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EX-32.2 - EXHIBIT 32.2 - Resource Real Estate Investors 7, L.P.exh32_2.htm
EX-31.2 - EXHIBIT 32.2 - Resource Real Estate Investors 7, L.P.exh31_2.htm
EX-31.1 - EXHIBIT 31.1 - Resource Real Estate Investors 7, L.P.exh31_1.htm
EX-32.1 - EXHIBIT 32.1 - Resource Real Estate Investors 7, L.P.exh32_1.htm
 


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

 
FORM 10-Q

(Mark One)

R
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2011

 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission file number 0 - 53962


Resource Real Estate Investors 7, L.P.
(Exact name of registrant as specified in its charter)

Delaware
 
26-2726308
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)

One Crescent Drive, Suite 203, Navy Yard Corporate Center, Philadelphia, PA  19112
(Address of principal executive offices) (Zip code)
 
(215) 231-7050
(Registrant's telephone number, including area code)

 
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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer
¨
 
Accelerated filer
¨
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
Smaller reporting company
R
 
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

   
PAGE
PART I
FINANCIAL INFORMATION
 
     
ITEM 1.
Financial Statements
 
     
 
 3
     
 
 4
     
 
 5
     
 
 6
     
 
 7
     
ITEM 2.
 14
     
ITEM 3.
 19
     
ITEM 4.
 19
     
PART II
OTHER INFORMATION
 
     
ITEM 6.
 19
   
 20




 
PART I.
FINANCIAL INFORMATION
 


ITEM 1.
FINANCIAL STATEMENTS



RESOURCE REAL ESTATE INVESTORS 7, L.P.
(in thousands)

   
March 31,
   
December 31,
 
   
2011
   
2010
 
   
(unaudited)
       
ASSETS
           
Rental property, at cost:
           
Land
  $ 7,717     $ 7,717  
Buildings and improvements
    48,049       48,014  
Personal property
    1,100       1,041  
Construction-in-progress
    18       12  
      56,884       56,784  
Accumulated depreciation and amortization
    (6,269 )     (5,747 )
      50,615       51,037  
                 
Cash
    10,935       11,350  
Restricted cash
    671       913  
Tenant receivables, net
    7       16  
Prepaid expenses and other assets
    112       122  
Deferred financing costs, net
    917       960  
Total assets
  $ 63,257     $ 64,398  
                 
LIABILITIES AND PARTNERS’ CAPITAL
               
Liabilities:
               
Mortgage notes payable
  $ 41,126     $ 41,212  
Accounts payable and accrued expenses
    476       739  
Accrued interest
    175       175  
Payables to related parties
    734       798  
Prepaid rent
    116       97  
Security deposits
    159       162  
Total liabilities
    42,786       43,183  
                 
Partners’ capital
    20,471       21,215  
                 
Total liabilities and partners’ capital
  $ 63,257     $ 64,398  
 

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)

   
For the Three Months Ended
 
   
March 31,
 
   
2011
   
2010
 
Revenues:
           
Rental income
  $ 1,885     $ 1,888  
                 
Expenses:
               
Rental operating
    889       855  
Management fees – related parties
    166       166  
General and administrative
    103       72  
Depreciation and amortization
    522       503  
Total expenses
    1,680       1,596  
Income before other expenses
    205       292  
                 
Other expenses:
               
Interest expense, net
    (539 )     (527 )
Loss on disposal of fixed assets
    (1 )      
Net loss
  $ (335 )   $ (235 )
                 
Weighted average number of limited partner units outstanding
    3,270       3,275  
                 
Net loss per weighted average limited partner unit
  $ (0.10 )   $ (0.07 )

 
The accompanying notes are an integral part of these consolidated financial statements.


RESOURCE REAL ESTATE INVESTORS 7, L.P.
FOR THE THREE MONTHS ENDED MARCH 31, 2011
(in thousands, except units)
(unaudited)


   
General Partner
   
Limited Partners
   
Total
 
   
Amount
   
Units
   
Amount
   
Amount
 
Balance at January 1, 2011
  $ 1       3,269,655     $ 21,214     $ 21,215  
Distributions
                (409 )     (409 )
Net loss
                (335 )     (335 )
Balance at March 31, 2011
  $ 1       3,269,655     $ 20,470     $ 20,471  
 

The accompanying notes are an integral part of this consolidated financial statement.



