NEN

Business Context and Reporting Period

Company: New England Realty Associates Limited Partnership (NERA)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2010
Business Overview: NERA owns and operates residential apartment buildings, condominium units, and commercial properties primarily in Massachusetts and New Hampshire. The partnership also holds 40% to 50% equity interests in nine unconsolidated joint ventures.

Key Financial Metrics

Note: Partners' Capital is negative due to significant share repurchases exceeding accumulated equity.

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased by approximately 1.1% ($188,296) compared to the prior year period. Rental income specifically dropped 1.4%, attributed to the amortization of free rent concessions granted to tenants.
• Net Loss: The partnership reported a net loss of $597,403, a reversal from the $1.3 million net income in the same period in 2009. This represents a decrease in income of approximately $1.9 million.
• Joint Venture Impact: The loss from unconsolidated joint ventures increased significantly to $2.019 million (from $555,288 in 2009). This was primarily driven by the acquisition of "Dexter Park" in late 2009, which generated a $1.56 million loss share for NERA due to high amortization of intangible assets (in-place leases).
• Expense Increases: Taxes and insurance expenses rose 12.0% ($227,931), and repairs and maintenance increased 4.9% ($106,972). These were partially offset by an 11.3% decrease in operating expenses due to improved heating efficiency.
• Debt Levels: Total debt increased slightly due to a $7.168 million loan from a related party (HBC Holdings, LLC) used to fund the Dexter Park acquisition, offset by refinancing activities.

Guidance, Outlook, and Risks

• Market Outlook: Management anticipates the Greater Boston real estate market will remain soft in the foreseeable future, potentially leading to increased vacancy rates or reduced rents. However, occupancy remains above 95%.
• Liquidity: Management believes current cash reserves ($5.03 million) and anticipated rental revenue are sufficient to fund operations, planned capital improvements (approx. $1.38 million planned for 2010), and continue quarterly distributions of $7.00 per unit.
• Share Repurchases: The partnership continues its equity repurchase program, having purchased 398,320 Depositary Receipts through June 2010. Management views this as accretive to remaining shareholders given current market conditions.
• Risks: Key risks include dependence on local economic conditions, potential impairment losses if significant commercial tenants are lost, rising utility costs, and the availability of financing for future acquisitions. The partnership also faces risks related to environmental liabilities and insurance coverage exclusions (e.g., terrorism, mold).

Investor Verification Checklist

• Joint Venture Amortization: Verify the timeline for the cessation of intangible asset amortization related to the Dexter Park acquisition (expected to end November 2010), which is currently suppressing reported earnings.
• Related Party Transactions: Review the terms of the $7.168 million loan from HBC Holdings, LLC (owned by the General Partner's majority shareholder) and the management fees paid to The Hamilton Company.
• Debt Maturities: Assess the schedule of mortgage maturities, noting significant payments due in 2013 ($19.8M) and 2014 ($31.9M), and the ability to refinance in the current credit environment.
• Capital Position: Understand the implications of the negative Partners' Capital balance ($24.3M) resulting from the aggressive share buyback program.
• Commercial Leases: Monitor the status of major commercial tenants (e.g., Staples, Trader Joe's) which account for a portion of rental income and are subject to straight-line rent recognition.