Resource Real Estate Investors 7, L.P. - FORM 10-Q

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EX-31.1 - EXHIBIT 31.1 - Resource Real Estate Investors 7, L.P.	exh31_1.htm
EXCEL - IDEA: XBRL DOCUMENT - Resource Real Estate Investors 7, L.P.	Financial_Report.xls
EX-32.1 - EXHIBIT 32.1 - Resource Real Estate Investors 7, L.P.	exh32_1.htm
EX-31.2 - EXHIBIT 31.2 - Resource Real Estate Investors 7, L.P.	exh31_2.htm
EX-32.2 - EXHIBIT 32.2 - Resource Real Estate Investors 7, L.P.	exh32_2.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 September 30, 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 R 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

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RESOURCE REAL ESTATE INVESTORS 7, L.P.

INDEX TO QUARTERLY REPORT

ON FORM 10-Q

		PAGE
PART I	FINANCIAL INFORMATION

ITEM 1.	Financial Statements

	Consolidated Balance Sheets – September 30, 2011 (unaudited) and December 31, 2010	3

	Consolidated Statements of Operations Three and Nine Months Ended September 30, 2011 and 2010 (unaudited)	4

	Consolidated Statement of Changes in Partners’ Capital Nine Months Ended September 30, 2011 (unaudited)	5

	Consolidated Statements of Cash Flows Nine Months Ended September 30, 2011 and 2010 (unaudited)	6

	Notes to Consolidated Financial Statements – September 30, 2011 (unaudited)	7

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13

ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	19

ITEM 4.	Controls and Procedures	19

PART II	OTHER INFORMATION

ITEM 6.	Exhibits	20

SIGNATURES		21

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PART I.

FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

RESOURCE REAL ESTATE INVESTORS 7, L.P.

CONSOLIDATED BALANCE SHEETS

(in thousands)

	September 30,			December 31,
	2011			2010
	(unaudited)
ASSETS
Rental property, at cost:
Land	$	7,717		$	7,717
Buildings and improvements		48,180			48,014
Personal property		1,259			1,041
Construction-in-progress		108			12
		57,264			56,784
Accumulated depreciation and amortization		(7,322	)		(5,747	)
		49,942			51,037

Cash		10,181			11,350
Restricted cash		834			913
Tenant receivables, net		42			16
Prepaid expenses and other assets		272			122
Deferred financing costs, net		830			960
Total assets	$	62,101		$	64,398

LIABILITIES AND PARTNERS’ CAPITAL
Liabilities:
Mortgage notes payable	$	40,897		$	41,212
Accounts payable and accrued expenses		797			739
Accrued interest		168			175
Payables to related parties		907			798
Prepaid rent		111			97
Security deposits		164			162
Total liabilities		43,044			43,183

Partners’ capital		19,057			21,215

Total liabilities and partners’ capital	$	62,101		$	64,398

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

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RESOURCE REAL ESTATE INVESTORS 7, L.P.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per unit data)

(unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2011			2010			2011			2010
Revenues:
Rental income	$	2,020		$	1,868		$	5,872		$	5,618

Expenses:
Rental operating		942			864			2,748			2,623
Management fees – related parties		173			165			508			496
General and administrative		79			122			283			307
Depreciation and amortization		535			515			1,583			1,525
Total expenses		1,729			1,666			5,122			4,951
Income before other expenses		291			202			750			667

Other expenses:
Interest expense, net		(548	)		(543	)		(1,631	)		(1,605	)
Casualty loss		(2	)		−			(45	)		−
Loss on disposal of fixed assets		(1	)		−			(4	)		−
Net loss	$	(260	)	$	(341	)	$	(930	)	$	(938	)

Weighted average number of limited partner units outstanding		3,270			3,269			3,270			3,272

Net loss per weighted average limited partner unit	$	(0.08	)	$	(0.10	)	$	(0.28	)	$	(0.29	)

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

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RESOURCE REAL ESTATE INVESTORS 7, L.P.

CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS’ CAPITAL

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 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		−		−		(1,228	)		(1,228	)
Net loss		−		−		(930	)		(930	)
Balance at September 30, 2011	$	1		3,269,655	$	19,056		$	19,057

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

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RESOURCE REAL ESTATE INVESTORS 7, L.P.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	For the Nine Months Ended
	September 30,
	2011			2010
Cash flows from operating activities:
Net loss	$	(930	)	$	(938	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		1,583			1,525
Amortization of deferred financing costs		130			115
Casualty loss		45			−
Loss on disposal of fixed assets		4			−
Changes in operating assets and liabilities:
Restricted cash		79			66
Tenant receivables		(26	)		3
Prepaid expense and other assets		(150	)		(87	)
Accounts payable and accrued expenses		58			(235	)
Payables due to related parties		109			213
Accrued interest		(7	)		(5	)
Prepaid rent		14			(1	)
Security deposits		2			(5	)
Net cash provided by operating activities		911			651

Cash flows from investing activities:
Capital expenditures		(537	)		(306	)
Net cash used in investing activities		(537	)		(306	)

Cash flows from financing activities:
Distributions to limited partners		(1,228	)		(1,228	)
Redemption, net		−			(50	)
Principal payments on mortgage notes		(315	)		(10	)
Net cash used in financing activities		(1,543	)		(1,288	)

Net decrease in cash		(1,169	)		(943	)
Cash at beginning of period		11,350			12,424
Cash at end of period	$	10,181		$	11,481

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

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RESOURCE REAL ESTATE INVESTORS 7, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 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 September 30, 2011. R-7 was formed on March 28, 2008 and commenced operations on September 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 held a 5.53% limited partnership interest in the Partnership at both September 30, 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 September 30, 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 and nine months ended September 30, 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:

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RESOURCE REAL ESTATE INVESTORS 7, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

SEPTEMBER 30, 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 (“Tamarlane”)	115	Portland, ME
RRE Bent Oaks Holdings, LLC (“Bent Oaks”)	146	Austin, TX
RRE Cape Cod Holdings, LLC (“Cape Cod”)	212	San Antonio, TX
RRE Woodhollow Holdings, LLC (“Woodhollow”)	108	Austin, TX
RRE Woodland Hills Holdings, LLC (“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 nine months ended September 30, 2011 and 2010, the Partnership paid, $1.5 million and $1.6 million, respectively, in cash for interest.

Advertising

The Partnership expenses advertising costs as they are incurred. Advertising expenses totaled $87,000 and $93,000 for the nine months ended September 30, 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.

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RESOURCE REAL ESTATE INVESTORS 7, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

SEPTEMBER 30, 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 the 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 $4.3 million and $3,000 for the twelve months ending September 30, 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 September 30, 2011 and 2010.

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

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 September 30, 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.

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RESOURCE REAL ESTATE INVESTORS 7, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

SEPTEMBER 30, 2011

(unaudited)

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):

	September 30,		December 31,
	2011		2010
Real estate taxes	$	506	$	613
Insurance		26		103
Capital improvements		302		197
	$	834	$	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 September 30, 2011 and December 31, 2010 was approximately $517,000 and $387,000, respectively. Estimated amortization expense of the existing deferred financing costs of the Partnership’s Properties for the 12 month periods ending September 30, and thereafter, is as follows (in thousands):

2012	$	173
2013		172
2014		170
2015		144
2016		63
Thereafter		108
	$	830

NOTE 5 – MORTGAGE NOTES PAYABLE

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

Property	September 30, 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		984		994	05/01/2015		6.12%	$	5	(2)
Bent Oaks		6,073		6,120	01/01/2019 (7)		5.99%	$	37	(3)
Cape Cod		6,313		6,362	01/01/2019 (7)		5.91%	$	38	(4)
Woodhollow		5,201		5,240	01/01/2019 (7)		6.14%	$	32	(5)
Hills		13,420		13,590	01/01/2016	variable		$	65	(6)
Total	$	40,897	$	41,212

(1)	Interest only through May 1, 2015.

(2)	Monthly payment including principal and interest totals $5,315, effective since inception 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 (which was 0.24% at September 30, 2011) 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%.

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RESOURCE REAL ESTATE INVESTORS 7, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

SEPTEMBER 30, 2011

(unaudited)

NOTE 5 – MORTGAGE NOTES PAYABLE – (Continued)

Annual principal payments on the mortgage notes payable for each of the next five years ending September 30, and thereafter, are as follows (in thousands):

2012	$	521
2013		549
2014		575
2015		1,525
2016		21,328
Thereafter		16,399
	$	40,897

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.