RESOURCE REAL ESTATE INVESTORS 7, L.P.
(in thousands)
(unaudited)

   
For the Three Months Ended
 
   
March 31,
 
   
2011
   
2010
 
Cash flows from operating activities:
           
Net loss
  $ (335 )   $ (235 )
Adjustments to reconcile net loss to net cash provided
by operating activities:
               
Depreciation and amortization
    522       503  
Amortization of deferred financing costs
    43       38  
Loss on disposal of fixed assets
    1        
Changes in operating assets and liabilities:
               
Restricted cash
    242       271  
Tenant receivables
    9        
Prepaid expense and other assets
    10       13  
Accounts payable and accrued expenses
    (263 )     (466 )
Payables due to related parties
    (64 )     73  
Prepaid rent
    19       (6 )
Security deposits
    (3 )     3  
Net cash provided by operating activities
    181       194  
                 
Cash flows from investing activities:
               
Capital expenditures
    (101 )     (153 )
Net cash used in investing activities
    (101 )     (153 )
                 
Cash flows from financing activities:
               
Distributions to limited partners
    (409 )     (409 )
Principal payments on mortgage note payable
    (86 )     (3 )
Net cash used in financing activities
    (495 )     (412 )
                 
Net decrease in cash
    (415 )     (371 )
Cash at beginning of period
    11,350       12,424  
Cash at end of period
  $ 10,935     $ 12,053  
 
The accompanying notes are an integral part of these consolidated financial statements.


RESOURCE REAL ESTATE INVESTORS 7, L.P.
MARCH 31, 2011
(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 or invests in multifamily residential properties located in Georgia, Maine and Texas (referred to as the “Properties”).  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 March 31, 2011.  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 5.53% limited partnership interest in the Partnership at both March 31, 2011 and December 31, 2010.  RCP is an indirect wholly owned subsidiary of Resource America, Inc. (“RAI”), a publicly traded company (NASDAQ: REXI) operating in the real estate, financial fund management and commercial finance 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 all partners have received the Priority Return (as defined in the Agreement); 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 Priority 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 March 31, 2011 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 Annual Report on Form 10-K for the year ended December 31, 2010.  The results of operations for the three months ended March 31, 2011 may not necessarily be indicative of the results of operations for the full year ending December 31, 2011.

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:



RESOURCE REAL ESTATE INVESTORS 7, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
MARCH 31, 2011
(unaudited)

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)

Principles of Consolidation

The consolidated financial statements include the accounts of the Partnership and its wholly owned subsidiaries, as follows:

Subsidiaries
 
Number
of Units
 
Location
RRE Tamarlane Holdings, LLC, or Tamarlane Apartments (“Tamarlane”)
 
115
 
Portland, ME
         
RRE Bent Oaks Holdings, LLC, or Bent Oaks Apartments (“Bent Oaks”)
 
146
 
Austin, TX
         
RRE Cape Cod Holdings,  LLC, or Cape Cod Apartments (“Cape Cod”)
 
212
 
San Antonio, TX
         
    RRE Woodhollow Holdings, LLC, or Woodhollow Apartments (“Woodhollow”)
 
108
 
Austin, TX
         
RRE Woodland Hills Holdings, LLC, or Woodland Hills Apartments (“Hills”)
 
228
 
Decatur, GA
   
809
   
 
        All material intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  The Partnership estimates the allowance for uncollectible receivables and adjusts the balance quarterly.  Actual results could differ from those estimates.

Supplemental Disclosure of Cash Flow Information

During the three months ended March 31, 2011 and 2010, the Partnership paid $509,284 and $508,630, respectively, in cash for interest.
 
Advertising
 
       The Partnership expenses advertising costs as they are incurred.  Advertising expenses totaled $27,322 and $42,030 for the three months ended March 31, 2011 and 2010, respectively.

Deferred Financing Costs

Costs incurred to obtain financing have been capitalized and are being amortized over the term of the related debt using the effective yield method.

Income Taxes

Income taxes or credits resulting from earnings or losses are payable by or accrue to the benefit of the Partners; accordingly, no provision has been made for income taxes in these consolidated financial statements.
 
