696
------------------- ------------------- -------------------
Total revenues 286,589 310,619 597,208
------------------- ------------------- -------------------
Operating expenses and operating expenses - affiliated 137,979 113,110 251,089
Management fees 14,716 19,617 34,333
Real estate taxes 13,260 18,094 31,354
Depreciation and amortization 50,864 73,788 124,652
------------------- ------------------- -------------------
Total operating expenses 216,819 224,609 441,428
------------------- ------------------- -------------------
Operating income 69,770 86,010 155,780
Interest and other income 69 1,502 1,571
Interest expense (50,437) (7,624) (58,061)
------------------- ------------------- -------------------
Net income $ 19,402 $ 79,888 $ 99,290
=================== =================== ===================
24
A reconciliation of the totals reported for the operating segments to the applicable line items in the financial statements is necessary given amounts recorded at the Partnership level and not allocated to the operating properties for internal reporting purposes:
Three Months Ended
March 31,
--------------------------------
2004
--------------------------------
DEPRECIATION AND AMORTIZATION
Depreciation and amortization for reportable segments $ 124,652
Depreciation and amortization for Partnership 1,529
--------------------------------
Total depreciation and amortization $ 126,181
================================
INTEREST AND OTHER INCOME
Interest and other income for reportable segments $ 1,571
Interest and other income for Partnership 311
--------------------------------
Total interest and other income $ 1,882
================================
NET INCOME (LOSS)
Net income for reportable segments $ 99,290
Net loss for Partnership (1) (217,348)
--------------------------------
Total net loss $ (118,058)
================================
| (1) | The Partnership net loss was primarily composed of professional and administrative costs born by the Partnership and also includes any joint venture income or loss recorded at the Partnership level and not allocated to the operating segments. The professional and administrative costs include the tax and public company reporting and compliance costs associated with a public limited partnership. |
25
NTS-V’s reportable operating segments included — Multifamily and Commercial Real Estate Operations. The multifamily operations represented NTS-V’s ownership and operating results relative to a multifamily community known as The Willows of Plainview Phase II. The commercial operations represented NTS-V’s ownership and operating results relative to suburban commercial office space known as Commonwealth Business Center Phase II and Lakeshore Business Center Phases I, II and III.
The following unaudited financial information of the operating segments was prepared using a management approach, which was consistent with the basis and manner in which NTS-V’s management internally reported financial information for the purposes of assisting in making internal operating decisions. NTS-V’s management evaluated performance based on stand-alone operating segment net income or loss. Professional and administrative expenses, depreciation and amortization, interest and other income, interest expense and minority interest income or loss recorded at the Partnership level were not allocated to the operating segments.
Three Months Ended March 31, 2004
-------------------------------------------------------------------
Multifamily Commercial Total
--------------------- --------------------- ---------------------
Rental income $ 293,138 $ 654,617 $ 947,755
Tenant reimbursements - 267,529 267,529
--------------------- --------------------- ---------------------
Total revenues 293,138 922,146 1,215,284
--------------------- --------------------- ---------------------
Operating expenses and operating expenses - affiliated 169,157 379,077 548,234
Management fees 14,762 52,409 67,171
Real estate taxes 14,490 117,333 131,823
Depreciation and amortization 56,584 262,392 318,976
--------------------- --------------------- ---------------------
Total operating expenses 254,993 811,211 1,066,204
--------------------- --------------------- ---------------------
Operating income 38,145 110,935 149,080
Interest and other income 509 5,297 5,806
Interest expense (66,297) (173,735) (240,032)
--------------------- --------------------- ---------------------
Net loss $ (27,643) $ (57,503) $ (85,146)
===================== ===================== =====================
26
A reconciliation of the totals reported for the operating segments to the applicable line items in the consolidated financial statements is necessary given amounts recorded at the Partnership level and not allocated to the operating properties for internal reporting purposes:
Three Months Ended
March 31,
------------------------------
2004
------------------------------
DEPRECIATION AND AMORTIZATION
Depreciation and amortization for reportable segments $ 318,976
Depreciation and amortization for Partnership 4,655
------------------------------
Total depreciation and amortization $ 323,631
==============================
INTEREST AND OTHER INCOME
Interest and other income for reportable segments $ 5,806
Interest and other income for Partnership 276
------------------------------
Total interest and other income $ 6,082
==============================
INTEREST EXPENSE
Interest expense for reportable segments $ 240,032
Interest expense for Partnership 5,091
------------------------------
Total interest expense $ 245,123
==============================
NET LOSS
Net loss for reportable segments $ (85,146)
Net loss for Partnership (1) (335,654)
Minority interest loss (10,364)
------------------------------
Total net loss $ (410,436)
==============================
| (1) | The Partnership net loss was primarily composed of professional and administrative costs born by the Partnership as well as interest and other income, depreciation, interest expense and minority interest recorded at the Partnership level and not allocated to the operating segments. The professional and administrative costs include the tax and public company reporting and compliance costs associated with a public limited partnership. |
27
NTS-VI’s reportable operating segments included — Multifamily and Commercial Real Estate Operations. The multifamily operations represented NTS-VI’s ownership and operating results relative to the multifamily communities known as Willow Lake Apartments, Park Place Apartments Phases I and III, Sabal Park Apartments and Golf Brook Apartments. The commercial operations represented NTS-VI’s ownership and operating results relative to suburban commercial office space known as Plainview Point Office Center Phase III.
The following unaudited financial information of the operating segments was prepared using a management approach, which was consistent with the basis and manner in which NTS-VI’s management internally disaggregated financial information for the purposes of assisting in making internal operating decisions. NTS-VI’s management evaluated performance based on stand-alone operating segment net income or loss. Professional and administrative expenses, depreciation and amortization, interest and other income, interest expense and minority interest income or loss recorded at the Partnership level were not allocated to the operating segments.
Three Months Ended March 31, 2004
-------------------------------------------------------------
Multifamily Commercial Total
--------------------- ------------------ ------------------
Rental income $ 2,476,683 $ 137,589 $ 2,614,272
Tenant reimbursements - 387 387
--------------------- ------------------ ------------------
Total revenues 2,476,683 137,976 2,614,659
--------------------- ------------------ ------------------
Operating expenses and operating expenses - affiliated 1,103,418 77,684 1,181,102
Management fees 124,345 8,376 132,721
Real estate taxes 104,135 21,653 125,788
Depreciation and amortization 586,378 54,022 640,400
--------------------- ------------------ ------------------
Total operating expenses 1,918,276 161,735 2,080,011
--------------------- ------------------ ------------------
Operating income (loss) 558,407 (23,759) 534,648
Interest and other income 457 150 607
Interest expense (206,146)