Resource Real Estate Investors 7, L.P. - FORM 10-Q - May 13, 2014

Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - Resource Real Estate Investors 7, L.P.Financial_Report.xls
EX-31.1 - EXHIBIT 31.1 - Resource Real Estate Investors 7, L.P.r7-20140331_ex31x1.htm
EX-32.2 - EXHIBIT 32.2 - Resource Real Estate Investors 7, L.P.r7-20140331_ex32x2.htm
EX-32.1 - EXHIBIT 32.1 - Resource Real Estate Investors 7, L.P.r7-20140331_ex32x1.htm
EX-31.2 - EXHIBIT 31.2 - Resource Real Estate Investors 7, L.P.r7-20140331_ex31x2.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2014
¨
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 þ 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 þ No o
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
o
 
Accelerated filer
o
Non-accelerated filer
o
(Do not check if a smaller reporting company)
Smaller reporting company
þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No þ




RESOURCE REAL ESTATE INVESTORS 7, L.P.
INDEX TO ANNUAL REPORT
ON FORM 10-Q

 
 
PAGE
PART I
FINANCIAL INFORMATION
 
 
 
 
ITEM 1.
Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ITEM 2.
 
 
 
ITEM 3.
 
 
 
ITEM 4.
 
 
 
PART II
OTHER INFORMATION
 
 
 
 
ITEM 6.
 
 
 







 






 
PART I.
FINANCIAL INFORMATION
 

ITEM 1.        FINANCIAL STATEMENTS
RESOURCE REAL ESTATE INVESTORS 7, L.P.
CONSOLIDATED BALANCE SHEETS
(in thousands)

 
March 31,
2014
 
December 31,
2013
 
(unaudited)
 
 
ASSETS
 
 
 
Rental properties, at cost:
 
 
 
Land
$
8,715

 
$
8,715

Buildings and improvements
58,311

 
58,248

Personal property
1,990

 
1,949

Construction-in-progress
39

 
87

Identifiable intangible assets
2,378

 
2,378

 
71,433

 
71,377

Accumulated depreciation and amortization
(14,317
)
 
(13,628
)
 
57,116

 
57,749

 
 
 
 
Cash
4,992

 
4,957

Restricted cash
1,051

 
1,712

Tenant receivables, net
19

 
22

Accounts receivable due from related parties
1

 
195

Prepaid expenses and other assets
131

 
150

Deferred financing costs, net
583

 
634

Total assets
$
63,893

 
$
65,419

 
 
 
 
LIABILITIES AND PARTNERS’ CAPITAL
 

 
 

Liabilities:
 

 
 

Mortgage notes payable
$
49,211

 
$
49,350

Accounts payable and accrued expenses
674

 
734

Real estate tax payable
324

 
976

Accrued interest
199

 
200

Payables to related parties
1,772

 
1,645

Prepaid rent
90

 
88

Security deposits
259

 
265

Total liabilities
52,529

 
53,258

Partners’ capital
11,364

 
12,161

Total liabilities and partners’ capital
$
63,893

 
$
65,419








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


RESOURCE REAL ESTATE INVESTORS 7, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per unit data)
(unaudited)

 
 
Three Months Ended
 
 
March 31,
 
 
2014
 
2013
Revenues:
 
 
 
 
     Rental income
 
$
3,007

 
$
2,875

 
 
 
 
 
Expenses:
 
 

 
 

     Rental operating
 
1,649

 
1,362

     Management fees – related parties
 
230

 
222

     General and administrative
 
192

 
102

     Depreciation and amortization
 
694

 
871

         Total expenses
 
2,765

 
2,557

 
 
 
 
 
             Income before other expenses
 
242

 
318

 
 
 
 
 
Other expenses:
 
 

 
 

     Interest expense, net
 
(628
)
 
(635
)
     Casualty loss
 
—

 
(27
)
     Loss on disposal of fixed assets
 
(2
)
 
(23
)
        Net loss
 
$
(388
)
 
$
(367
)
 
 
 
