ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion relates to our financial statements and should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report. Statements contained in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" that are not historical facts may be forward-looking statements. Such statements are subject to certain risks and uncertainties, which could cause actual results to materially differ from those projected. See "Cautionary Note Regarding Forward-Looking Statements."
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Leverage Ratio Number Property Subsidiary / Property Purchase Date (1) of Units Location RRE Memorial Towers Holdings, LLC, or Memorial Towers 12/18/2007 63% 112 Houston, Texas RRE Villas Holdings, LLC, or Villas 12/27/2007 67% 228 San Antonio, Texas RRE Coach Lantern Holdings, LLC, or Coach Lantern 1/29/2008 61% 90 Scarborough, Maine RRE Foxcroft Holdings, LLC, or Foxcroft 1/29/2008 62% 104 Scarborough, Maine RRE Park Hill Holdings, LLC, or Park Hill 2/29/2008 56% 288 San Antonio, Texas Total 822 _______________
The following table sets forth operating statistics about our multifamily residential rental properties:
Average Average Effective Rent Ratio of Operating Occupancy Rate (1) per Square Foot (2) Expense to Revenue (3) Year Ended Year Ended Year Ended December 31, December 31, December 31, Property 2013 2012 2013 2012 2013 2012 Memorial Towers 96.7 % 94.9 % $ 1.30 $ 1.20 62 % 63 % Villas 93.3 % 95.0 % $ 0.94 $ 0.90 54 % 52 % Coach Lantern 95.0 % 95.9 % $ 1.08 $ 1.04 31 % 37 % Foxcroft 95.6 % 96.5 % $ 1.18 $ 1.13 35 % 38 % Park Hill 94.5 % 95.7 % $ 0.95 $ 0.90 58 % 59 % _______________
(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 a period.
(3) Includes rental operating expenses and general and administrative expenses as a percentage of rental income.
We also own three subordinated notes through our wholly owned subsidiary, RRE Funding II, LLC, or Funding, which was formed to hold title to our Real Estate Debt Investments as of December 31, 2013, as follows (in thousands, except units and percentages):
Stated Number Face Value of Carrying Value of Interest of Real Estate Debt Investment Note Note Rate Unites Location San Bernardino, Acacia Park, or Acacia $ 2,000 $ - 10.27 % 304 California Montgomery, Hillwood $ 400 $ - 10.97 % 118 Alabama Southern Cover $ 500 $ - 12.75 % 100 Las Vegas, Nevada
During the year ended December 31, 2012, the notes were deemed uncollectible and charged off.
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Our operating results and cash flows from our Properties are affected by four principal factors:
? property operating expenses,
? interest rates on the related financing, and
? capital expenditures.
The amount of rental revenues from our Properties depends upon their occupancy rates, rental rates, and concessions granted. We seek to maximize our occupancy rates through aggressive property-level programs, in particular, our Lease Rent Optimizer, or LRO, program which includes rent concessions and a substantial capital improvements program. 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 year ended December 31, 2013 of approximately (0.6)% with an average occupancy rate of 95.0% as compared to an average occupancy rate of 95.6% during the same period in 2012. Our Properties experienced an overall increase in the average effective rent per square foot of $0.06 during the year ended December 31, 2013 compared to the same period in 2012 for the same properties.
December 31, Increase (Decrease) 2013 2012 Amount Percent Revenues: Rental income $ 9,600 $ 8,942 $ 658 7 % Expenses: Rental operating 4,495 4,252 243 6 % Management fees - related parties 877 845 32 4 % General and administrative 466 508 (42 ) (8 )% Depreciation and amortization 2,817 2,816 1 - % Total expenses 8,655 8,421 234 3 % Income before other expenses 945 521 424 81 % Other income (expense): Interest expense, net (2,624 ) (2,636 ) 12 - % Casualty loss (9 ) (32 ) 23 (72 )% Loss on disposal of fixed assets, net (81 ) (1 ) (80 ) (100 )% Net loss $ (1,769 ) $ (2,148 ) $ 379 (18 )% Weighted average number of limited partner units outstanding 3,703 3,703 Net loss per weighted average limited partner unit $ (0.48 ) $ (0.58 )
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Revenues We attribute the $658,000 increase in revenues principally to 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 demand. Expenses We attribute the $234,000 increase in expenses across all Properties principally to: ? a $243,000 increase in rental operating expenses principally reflecting the following: - a $28,000 increase in turnover costs due to ongoing upkeep of units for new tenants; - a $31,000 increase in repairs and maintenance relating primarily to a HVAC project at one of the properties;
- a $228,000 increase in real estate taxes due to increased tax rates;
- a $94,000 increase in payroll and benefits due to annual salary increases; and
- a $206,000 decrease in insurance expense due to premium refunds;
a $32,000 increase in management fees related to the increase in revenues; and
? a $42,000 decrease in general and administrative expenses due primarily to unusually high professional fees incurred in the prior year.
Other income (expense)
a $23,000 decrease in casualty loss (see Note 8 to our consolidated financial statements) and a $12,000 decrease in net interest expense as a result of principal amortization.
Liquidity and Capital Resources
Years Ended December 31, 2013 2012 Provided by operating activities (1) $ 2,092 $ 2,462 Used in investing activities (587 ) (2,059 ) Used in financing activities (1,432 ) (1,112 ) Net increase (decrease) in cash $ 73 $ (709 ) _______________
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, and to control property operating expenses. 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.
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Capital Future Discretionary Subsidiaries Expenditures Capital Expenditures Memorial Towers $ 136 $ 440 Villas 107 882 Coach Lantern 79 361 Foxcroft 111 338 Park Hill 154 877 Total $ 587 $ 2,898
Funding for future discretionary capital expenditures over the remaining life of the Partnership will come from future operating cash flows. We have planned a series of major capital projects for our Properties, such as repairs and renovations to the HVAC systems, parking improvements, and foundation work. We review future expenditures periodically and adjust them based on both operating results, local market conditions and our expected return on the investment of capital. 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.
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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. No impairment charges were recorded in either 2012 or 2013.
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Off-Balance Sheet Arrangements
Mar 26, 2014