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):

	September 30,		December 31,
	2011		2010
Payables to related parties:
RAI and affiliates (a)	$	907	$	798

(a)

RCP is entitled to receive an annual investment management fee, payable monthly, equal to 1% of the gross proceeds from the offering of partnership units, 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 to, and reimburse expenses of, related parties. These activities are summarized in the following table (in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2011		2010		2011		2010
RCP:
Investment management fees (1)	$	72	$	72	$	215	$	215
RREML:
Property management fees (2)	$	101	$	93	$	293	$	281

(1)

(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).

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RESOURCE REAL ESTATE INVESTORS 7, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

SEPTEMBER 30, 2011

(unaudited)

NOTE 7– FAIR VALUE MEASURE AND DISCLOSURES

The following methods and assumptions were used to estimate the fair value of our financial instruments:

●

Mortgage notes payable. Rates currently available to the Partnership for debt with similar terms and remaining maturities are used to estimate fair value of existing debt.

The carrying and fair values of the Partnership’s financial instruments are as follows (in thousands):

	September 30, 2011				December 31, 2010
	Carrying Amount		Fair Value		Carrying Amount		Fair Value

Tamarlane	$	9,890	$	10,135	$	9,900	$	9,700
Bent Oaks		6,073		6,728		6,120		6,343
Cape Cod		6,313		6,962		6,362		6,562
Woodhollow		5,201		5,778		5,240		5,453
Hills		13,420		12,985		13,590		12,435
Total mortgage notes payable	$	40,897	$	42,588	$	41,212	$	40,493

NOTE 8 - INSURANCE CLAIM

On April 4, 2011, a windstorm damaged one unit at Woodland Hills; the loss was covered by insurance. The Partnership reduced the carrying value of buildings and improvements for Woodland Hills by $54,000, and established a receivable for the expected net insurance proceeds of $12,000 (of which $9,000 has already been received and $3,000 has been deemed as uncollectible). Accordingly, the estimated loss of $45,000 was charged to casualty loss.

NOTE 9 – 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.

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ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
	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 September 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 September 30, 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 September 30, 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:

	Average Occupancy Rate (1)				Average Effective Rent per Square Foot (2), (4)				Ratio of Operating Expense to Revenue (3)
	Three Months Ended				Three Months Ended				Three Months Ended
	September 30,				September 30,				September 30,
Apartment Complex	2011		2010		2011		2010		2011		2010
Tamarlane		97.4%		98.0%	$	1.21	$	1.12		38%		41%
Bent Oaks		97.5%		93.8%	$	1.01	$	0.92		58%		61%
Cape Cod		95.9%		95.4%	$	0.85	$	0.80		55%		47%
Woodhollow		96.0%		95.1%	$	0.90	$	0.83		65%		61%
Hills		97.4%		96.6%	$	0.68	$	0.64		47%		50%

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	Average Occupancy Rate (1)				Average Effective Rent per Square Foot (2), (4)				Ratio of Operating Expense to Revenue (3)
	Nine Months Ended				Nine Months Ended				Nine Months Ended
	September 30,				September 30,				September 30,
Apartment Complex	2011		2010		2011		2010		2011		2010
Tamarlane		96.3%		96.5%	$	1.16	$	1.09		42%		42%
Bent Oaks		96.2%		95.0%	$	0.97	$	0.92		59%		59%
Cape Cod		95.8%		95.1%	$	0.83	$	0.79		56%		58%
Woodhollow		95.5%		95.8%	$	0.88	$	0.84		63%		61%
Hills		95.8%		96.2%	$	0.66	$	0.65		49%		48%

(1)	Number of occupied units divided by total units 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.

(4)	Average effective rent per square foot and ratio of operating expense to revenue for 2010 has been adjusted to conform to 2011 presentation.

Results of Operations

We generate our income from the net revenues we receive from our Properties. We also may, in the future, generate funds from the sale or refinancing of our Properties. Because we acquired our Properties in 2008, we do not expect that we will sell or refinance our Properties 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 market our apartment units to current and potential tenants who are worried about incurring substantial lease breakage penalties if they lose their jobs. The program allows tenants who sign new or 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 four of our Properties have increased to compete in the market.

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 prior year period 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 costs did not occur in the quarter ended September 30, 2011.

We seek to control operating expenses through our GP’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.