 
 
Weighted average number of limited partner units outstanding
 
3,270

 
3,270

 
 
 
 
 
Net loss per weighted average limited partner unit
 
$
(0.12
)
 
$
(0.11
)

 


















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


RESOURCE REAL ESTATE INVESTORS 7, L.P.
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS’ CAPITAL
FOR THE THREE MONTHS ENDED MARCH 31, 2014
(in thousands, except units)
(unaudited)

 
General
 
Limited Partners
 
 
 
Partner
 
Units
 
Amount
 
Total
Balance at January 1, 2014
$
1

 
3,269,655

 
$
12,160

 
$
12,161

Distributions
—

 
—

 
(409
)
 
(409
)
Net loss
—

 
—

 
(388
)
 
(388
)
Balance at March 31, 2014
1

 
3,269,655

 
11,363

 
11,364










































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


RESOURCE REAL ESTATE INVESTORS 7, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)


 
Three Months Ended
 
March 31,
 
2014
 
2013
Cash flows from operating activities:
 
 
 
Net loss
$
(388
)
 
$
(367
)
Adjustments to reconcile net loss to net cash provided by
  operating activities:
 

 
 

Depreciation and amortization
694

 
871

Amortization of deferred financing costs
51

 
52

Casualty loss
—

 
27

Losses on disposal/sale of fixed assets
2

 
23

Changes in operating assets and liabilities, excluding the effects of
acquisition:
 

 
 

Restricted cash
661

 
180

Tenant receivables, net
3

 
(2
)
Prepaid expense and other assets
19

 
75

    Accounts receivable - related parties
194

 
—

Accounts payable and accrued expenses
(59
)
 
(245
)
Real estate tax payable
(652
)
 
—

Accrued interest
(1
)
 
—

Payables to related parties
127

 
80

Prepaid rent
2

 
(14
)
Security deposits
(6
)
 
14

Net cash provided by operating activities
647

 
694

 
 
 
 
Cash flows from investing activities:
 

 
 

Capital expenditures
(64
)
 
(205
)
Net cash used in investing activities
(64
)
 
(205
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Distributions to limited partners
(409
)
 
(409
)
Principal payments on mortgage notes payable
(139
)
 
(133
)
Net cash used in financing activities
(548
)
 
(542
)
 
 
 
 
Net increase (decrease) in cash
35

 
(53
)
Cash at beginning of period
4,957

 
5,234

Cash at end of period
$
4,992

 
$
5,181

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


RESOURCE REAL ESTATE INVESTORS 7, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014
(unaudited)
NOTE 1 – NATURE OF BUSINESS AND OPERATIONS
Resource Real Estate Investors 7, L.P. (“R-7” or the “Partnership”) is a Delaware limited partnership which owns and operates multifamily residential rental properties located in Georgia, Maine, Texas and South Carolina (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 held no such investments as of March 31, 2014 and December 31, 2013.  The Partnership was formed on March 28, 2008 and commenced operations on June 16, 2008.  The General Partner, Resource Capital Partners, Inc. (“RCP”, the “General Partner”, or the “GP”), is in the business of sponsoring and managing real estate investment limited partnerships.  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 March 31, 2014, and December 31, 2013.  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 the LP’s have received their Preferred Return (as defined in the Agreement); and thereafter, 80% to the LPs and 20% to the GP.
Distributable cash from capital transactions, as determined by the GP, is first allocated 100% to the LPs until the LPs have received their Preferred Return; second, 100% to the LPs until their Adjusted Capital Contributions (as defined in the Agreement) have been reduced to zero; and thereafter, 80% to the LPs and 20% to the GP.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows:
Principles of Consolidation
The consolidated financial statements include the accounts of the Partnership and its wholly-owned subsidiaries, as follows:
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
RRE Woodland Village Holdings, LLC, or Woodland Village Apartments (“Village”)
 
308
 
Columbia, SC
 
 
1,117
 
 
All intercompany transactions and balances have been eliminated in consolidation.