       The Partnership evaluates the benefits of tax positions taken or expected to be taken in its tax returns under a two-step recognition and measurement process.  Only the largest amount of benefits from the tax positions that will more likely than not be sustainable upon examination are recognized by the Partnership.  The Partnership does not have any unrecognized tax benefits, nor interest and penalties, recorded in the Consolidated Balance Sheets or Consolidated Statements of Operations and does not anticipate significant adjustments to the total amount of unrecognized tax benefits within the next twelve months.


RESOURCE REAL ESTATE INVESTORS 7, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
MARCH 31, 2011
(unaudited)


NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – (Continued)

Income Taxes- (Continued)

The Partnership is subject to examination by the U.S. Internal Revenue Service (“IRS”) and by the taxing authorities in those states in which the Partnership has significant business operations.  The Partnership is not currently undergoing any examinations by taxing authorities.  The Partnership may be subject to U.S. Federal income tax and state/local income tax examinations for years 2008 through 2010.

Revenue Recognition

Revenue is primarily derived from the rental of residential housing units with lease agreement terms of approximately twelve months.  The Partnership recognizes revenue in the period that rent is earned, which is on a monthly basis.  Rents are recognized as income on a straight-line basis over the term of the lease for leases with varying rental payments.  Any incentives included in the lease are amortized on a straight-line basis over the term of the lease.

The future minimum rental payments to be received from noncancelable operating leases are approximately $3.4 million and $11,077 for the twelve months ending March 31, 2012 and 2013, respectively, and none thereafter.
 
Long-Lived Assets
 
        The Partnership reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  If it is determined that an asset’s estimated future cash flows will not be sufficient to recover its carrying amount, an impairment charge will be recorded to reduce the carrying amount for that asset to its estimated fair value.  There was no recorded impairment loss for the period ended March 31, 2011.
 
Rental Properties
 
        Rental properties are carried at cost, net of accumulated depreciation.  Buildings and improvements and personal property are depreciated for financial reporting purposes on the straight-line method over their estimated useful lives.  The value of in place leases is amortized on a straight-line basis over the average remaining term of each respective in place lease acquired.  For income tax reporting purposes, the Partnership uses the Modified Accelerated Cost Recovery System.  Useful lives used for calculating depreciation for financial reporting purposes are as follows:

 
Buildings and improvements
 5 - 27.5 years
 
 
Personal property
 3 - 15 years
 
 
Concentration of Credit Risk
 
        Financial instruments, which potentially subject the Partnership to concentration of credit risk, consist of periodic temporary deposits of cash.  At March 31, 2011, the Partnership had $11.2 million of deposits at various banks of which $9.3 million was over the insurance limit of the Federal Deposit Insurance Corporation.  No losses have been experienced on such deposits.



RESOURCE REAL ESTATE INVESTORS 7, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
MARCH 31, 2011
(unaudited)


NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – (Continued)
 
Tenant Receivables
 
        Tenant receivables are stated in the financial statements at amounts due from tenants net of an allowance for uncollectible receivables.  Payment terms vary and receivables 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 charges off receivables when they become uncollectible.  At March 31, 2011 and December 31, 2010, there was $0 and $248, respectively, in the allowance for uncollectible receivables.
 
Redemptions
 
        The LPs may request redemption of their units at any time.  The Partnership has no obligation to redeem any units and will do so only at the GP’s discretion.  If the Partnership redeems units, the redemption price is generally the initial investment less all distributions from the Fund to the LP, and less all organization and offering expenses charged to the LP.
 
Reclassification
 
        Bad debt expense was reclassified from general and administrative expense to Rental operating expense in the 2010 consolidated financial statements to conform to the 2011 presentation.