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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 these planned improvements to our Properties, we seek to maintain our stable occupancy rates and, potentially, increase rental rates and our cash flow from operating activities in order to pay for these improvements.

The following table sets forth the unaudited results of our operations for the three months ended September 30, 2011 and 2010 (in thousands, except per unit data):

	September 30,						Increase (Decrease)
	2011			2010			Dollars			Percent
Revenues:
Rental income	$	2,020		$	1,868			152			8.1%
Expenses:
Rental operating		942			864			78			9.0%
Management fees – related party		173			165			8			4.8%
General and administrative		79			122			(43	)		(35.2)%
Depreciation and amortization		535			515			20			3.9%
Total expenses		1,729			1,666			63			3.8%
Income before other expenses		291			202			89			44.1%
Other expenses:
Interest expense, net		(548	)		(543	)		(5	)		0.9%
Casualty loss		(2	)		−			(2	)		100%
Loss on disposal of fixed assets		(1	)		−			(1	)		100%
Net loss	$	(260	)	$	(341	)	$	81			(23.8)%
Weighted average number of limited partner units outstanding		3,270			3,269
Net loss per weighted average limited partner unit	$	(0.08	)	$	(0.10	)

Revenues – Three Months Ended September 30, 2011 Compared to Three Months Ended September 30, 2010

We attribute the $152,000 increase in revenues principally to the increase in the average occupancy rate at the Properties and the increase in the average effective rent per square foot at the Properties. Occupancy rates have varied within our expected range. We were able to increase rents as a result of stable occupancy and strong market demands.

Expenses – Three Months Ended September 30, 2011 Compared to Three Months Ended September 30, 2010

We attribute the $63,000 increase in expenses to the following:

●

a $78,000 increase in rental operating expenses principally due to an increase in insurance costs across the portfolio and real estate taxes at Cape Cod due to an appraisal adjustment ; and

●

a $20,000 increase in depreciation and amortization due to the impact of recent capital expenditures.

These increases were partially offset by:

●

a $43,000 decrease in general and administrative due to a reduction in audit and legal costs at the fund level.

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The following table sets forth the unaudited results of our operations for the nine months ended September 30, 2011 and 2010 (in thousands, except per unit data):

	September 30,						Increase (Decrease)
	2011			2010			Dollars			Percent
Revenues:
Rental income	$	5,872		$	5,618		$	254			4.5%
Expenses:
Rental operating		2,748			2,623			125			4.8%
Management fees – related party		508			496			12			2.4%
General and administrative		283			307			(24	)		(7.8)%
Depreciation and amortization		1,583			1,525			58			3.8%
Total expenses		5,122			4,951			171			3.5%
Income before other expenses		750			667			83			12.4%
Other expenses:
Interest expense, net		(1,631	)		(1,605	)		(26	)		1.6%
Casualty loss		(45	)		−			(45	)		100%
Loss on disposal of fixed assets		(4	)		−			(4	)		100%
Net loss	$	(930	)	$	(938	)	$	8			(0.9)%
Weighted average number of limited partner units outstanding		3,270			3,272
Net loss per weighted average limited partner unit	$	(0.28	)	$	(0.29	)

Revenues – Nine Months Ended September 30, 2011 Compared to Nine Months Ended September 30, 2010

We attribute the $254,000 increase in revenues principally to increases in the average occupancy rate and the average effective rent per square foot at the Properties. Occupancy rates have varied within our expected range. We were able to increase rents as a result of stable occupancy and strong market demand.

Expenses – Nine Months Ended September 30, 2011 Compared to Nine Months Ended September 30, 2010

We attribute the $171,000 increase in expenses primarily to the following:

●

a $125,000 increase in rental operating expenses principally due to an increase in insurance costs across the fund, sewer and water expenses at Bent Oaks, temporary help at Woodhollow, and trash collection contract expense at Woodland Hills ; and

●

a $58,000 increase in depreciation and amortization due to the impact of capital expenditures.

These expenses were partially offset by:

●

a $24,000 decrease in general and administrative expenses due to decreased postage, printing and legal costs at the fund level.

Other expenses

We attribute the $75,000 increase in other expenses primarily to the following:

●

a $26,000 increase in net interest expense due to an increase in the amortization of financing costs; and

●

a $45,000 increase in casualty loss due to windstorm damage at one of the Properties.