RESOURCE REAL ESTATE INVESTORS 7, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
MARCH 31, 2014
(unaudited)

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 loan losses 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, 2014 and 2013, the Partnership paid $579,000 and $587,000, respectively, in cash for interest.
Advertising
The Partnership expenses advertising costs as they are incurred.  Advertising costs, which are included in rental operating expenses, totaled $35,000 and $28,000 for the three months ended March 31, 2014 and 2013, 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.
The Partnership is subject to examination by the U.S. Internal Revenue Service 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 2010 through 2013.
Revenue Recognition
Revenue is primarily derived from the rental of residential housing units with lease agreement terms of generally one year or less.  The Partnership recognizes revenue in the period that rent is earned, which is on a monthly basis.  The Partnership recognizes rent as income on a straight-line basis over the term of the related lease.  Additionally, any incentives included in the lease are amortized on a straight-line basis over the term of the related lease.
Included within rental income are other income amounts such as utility reimbursements, late fees, parking fees, pet fees and lease application fees which are recognized when earned or received.
The future minimum rental payments to be received from noncancelable operating leases is approximately $5.6 million and $86,000 for the twelve months ending March 31, 2015 and 2016, 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.  The Partnership impaired assets at one of the Properties due to a wind storm in 2013 (see Note 8).  Insurance proceeds covered the majority of the impairment.

RESOURCE REAL ESTATE INVESTORS 7, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
MARCH 31, 2014
(unaudited)

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 over the average remaining term of the respective leases on a straight-line basis.  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 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 general condition of the economy and the industry as a whole.  The Partnership writes off receivables when they become uncollectible.  At March 31, 2014 and December 31, 2013, there were $0 and $1,232, respectively, in allowances 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 amount of the initial investment less all distributions from the Partnership to the LP, and less all organization and offering expenses charged to the LP.
Recent Accounting Standards
Accounting Standards Issued But Not Yet Effective
In April 2014, the FASB issued authoritative guidance to change the criteria for reporting discontinued operations. Under the new guidance, only disposals representing a strategic shift in a company's operations and financial results should be reported as discontinued operations, with expanded disclosures. In addition, disclosure of the pre-tax income attributable to a disposal of a significant part of an organization that does not qualify as discontinued operations is required. This guidance is effective for the Partnership as of January 1, 2015, with early adoption permitted. The Partnership believes this amendment will have no impact on its financial statements.
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,
2014
 
December 31,
2013
Real estate taxes
$
174

 
$
882

Insurance
331

 
278

Capital improvements
546

 
552

Total
$
1,051

 
$
1,712




RESOURCE REAL ESTATE INVESTORS 7, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
MARCH 31, 2014
(unaudited)

NOTE 4 – DEFERRED FINANCING COSTS
Deferred financing costs include unamortized costs incurred to obtain financing which are being amortized over the term of the related debt.  Accumulated amortization as of March 31, 2014 and December 31, 2013 was $1.0 million and $967,000, respectively.  Estimated amortization of the Properties’ existing deferred financing costs for the next five years ending March 31, and thereafter, is as follows (in thousands):
2015
$
206

2016
136

2017
83

2018
82

2019
73

Thereafter
3

 
$
583

NOTE 5 – MORTGAGE NOTES PAYABLE
The following is a summary of mortgage notes payable (in thousands, except percentages):
 
 
 
 
 
 
 
 
 
 
 
 
Balance at
 
Balance at
 
 
 
 
 
 
 
     Property
 
March 31,
2014
 
December 31,
2013
 
Maturity
Date
 
Annual
Interest Rate
 
Monthly
Debt Service
 
Tamarlane
 
$
8,906

 
$
8,906

 
05/01/2015
 
4.92%
 
$
37

(1) 
Tamarlane
 
948

 
952

 
05/01/2015
 
6.12%
 
$
6

(2) 
Bent Oaks
 
5,882

 
5,903

 
01/01/2019
(4) 
5.99%
(4) 
$
37

(2) 
Cape Cod
 
6,110

 
6,133

 
01/01/2019
(4) 
5.91%
(4) 
$
38

(2) 
Woodhollow
 
5,042

 
5,060

 
01/01/2019
(4) 
6.14%
(4) 
$
32

(2) 
Hills
 
12,743

 
12,816

 
01/01/2016
 
3.39%
(3) 
$
60

(3) 
Village
 
9,580

 
9,580

 
04/01/2019
 
3.76%
(5) 
$
31

(5) 
Total
 
$
49,211

 
$
49,350

 
 