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):

   
March 31,
   
December 31,
 
   
2011
   
2010
 
Real estate taxes
  $ 287     $ 613  
Insurance
    163       103  
Capital improvements
    221       197  
    $ 671     $ 913  

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 March 31, 2011 and December 31, 2010 was approximately $430,000 and $387,000, respectively.  Estimated amortization expense of the existing deferred financing costs of the Partnership’s Properties for the 12 month periods ending March 31, and thereafter, is as follows (in thousands):

2012
  $ 174  
2013
    172  
2014
    171  
2015
    169  
2016
    99  
Thereafter
    132  
    $ 917  



RESOURCE REAL ESTATE INVESTORS 7, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
MARCH 31, 2011
(unaudited)

NOTE 5 – MORTGAGE NOTES PAYABLE

The following is a summary of mortgage notes payable (in thousands, except percentages):

     Property
 
March 31,
2011
   
December 31,
2010
 
Maturity Date
 
Annual
Interest Rate
   
Average Monthly Debt Service
 
Tamarlane
  $ 8,906     $ 8,906  
05/01/2015
    4.92%     $ 37 (1)
Tamarlane
    991       994  
05/01/2015
    6.12%     $ 5 (2)
Bent Oaks
    6,107       6,120  
01/01/2019 (7)
    5.99%     $ 37 (3)
Cape Cod
    6,348       6,362  
01/01/2019 (7)
    5.91%     $ 38 (4)
Woodhollow
    5,228       5,240  
01/01/2019 (7)
    6.14%     $ 32 (5)
Hills
    13,546       13,590  
01/01/2016
 
variable
    $ 65 (6)
Total
  $ 41,126     $ 41,212                    

(1)
Interest only through May 1, 2015.
 
(2)
Monthly payment including principal and interest totals $5,315, effective since start date of loan.
 
(3)
Monthly payment including principal and interest totals $36,653, effective since February 1, 2011.
 
(4)
Monthly payment including principal and interest totals $37,776, effective since February 1, 2011.
 
(5)
Monthly payment including principal and interest totals $31,890, effective since February 1, 2011.
 
(6)
Monthly payment including principal and interest is approximately $65,000 (based on variable rate at the inception date of the loan), effective since 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.
 
(7)
The Partnership has the option to extend the maturity for one year to January 1, 2020.  During the extension period, the interest rate would be the Federal Home Loan Mortgage Corporation Bill Index Rate plus 2.5%.
 
        Annual principal payments on the mortgage notes payable for each of the next five years ending March 31, and thereafter, are as follows (in thousands):

2012
  $ 514  
2013
    541  
2014
    567  
2015
    594  
2016
    22,401  
Thereafter
    16,509  
    $ 41,126  
 
        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 General Partner has guaranteed by executing a guarantee with respect to each property.  These exceptions are referred to as “carveouts”.  In general, carveouts relate to damages suffered by the lender for a subsidiary’s failure to pay rents, insurance or condemnation proceeds to lender, to pay water, sewer and other public assessments or charges, to pay environmental compliance costs or to deliver books and records, in each case as required in the loan documents.  The exceptions also require the General Partner to guarantee payment of audit costs, lender’s enforcement of its rights under the loan documents and payment of the loan if the subsidiary voluntarily files for bankruptcy or seeks reorganization, or if a related party of the subsidiary does so with respect to the subsidiary.




RESOURCE REAL ESTATE INVESTORS 7, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
MARCH 31, 2011
(unaudited)


NOTE 6 – CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

In the ordinary course of its business operations, the Partnership has ongoing relationships with several related entities.  Payables to related parties are summarized in the following table (in thousands):

   
March 31,
   
December 31,
 
   
2011
   
2010
 
Payables to related parties:
           
RAI and affiliates (a) 
  $ 734     $ 798  

(a)
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.
 
        A wholly owned subsidiary of RCP, Resource Real Estate Management, LLC (“RREML”) is entitled to receive property and debt management fees.  RREML engaged Resource Real Estate Management, Inc (“RREMI”), an indirect wholly owned subsidiary of RAI, to be the manager of the Partnership’s properties.
 
        During the ordinary course of business, RCP and RREMI advance funds for ordinary operating expenses on behalf of the Properties; these advances are repaid within a few days.
 
        The Partnership is obligated to pay fees and reimbursements of expenses to related parties.  These activities are summarized in the following table (in thousands):

   
Three Months Ended
 
   
March 31,
 
   
2011
   
2010
 
RCP:
           
Investment management fees (1) 
  $ 72     $ 72  
                 
RREML:
               
Property management fees (2) 
    94       94  
    $ 166     $ 166  

(1)
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.
 
(2)
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 or obtaining and supervising third-party managers (see footnote (a) to the previous table).
 