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Liquidity and Capital Resources

The following table sets forth our sources and uses of cash (in thousands):

	Nine Months Ended September 30,
	2011			2010
Provided by operating activities (1)	$	911		$	651
Used in investing activities		(537	)		(306	)
Used in financing activities		(1,543	)		(1,288	)
Decrease in cash	$	(1,169	)	$	(943	)

(1)	Including changes in operating assets and liabilities.

Our liquidity needs consist principally of capital to pay the Properties’ debt service, operating expenses, capital expenditures and monthly distributions to the limited partners. Our ability to meet our liquidity needs will be subject to our ability to generate cash from operations as well as the amount of our cash reserves and working capital. The ability to generate cash from operations will depend on the occupancy rates, rates charged to tenants compared with competing properties in the area and the ability of tenants to pay rent. Occupancy rates can fluctuate based on changes in local market conditions where the Properties are located such as: excessive building resulting in an oversupply of similar properties, deterioration of surrounding areas 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 nine months ended September 30, 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 nine months ended September 30, 2011 and 2010 of $930,000 and $938,000, respectively, included $1.6 million and $1.5 million, respectively, of non-cash depreciation and amortization expense. Our operations generated $832,000 and $702,000, respectively, of positive adjusted cash flow from operations for the nine months ended September 30, 2011 and 2010. We define adjusted cash flow from operations, a non-GAAP liquidity measure, as net cash provided by operating activities as adjusted to exclude 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 are impacted by this measure. 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):

	Nine Months Ended
	September 30,
	2011			2010
Net cash provided by operating activities	$	911		$	651
Net changes in operating assets and liabilities		(79	)		51
Adjusted cash flow from operations	$	832		$	702

As of September 30, 2011, we had $9.8 million in cash reserves, which were derived from the offering of our units in 2008 and 2009 and $338,000 in working capital. Accordingly, we believe we will be able to meet our liquidity needs for the foreseeable future. During the nine months ended September 30, 2011, we have spent approximately $537,000 on capital expenditures, as follows (in thousands):

Subsidiary	Capital Expenditures		Future Discretionary Capital Expenditures
Tamarlane	$	147	$	600
Bent Oaks		62		1,660
Cape Cod		82		1,939
Woodhollow		27		820
Hills		219		1,894
Total	$	537	$	6,913

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Although our capital expenditures were nominal ($537,000) during the nine months ended September 30, 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 $521,000 for the next 12 months.

Mortgage financing, incurred in connection with the acquisitions of our Properties, totaled $40.9 million at September 30, 2011. 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 our 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 September 30, 2011, a total of 5,000 units have been redeemed; at an aggregate redemption price of $9.30; no units were redeemed in the nine months 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 for the year ended December 31, 2010 under “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates.”

Off-Balance Sheet Arrangements

As of September 30, 2011 and December 31, 2010, we do not have any off-balance sheet arrangements or obligations, including contingent obligations, other than guarantees by our GP of certain limited standard expectations to the non-recourse nature of the mortgage notes which are secured by the Properties.

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ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Omitted as permitted under rules applicable to smaller reporting companies.

ITEM 4.

CONTROLS AND PROCEDURES

Disclosure Controls

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our General Partner, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our General Partner recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Under the supervision of our General Partner’s principal executive officer and principal financial officer, we have carried out an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our General Partner’s principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting that occurred during the three months ended September 30, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 6.

EXHIBITS

Exhibit No.		Description
3.1		Amended and Restated Agreement of Limited Partnership. (1)

3.2		Certificate of Limited Partnership. (1)

4.1		Forms of letters sent to limited partners confirming their investment. (1)

31.1		Certification of 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.

101		Interactive Data Files

(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.

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SIGNATURES

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

	RESOURCE REAL ESTATE INVESTORS 7, L.P.
	By: Resource Capital Partners, Inc., its general partner

November 10, 2011	By: /s/ Kevin M. Finkel
	Kevin M. Finkel
	President
	(Principal Executive Officer)

November 10, 2011	By: /s/ Steven R. Saltzman
	Steven R. Saltzman
	Vice President – Finance
	(Principal Financial and Accounting Officer)

Resource Real Estate Investors 7, L.P. - FORM 10-Q - November 10, 2011

Attached files

Resource Real Estate Investors 7, L.P. Reports