 
 
 
 

 
____________________
(1)
Interest only through the date of maturity, at which time the principal is due.
(2)
Monthly payment includes principal and interest.
(3)
Monthly payment includes principal and interest. Interest is variable and calculated monthly based upon the one-month British Bankers Association London Interbank Offered Rate (LIBOR) plus 323 basis points, capped at 7% for the term of the loan. The LIBOR at March 31, 2013 was 15 basis points. The monthly debt service shown is the total principal and interest due on April 1, 2014.
(4)
The Partnership has an option to extend the maturity date for an additional one year to January 1, 2020.  During the extension period, the interest rate would convert to the Federal Home Loan Mortgage Corporation Bill Index Rate plus 2.5%.
(5)
Interest only payments of approximately $31,000 through April 1, 2014; thereafter, monthly payment including principal and interest will total $44,422.
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):
2015
 
$
709

2016
 
22,723

2017
 
460

2018
 
485

2019
 
16,159

Thereafter
 
8,675

 
 
$
49,211


RESOURCE REAL ESTATE INVESTORS 7, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
MARCH 31, 2014
(unaudited)


The mortgage notes payable are with recourse only to the Properties securing them subject to certain limited standard exceptions, as defined in the mortgage notes, which the GP has guaranteed 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 the 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 GP 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.
At December 31, 2013, substantially all of the receivables from related parties represents escrow funds held by RAI for self-insurance. The Properties are partially self-insured with respect to property coverage. The Properties participate in an insurance pool with other properties managed by RCP. Therefore, unforeseen or catastrophic losses in excess of the pool's insured limits could have a material adverse effect on the Partnership's financial condition and operating results.
RCP is entitled to receive an annual investment management fee, payable monthly, equal to 1% of the gross offering proceeds, net of any amounts otherwise attributable to LP interests owned by RCP.  During the term of the Partnership, RCP must subordinate up to 100% of its annual investment management fee to the receipt by the LPs of their Preferred Return.  As of March 31, 2014 and December 31, 2013, investment management fees due to RCP totaled $1.6 million and $1.5 million, respectively.
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 manage the Partnership’s Properties.  As of March 31, 2014 and December 31, 2013, property management fees due totaled $56,000 and $49,000, respectively.
During the ordinary course of business, RCP and RREMI advance funds for ordinary operating expenses on behalf of the Properties, which are repaid within a few days.  As of March 31, 2014 and December 31, 2013, advances due totaled $100,000 and $62,000, respectively.
The Partnership is obligated to pay fees and reimbursements of expenses to related parties.  These expenses are summarized as follows (in thousands):
 
 
Three Months Ended 
 March 31,
 
 
2014
 
2013
RCP:
 
 
 
 
    Investment management fees
 
$
81

 
$
79

 
 
 
 
 
RREML:
 
 

 
 

    Property management fees - 5% of gross cash receipts
 
149

 
143

 
 
$
230

 
$
222

NOTE 7 – FAIR VALUE OF FINANCIAL INSTRUMENTS
In analyzing the fair value of its financial instruments disclosed or accounted for on a fair value basis, the Partnership follows the fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  The Partnership determines fair value based on quoted prices when available or, if quoted prices are not available, through the use of alternative approaches, such as discounting the expected cash flows using market interest rates commensurate with the credit quality and duration of the financial instruments.  The fair value of cash, tenant receivables and accounts payable approximate their carrying values due to their short term nature.  The hierarchy followed defines three levels of inputs that may be used to measure fair value:

RESOURCE REAL ESTATE INVESTORS 7, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
MARCH 31, 2014
(unaudited)

NOTE 7 – FAIR VALUE OF FINANCIAL INSTRUMENTS - (continued)
Level 1 - Quoted prices in active markets for identical assets that the reporting entity has the ability to access at the measurement date. 
Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or can be corroborated with observable market data for substantially the entire contractual term of the asset.
Level 3 - Unobservable inputs that reflect the entity’s own assumptions about the assumptions that market participants would use in the pricing of the asset and are consequently not based on market activity, but rather through particular valuation techniques.
The following methods and assumptions were used to estimate the fair value of the Partnership’s financial instruments:
Ÿ
Mortgage notes payable.  Rates currently available to the Partnership for debt with similar terms and remaining maturities are used to estimate the fair value of existing debt.
The carrying amounts and estimated fair values of the Partnership’s financial instruments were as follows (in thousands):
 
March 31, 2014
 
December 31, 2013
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
Mortgage notes payable:
 
 
 
 
 
 
 
Tamarlane
$
9,854

 
$
9,997

 
$
9,858

 
$
10,061

Bent Oaks
5,882

 
6,251

 
5,903

 
6,305

Cape Cod
6,110

 
6,473

 
6,133

 
6,529

Woodhollow
5,042

 
5,356

 
5,060

 
5,404

Hills
12,743

 
12,563

 
12,816

 
12,679

Village
9,580

 
9,250

 
9,580

 
9,260

Total mortgage notes payable
$
49,211

 
$
49,890

 
$
49,350

 
$
50,238

NOTE 8 - INSURANCE CLAIM
On February 25, 2013, Bent Oaks suffered roof damage as the result of a windstorm.  The damage was partially covered by insurance.  The Partnership reduced the net carrying value of buildings and improvements for Bent Oaks by $61,000. The Partnership received insurance proceeds of $35,000.  Additional non-capitalized expenses incurred in conjunction with this claim were $2,000.   Accordingly, The Partnership recorded a loss of $27,000 for the three months ended March 31, 2013.
NOTE 9 – SUBSEQUENT EVENTS
The Partnership has evaluated subsequent events and determined that no events have occurred which would require an adjustment to the consolidated financial statements.


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 June 16, 2008.  Through wholly owned subsidiaries, we own in fee, operate and invest in multifamily residential rental properties located in Georgia, Maine, South Carolina 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, 2014, 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 would 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, 2014, we own six multifamily residential rental Properties through our 100% owned subsidiaries, as follows:
Subsidiary / Property
 
Purchase
Date
 
Leverage
Ratio (1)
 
Number
of Units
 
Property
Location
RRE Tamarlane Holdings, LLC, or Tamarlane
 
07/31/2008
 
68%
 
115
 
Portland, ME
RRE Bent Oaks Holdings, LLC, or Bent Oaks
 
12/10/2008
 
57%
 
146
 
Austin, TX
RRE Cape Cod Holdings, LLC, or Cape Cod
 
12/10/2008
 
57%
 
212
 
San Antonio, TX
RRE Woodhollow Holdings, LLC, or Woodhollow
 
12/12/2008
 
60%
 
108
 
Austin, TX
RRE Woodland Hills Holdings, LLC, or Hills
 
12/19/2008
 
65%
 
228
 
Decatur, GA
RRE Woodland Village Holdings, LLC, or Village
 
03/07/2012
 
77%
 
308
 
Columbia, SC
 
 
 
 
 
 
1,117
 
 
_________
(1)
Original 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)
 
Ratio of Operating
Expense to Revenue (3)
 
 
March 31,
 
March 31,
 
March 31,
Apartment Complex
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
Tamarlane
 
