Business Context and Reporting Period
Company: New England Realty Associates Limited Partnership (NERA)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 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
| Metric | Nine Months Ended Sep 30, 2010 | Nine Months Ended Sep 30, 2009 |
|---|---|---|
| Total Revenues | $24,775,474 | $24,946,608 |
| Net Income (Loss) | $(1,378,896) | $1,597,365 |
| Net Income (Loss) per Unit | $(10.46) | $11.99 |
| Cash from Operating Activities | $5,841,425 | $6,926,084 |
| Cash and Cash Equivalents (Sep 30, 2010) | $4,814,195 | $2,879,663 (Dec 31, 2009) |
| Total Debt (Mortgage + Note Payable) | $145,071,703 | $144,809,954 (Dec 31, 2009) |
| Weighted Avg Units Outstanding | 131,767 | 133,175 |
Material Changes vs. Prior Period
- Net Loss vs. Profit: The Partnership reported a net loss of approximately $1.38 million for the nine months ended September 30, 2010, compared to a net income of $1.60 million in the same period in 2009. This represents a decrease in income of approximately $2.98 million.
- Joint Venture Impact: The primary driver of the loss was a significant increase in the loss from unconsolidated joint ventures, which rose from $881,000 in 2009 to $3.17 million in 2010. This increase is largely attributed to the amortization of intangible assets (in-place leases) associated with the Dexter Park acquisition in late 2009.
- Revenue Decline: Total revenues decreased slightly by 0.7% ($171,000), driven by a 0.8% decrease in rental income offset by a 9.7% increase in laundry and sundry income.
- Expense Increases: Operating expenses increased by 1.3%. Notable increases included taxes and insurance (up 13.9% due to higher real estate taxes) and repairs and maintenance (up 4.9%).
- Interest Expense: Interest expense increased by 4.3% to $6.14 million, primarily due to a $7.17 million note borrowed in October 2009 to fund the Dexter Park acquisition.
Guidance, Outlook, and Risks
- Market Outlook: Management believes the Greater Boston real estate market has stabilized. They anticipate declining concessions and tepid revenue increases due to minimal new housing production and an improving labor market. Occupancy rates improved, with a 38% decline in vacancy rates compared to the prior year.
- Liquidity and Capital: Management expects cash reserves and rental revenue to be sufficient to fund operations, planned improvements, and distributions. Quarterly distributions of $7.00 per unit ($0.70 per receipt) were approved for 2010.
- Debt Contingency: A significant liquidity risk involves a $7.17 million loan from HBC Holdings, LLC (an affiliate of the General Partner). In August 2010, the lender demanded a principal paydown of $2.5 million. The Partnership paid $1.3 million in October 2010 and anticipates paying the remaining $1.2 million by December 31, 2010. Failure to meet this obligation could force the sale or refinancing of properties.
- Stock Repurchase: The Partnership continues its repurchase program, buying back 6,896 depositary receipts and associated Class B/General Partner units during the nine-month period.
- Risks: Key risks include dependence on the local real estate market, potential loss of significant commercial tenants, rising real estate taxes, and the ability to refinance debt on favorable terms.
Investor Verification Checklist
- Joint Venture Amortization: Verify the impact of the $1.47 million amortization expense related to Dexter Park's in-place leases, which significantly reduced net income but is a non-cash charge expected to cease in November 2010.
- Related Party Loan: Confirm the status of the $1.2 million remaining payment due to HBC Holdings, LLC by year-end 2010 and the potential impact on liquidity if refinancing is required.
- Occupancy Trends: Validate the reported 38% decline in vacancy rates and the correlation with the modest rental income increases observed in specific properties.
- Debt Maturities: Review the schedule of mortgage maturities, noting significant payments due in 2013 ($43.8 million) and the weighted average interest rate of 5.55%.
- Related Party Transactions: Review the $1.02 million in management fees and other related party expenses paid to The Hamilton Company and affiliates.