RESOURCE REAL ESTATE INVESTORS 7, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
MARCH 31, 2011
(unaudited)


NOTE 7– DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
 
        Rates currently available to the Partnership for debt with similar terms and remaining maturities were used to estimate the fair value of existing debt.  The estimated fair values of the Partnership’s mortgage notes payable were as follows (in thousands):

   
March 31, 2011
   
December 31, 2010
 
   
Carrying Amount
   
Fair Value
   
Carrying Amount
   
Fair Value
 
                         
Tamarlane
  $ 9,897     $ 9,761     $ 9,900     $ 9,700  
Bent Oaks
    6,107       6,360       6,120       6,343  
Cape Cod
    6,348       6,580       6,362       6,562  
Woodhollow
    5,228       5,465       5,240       5,453  
Hills
    13,546       12,486       13,590       12,435  
Total mortgage notes payable
  $ 41,126     $ 40,652     $ 41,212     $ 40,493  

NOTE 8 – SUBSEQUENT EVENTS
 
        The Company has evaluated subsequent events and determined that no events have occurred which would require an adjustment to the consolidated financial statements.



ITEM 2.
 
AND RESULTS OF OPERATIONS (unaudited)

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 inherent in partnerships that invest in real estate and real estate assets, including those referred to in our filings under the Securities Exchange Act of 1934.  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 March 31, 2011, we did not own any real estate debt investments.  If we were to acquire mortgages or other real estate debt investments in the future, these investments will be in an amount that would not cause us to become an investment company within the meaning of Section 3(a)(1) of the Investment Company Act of 1940.
 
        As of March 31, 2011, we own five multifamily residential rental properties through our 100% owned subsidiaries, as follows:
 
Subsidiaries
 
Purchase Date
 
Leverage
Ratio (1)
 
Number
of Units
 
Property
Location
RRE Tamarlane Holdings, LLC, or Tamarlane
 
07/31/08
 
68%
 
115
 
Portland, ME
RRE Bent Oaks Holdings, LLC, or Bent Oaks
 
12/10/08
 
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 table sets forth operating statistics about our multifamily residential rental properties for the three months ending March 31, 2011 and 2010:

   
Average
Occupancy Rate (1)
   
Average Effective Rent
per Square Foot (2)
   
Ratio of Operating
Expense to Revenue (3)
 
Apartment Complex
 
March 31,
2011
   
March 31,
2010
   
March 31,
2011
   
March 31,
2010
   
March 31,
2011
   
March 31,
2010
 
Tamarlane
    94.8%       95.1%     $ 1.11     $ 1.07       43%       42%  
Bent Oaks
    94.7%       95.9%     $ 0.93     $ 0.92       56%       55%  
Cape Cod
    95.6%       97.0%     $ 0.81     $ 0.79       52%       57%  
Woodhollow
    92.6%       97.5%     $ 0.85     $ 0.85       62%       59%  
Hills
    95.0%       96.5%     $ 0.65     $ 0.65       49%       42%  

(1)
Number of occupied units divided by total unit adjusted for any unrentable units; average calculated on a weekly basis.
 
(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 Real Estate Investments in 2008, we do not expect that we will sell or refinance our Properties during at least the next year.  Should economic conditions in the areas in which our Properties are located deteriorate, we could experience lower occupancy, lower rental revenues and higher operating costs, all of which could harm our operations and financial condition, reduce the value of our Properties and limit or eliminate our ability to make 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.  We seek to maximize our occupancy rates through aggressive property-level programs, including, in particular, our Lease Assurance Program and our Lease Rent Optimizer, or LRO, program which includes rent concessions and a substantial capital improvements program.  Under our lease assurance program, we are marketing 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 renewal 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.
 
        As a result of these programs and capital expenditures to improve the Properties, the rental rates at three of our Properties have increased to compete in the market.  However, the rents at two properties have remained flat.  Our Properties experienced an overall decrease in the average occupancy rate during the three months ended March 31, 2011 of approximately 1.9%, with an average occupancy rate of 94.5% as compared to an average occupancy rate during the same period in 2010 of 96.4%.  The decrease in the overall fund occupancy was primarily due to an unexpected number of skips and evictions in January at Woodhollow.  Woodhollow is a smaller asset, so a small number of tenant move outs has a large impact on the property.  The remainder of the properties had small decreases which were due timing of move ins and move outs and normal fluctuations.
 