93.1%
 
98.0%
 
$
1.25

 
$
1.26

 
44
%
 
37%
Bent Oaks
 
95.8%
 
98.6%
 
$
1.18

 
$
1.13

 
54
%
 
51%
Cape Cod
 
99.6%
 
96.9%
 
$
0.96

 
$
0.95

 
62
%
 
49%
Woodhollow
 
96.6%
 
99.1%
 
$
1.07

 
$
1.00

 
52
%
 
51%
Hills
 
95.0%
 
94.2%
 
$
0.73

 
$
0.70

 
56
%
 
44%
Village
 
95.6%
 
94.8%
 
$
0.54

 
$
0.53

 
66
%
 
57%
_________
(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 and transaction expenses, 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.  We do not expect that we will sell or refinance our Properties during 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 our ability to make distributions to our limited partners.
Our operating results and cash flows from our Properties are affected by four principal factors:
Ÿ
occupancy and rental rates,
Ÿ
property operating expenses,
Ÿ
interest rates on the related financing, and
Ÿ
capital expenditures.
The amount of rental revenues from our Properties depends upon their occupancy rates and concessions granted.  We seek to maximize our rental revenues through aggressive property-level programs, including, in particular, our Lease Rent Optimizer, or LRO, program which includes rent concessions.  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.  Our Properties experienced an overall decrease in the average occupancy rate during the three months ended March 31, 2014 of approximately (0.93)%, with an average occupancy of 96.0% as compared to an average occupancy rate of 96.93% during the same period of 2013. Our Properties also experienced an overall increase in the average effective rent per square foot of $0.04 during the three months ended March 31, 2014 compared to the same period in 2013 for the same properties. The net impact of the lower average occupancy rate offset by higher average effective rent per square foot during the quarter ending March 31, 2014 was to increase rental revenue for the quarter. One of the Properties, Tamarlane, was affected by the severe winter and, therefore, we were not able to increase our effective rent per square foot.
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 our expected term.  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.


















Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013
The following table sets forth the results of our operations for the periods indicated (in thousands, except per unit data):
 
 
March 31,
 
Increase (Decrease)
 
 
2014
 
2013
 
Amount
 
Percent
Revenues:
 
 
 
 
 
 
 
 
     Rental income
 
$
3,007

 
$
2,875

 
$
132

 
5
 %
 
 
 
 
 
 
 
 
 
Expenses:
 
 

 
 

 
 

 
 

     Rental operating
 
1,649

 
1,362

 
287

 
21
 %
     Management fees – related parties
 
230

 
222

 
8

 
4
 %
     General and administrative
 
192

 
102

 
90

 
88
 %
     Depreciation and amortization
 
694

 
871

 
(177
)
 
(20
)%
         Total expenses
 
2,765

 
2,557

 
208

 
8
 %
             Income before other expenses
 
242

 
318

 
(76
)
 
24
 %
 
 
 
 
 
 
 
 
 
Other expenses:
 
 

 
 

 
 

 
 

     Interest expense, net
 
(628
)
 
(635
)
 
(7
)
 
(1
)%
     Casualty loss
 
—

 
(27
)
 
(27
)
 
(100
)%
     Loss on disposal of fixed assets
 
(2
)
 
(23
)
 
(21
)
 
91
 %
        Net loss
 
$
(388
)
 
$
(367
)
 
$
(21
)
 
(6
)%
 
 
 
 
 
 
 
 
 
Weighted average number of limited partner units outstanding
 
3,270

 
3,270

 
 

 
 

 
 
 
 
 
 
 
 
 
Net loss per weighted average limited partner unit
 
$
(0.12
)
 
$
(0.11
)
 
 

 
 

Revenues
We attribute the $132,000 increase in revenues principally to an 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 market demand.
Expenses
We attribute the $208,000 increase in expenses principally to:
•a $287,000 increase in rental operating expenses, primarily due to a $146,000 increase in insurance expense, as a result of losses in the portfolio covered by RCP's self-insurance pool, a $46,000 increase in real estate taxes for the Properties and an increase of $28,000 in repair expenses as a result of our capital improvements program.
•a $90,000 increase in general and administrative expenses due primarily to an increase in professional fees.
•Partially offsetting the increase is a $177,000 decrease in depreciation and amortization due to the expiration of the amortization of the acquired in place leases at the Village.
Other expenses
We attribute the decrease in other expenses primarily to:
Ÿ
a $27,000 decrease in casualty loss expense due to the non-recurring nature of the expenses in 2013 related to wind damage at Bent Oaks; and
Ÿ
a $21,000 decrease in losses related to the disposal of fixed assets due to the write-off of carpeting and flooring whose actual life was less than the originally estimated economic life. We did not have a similar write-off in the first quarter of 2014.