         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 the quarter ended March 31, 2010 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.  Such turnover did not occur in the quarter ended March 31, 2011.
 
         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 of these notes.  However, should interest rates change materially, the interest component of our variable rate financing, which is based upon the one-month London Interbank Offered Rate plus 323 basis points, and is capped at 7%, could change.
 
         Under our capital improvements program, more particularly described in “Liquidity and Capital Resources,” we expect to spend approximately $6.9 million in the next five years for property improvements intended to increase the Properties’ appeal to tenants.  As we implement planned improvements to our Properties, we seek to cause our occupancy rates and, potentially, rental rates and our cash flow from operating activities to increase.



 
         The following table sets forth the unaudited results of our operations for the three months ended March 31, 2011 and 2010 (in thousands, except per unit data):
 
   
March 31,
   
Increase (Decrease)
 
   
2011
   
2010
   
Dollars
   
Percent
 
Revenues:
                       
Rental income
  $ 1,885     $ 1,888     $ (3 )     (0.2)%  
Expenses:
                               
Rental operating
    889       855       34       3.8%  
Management fees – related party
    166       166             0.0%  
General and administrative
    103       72       31       30.1%  
Depreciation and amortization
    522       503       19       3.6%  
Total expenses
    1,680       1,596       84       5.0%  
Income before other expenses
    205       292       (87 )     (42.4)%  
Other expenses:
                               
Interest expense, net
    (539 )     (527 )     (12 )     2.2%  
Loss on disposal of fixed assets
    (1 )     -       (1 )     100.0%  
Net loss
  $ (335 )   $ (235 )   $ (100 )     (29.9)%  
Weighted average number of limited partner units
outstanding
    3,270       3,275                  
Net loss per weighted average limited partner unit
  $ (0.10 )   $ (0.07 )                

Revenues – Three Months Ended March 31, 2011 Compared to Three Months Ended March 31, 2010

We attribute the $3,000 decrease in revenues principally to a decrease of 1.9% in the weighted average occupancy rate for the respective three months due to unexpected move outs at Woodhollow.  Occupancy rates at the other properties have varied within the normal range of fluctuation.

Expenses – Three Months Ended March 31, 2011 Compared to Three Months Ended March 31, 2010

We attribute the $84,000 increase in expenses to the following:
 
 
a $34,000 increase in rental operating expenses principally due to higher insurance premiums and higher costs at Woodhollow due to higher turnover costs due to a higher level of move outs, offset by a decrease in real estate taxes; and
 
 
a $31,000 increase in general and administrative expenses due to increased internal audit costs; and
 
 
a $19,000 increase in depreciation and amortization due to capital expenditures we have made.
 
Interest Expense, net
 
        We attribute the $12,000 increase in interest expense due to amortization of financing costs.

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):
 
   
March 31,
 
   
2011
   
2010
 
Provided by operating activities (1) 
  $ 181     $ 194  
Used in investing activities
    (101 )     (153 )
Used in financing activities
    (495 )     (412 )
Decrease in cash                                                                                      
  $ (415 )   $ (371 )

(1)
Including changes in operating assets and liabilities.
 
 
 
16

 
        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 or a decrease in market rates.  The rental 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 three months ended March 31, 2011 and 2010, we incurred net losses; our results are substantially affected by non-cash expenses, principally depreciation and amortization expense, as is common for entities that own real properties.  Our net losses for the three months ended March 31, 2011 and 2010 of $335,000 and $235,000, respectively, included $522,000 and $503,000, respectively, of non-cash depreciation and amortization expense.  Our operations generated $231,000 and $306,000, respectively, of positive adjusted cash flow from operations for the three months ended March 31, 2011 and 2010.  We define adjusted cash flow from operations, a non-GAAP liquidity measure, as net cash provided by operating activities as 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 the 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 positive adjusted cash flow from operations for the twelve months ended December 31, 2011.
 
        The following table reconciles net cash provided by operating activities to adjusted cash flow from operations, as described in the paragraph above (in thousands):
 
   
Three Months Ended
 
   
March 31,
 
   
2011
   
2010
 
Net cash provided by operating activities
  $ 181     $ 194  
Net changes in operating assets and liabilities
    50       112  
Adjusted cash flow from operations (non-GAAP)
  $ 231     $ 306  
 
        As of March 31, 2011, we had $10.7 million in cash reserves and $278,000 in working capital.  Accordingly, we believe we will be able to meet our liquidity needs for the foreseeable future.  During the three months ended March 31, 2011, we have spent approximately $101,000 on capital expenditures, such as extensive exterior paint projects, roof replacements, landscaping upgrades, additional amenities such as dog parks, parking lot paving, fixture upgrades, saltwater conversion of pools and turnover costs, as follows (in thousands):

    Subsidiary
 
Capital
Expenditures
   
Future Discretionary Capital Expenditures
 
Tamarlane
  $ 23     $ 600  
Bent Oaks
    20       1,660  
Cape Cod
    8       1,939  
Woodhollow
    7       820  
Hills
    43       1,894  
Total
  $ 101     $ 6,913  




        Although our capital expenditures were nominal ($101,000) during the three months ended March 31, 2011, 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 $11.5 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 additional 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 and there is an acceptable return on the additional expenditures, 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 debt service requirements, which began in early 2011, and are approximately $514,000 for the next 12 months.
 
        In connection with the acquisitions of our Properties, we incurred $41.2 million of mortgage financing.  For information regarding such financing, with respect to each Property, see Note 5 to the notes to our consolidated financial statements.

Redemption of Units
 
        We are permitted, in our General Partner’s sole discretion, to redeem units upon a unitholder’s request.  However, we have no obligation to redeem units at any time, and we can decline to redeem units for any reason. For example, if our General Partner determines that we do not have the necessary cash flow, taking into account future distributions to our other limited partners, investments, and foreseeable operating expenses, a unitholder’s request may be declined. In addition, our General Partner may not approve the redemption of units if it concludes that the redemption might cause our total unit transfers in the year, subject to certain exceptions, to exceed 2% of our total capital or profits interests. All of these determinations are subjective and will be made in our General Partner’s sole discretion.  We will also determine the redemption price based on provisions set forth in the First Amended and Restated Agreement of Limited Partnership, or the Partnership Agreement. To the extent the formula for arriving at the redemption price has any subjective determinations, they will fall within the sole discretion of our General Partner.  If we lack the requisite liquidity to redeem the units, our General Partner, in its sole discretion, may purchase the units on generally the same terms as we would have redeemed the units.  As of March 31, 2011, 5,000 units have been redeemed, although no units were redeemed in the quarter then ended.
 
Legal Proceedings
 
        We are a party to various routine legal proceedings arising out of the ordinary course of our business.  Management believes that none of these actions, individually or in the aggregate, will have a material adverse effect on our financial condition or operations.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.  The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, revenues and cost and expenses, and related disclosure of contingent assets and liabilities.  On an on-going basis, we evaluate our estimates, including those related to certain accrued liabilities.  We base our estimates on historical experience, current economic conditions and on various other assumptions that we believe reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.

For a discussion on our critical accounting policies and estimates, see the discussion in our annual report on Form 10-K under “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates.”
 
Off-Balance Sheet Arrangements
 
        As of March 31, 2011 and December 31, 2010, we do not have any off-balance sheet arrangements or obligations, including contingent obligations, other than guarantees by the General Partner of certain limited standard expectations to the non-recourse nature of the mortgage notes which are secured by the Properties.





 
        Omitted as permitted under rules applicable to smaller reporting companies.


 
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 March 31, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


PART II.                      OTHER INFORMATION

ITEM 6.


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 Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 31.2
 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 32.1
 
Certification of Chief 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 Chief Financial 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 for the year ended December 31, 2009 and by this reference incorporated herein.



 

Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned duly authorized.


 
RESOURCE REAL ESTATE INVESTORS 7, L.P.
 
By:  Resource Capital Partners, Inc., its general partner
   
May 12, 2011
By:           /s/ Kevin M. Finkel
 
Kevin M. Finkel
 
President
 
(Principal Executive Officer)


May 12, 2011
By:           /s/ Steven R. Saltzman
 
Steven R. Saltzman
 
Vice President – Finance
 
(Principal Financial and Accounting Officer)
 
20