Liquidity and Capital Resources
The following table sets forth our sources and uses of cash (in thousands):
 
 
Three Months Ended
 
 
March 31,
 
 
2014
 
2013
Provided by operating activities (1) 
 
$
647

 
$
694

Used in investing activities
 
(64
)
 
(205
)
Used in financing activities
 
(548
)
 
(542
)
Net increase (decrease) in cash
 
$
35

 
$
(53
)
(1)
Includes changes in operating assets and liabilities.
Our liquidity needs consist principally of funds 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, to control property operating expenses and, with respect to capital expenditures, the use of cash reserves established when the Properties were purchased.  The ability to generate cash from operations will depend on the occupancy rates, rates charged to tenants compared with competing properties in the area and the ability of tenants to pay rent.  Occupancy rates can fluctuate based on changes in local market conditions where the Properties are located such as: excessive building resulting in an oversupply of similar properties, deterioration of surrounding areas, a decrease in market rates or local economic conditions including unemployment rates.  The rental rates charged to tenants compared to competing properties can be impacted by a lack of perceived safety, convenience and attractiveness of a property.
During the three months ended March 31, 2014, we incurred a net loss; 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 loss for the three months ended March 31, 2014 and 2013 of $388,000 and $367,000, respectively, included $694,000 and $871,000, respectively, of depreciation and amortization expense and $288,000 and $91,000 of net changes in operating assets and liabilities.  Excluding these non-cash expenses, our operations generated $935,000 and $785,000, respectively, of positive adjusted cash flow from operations for the three months ended March 31, 2014 and 2013, respectively.  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 operating 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 year ending December 31, 2014.
The following table reconciles net cash provided by operating activities to adjusted cash flow from operations, a non-GAAP measure, as described in the paragraph above (in thousands):
 
 
Three Months Ended
 
 
March 31,
 
 
2014
 
2013
Net cash provided by operating activities
 
$
647

 
$
694

Net changes in operating assets and liabilities
 
288

 
91

Adjusted cash flow from operations (non-GAAP)
 
$
935

 
$
785

Under our capital improvements program, we expect to spend approximately $4.5 million in the next four years for property improvements intended to increase the Properties’ appeal to tenants.  As we implement planned improvements to our Properties, we seek to maintain our occupancy rates and, potentially, to increase our rental rates and our cash flow from operating activities.
We are planning improvements to the Properties for the next four years based on the assumption that the General Partner will exercise its right to extend the term of the partnership for the two one-year extensions. At this time, we expect that the General Partner will, in fact, do so in order to maximize the return to our investors.


The following table sets forth the capital expenditures incurred during the year ended March 31, 2014 and estimated future capital expenditures, which are discretionary in nature (in thousands):
Subsidiaries
 
Capital
Expenditures
 
Future
Discretionary
Capital
Expenditures
Tamarlane
 
$
7

 
$
404

Bent Oaks
 
7

 
708

Cape Cod
 
3

 
992

Woodhollow
 
4

 
655

Hills
 
12

 
660

Village
 
31

 
1,072

Total
 
$
64

 
$
4,491

Our capital expenditures were $64,000 during the three months ended March 31, 2014.  We have planned a series of future major capital projects for our Properties, including further landscaping, parking lot paving, signage upgrades, upgrades to exterior structures, replacing the HVAC condensing units and replacing water heaters.  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 a previously contemplated 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. Any excess cash flow not used for capital expenditures would be distributed to the investors.
In connection with the acquisitions of our Properties, we have $49.2 million of total mortgage financing outstanding.  For information regarding mortgage financing with respect to each Property, see Note 5 of the notes to our consolidated financial statements.
Our payables to related parties consist of investment management fees due to our General Partner, payable monthly, equal to 1% of the gross offering proceeds, net of any limited partnership interest owned by the General Partner.  The General Partner must subordinate up to 100% of its annual investment management fee to the receipt by the limited partners of their Preferred Return.  The limited partners have not received their Preferred Return over the five years the Partnership has been operating and we do not anticipate they will receive the return in 2014.
Our debt service requirements for the next 12 months are $2.8 million in the aggregate.
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.  See Item 1, "Redemption of Units." Cumulatively through March 31, 2014, a total of 5,000 units have been redeemed at an aggregate price of $46,710, although no units were redeemed in the three 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 results of 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, or GAAP. 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 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.
We have identified the following policies as critical to our business operations and the understanding of our results of operations.


Property Acquisitions. We allocated the purchase price of acquired properties to the acquired tangible assets and liabilities, consisting of land, building, tenant improvements, long-term debt and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, the value of in-place leases, the value of unamortized lease origination costs and the value of tenant relationships, based in each case on their relative fair values. The value of in-place leases is amortized over the average remaining term of the respective lease on a straight line basis.
Impairment. We review the carrying value of each Property to determine if circumstances that indicate impairment in the carrying value of the investment exist or that depreciation periods should be modified. If we determine that an asset’s estimated future cash flows will not be sufficient to recover its carrying amount, we will record an impairment charge to reduce the carrying amount for that asset to its estimated fair value. We have not recognized any impairments of our Properties for the three March 31, 2014 and 2013.
Revenue Recognition. We derive our revenue primarily from rental of residential housing units with lease agreement terms of generally one year or less. We recognize rent as income on a straight-line basis over the term of the related lease. Additionally, any incentives included in the lease are amortized on a straight-line basis over the term of the related lease.
Included within rental income are other income amounts such as utility reimbursements, late fees, parking fees, pet fees and lease application fees which are recognized when earned.
Off-Balance Sheet Arrangements
As of March 31, 2014 and December 31, 2013, 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.
Recent Accounting Standards
Accounting Standards Issued But Not Yet Effective
In April 2014, the FASB issued authoritative guidance to change the criteria for reporting discontinued operations. Under the new guidance, only disposals representing a strategic shift in a company's operations and financial results should be reported as discontinued operations, with expanded disclosures. In addition, disclosure of the pre-tax income attributable to a disposal of a significant part of an organization that does not qualify as discontinued operations is required. This guidance is effective for us as of January 1, 2015, with early adoption permitted. We believe this amendment will have no impact on our financial statements.

ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Omitted pursuant to Regulation S-K, Item 305(e).
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 SEC’s rules and forms, and that such information is accumulated and communicated to our General Partner, including its chief executive officer and its chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.  In designing and evaluating the disclosure controls and procedures, our management 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 the chief executive officer and chief financial officer of our General Partner, 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 chief executive officer and chief 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 our first quarter March 31, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



PART II

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.
101.1
 
The following information from the Partnership's Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Operations; (iii) Consolidated Statement of Changes in Partners' Capital; and (iv) Consolidated Statements of Cash Flows.
(1)
Filed previously as an exhibit to the Partnership’s registration statement on Form 10 for the year ended December 31, 2008 and by this reference incorporated herein.






SIGNATURES

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 thereunto duly authorized.

 
RESOURCE REAL ESTATE INVESTORS 7, L.P.
 
By:  Resource Capital Partners, Inc., its general partner
 
 
May 13, 2014
By:         /s/ Kevin M. Finkel
 
Kevin M. Finkel
 
President
 
(Principal Executive Officer)
May 13, 2014
By:        /s/ Steven R. Saltzman
 
Steven R. Saltzman
 
Vice President – Finance
 
(Principal Financial and Accounting Officer)


Resource Real Estate Investors 7, L.P. Reports