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, 2009
Business Overview: NERA owns and operates residential apartment buildings, condominium units, and commercial properties primarily in Massachusetts and New Hampshire. The Partnership also holds 50% ownership interests in eight unconsolidated joint ventures.

Key Financial Metrics

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

Material Changes vs. Prior Period

• Net Income Decline: Net income decreased by 78.4% ($4.7 million) compared to the prior year. This is primarily attributable to the absence of a $9.99 million gain on the sale of real estate (discontinued operations) recorded in the first half of 2008.
• Operating Performance: Income from continuing operations improved significantly, rising from a loss of $3.95 million in 2008 to a profit of $1.31 million in 2009. This was driven by a 4.3% increase in rental income and a 2.6% decrease in operating expenses.
• Revenue Growth: Rental income increased by $687,000 (4.3%), largely due to the October 2008 acquisition of a commercial property in Brookline ("The Barn").
• Expense Reduction: Total operating expenses decreased by $291,000. Key reductions included depreciation ($307k), repairs and maintenance ($99k), and renting expenses ($43k), partially offset by a $121k increase in taxes and insurance.
• Joint Venture Losses: The Partnership's share of losses from unconsolidated joint ventures increased to $555,000 in 2009 from $465,000 in 2008.

Guidance, Outlook, and Risks

Management Commentary:

• Market Conditions: Management anticipates the Greater Boston real estate market will remain soft through 2009 and into 2010, citing high unemployment and corporate downsizing. Recovery is expected to be slow.
• Revenue Outlook: Future revenue growth for the remainder of 2009 and the first two quarters of 2010 is expected to be modest (approximately 1% overall increase). Increased vacancy rates and the need for more free rent concessions are noted risks.
• Liquidity: Management believes current cash reserves and anticipated rental revenue are sufficient to fund operations, planned improvements, and continue quarterly distributions of $7.00 per unit ($0.70 per receipt).
• Capital Allocation: The Partnership continues its stock repurchase program, viewing it as accretive to shareholders given current market prices. Management remains active in bidding on commercial real estate acquisitions.

Risks and Contingencies:

• Impairment Risk: Continued market deterioration or loss of a significant commercial tenant could trigger an impairment loss on rental properties.
• Debt Maturities: Significant mortgage maturities are scheduled for 2013 ($19.8M) and 2014 ($31.9M). Refinancing may not be available on favorable terms.
• Related Party Transactions: The Partnership pays management fees (4% of revenue) and reimburses costs to The Hamilton Company, which is owned by the majority shareholder of the General Partner.

Investor Verification Checklist

• Discontinued Operations Impact: Verify the extent to which the 2008 net income was driven by one-time property sales ($9.99M gain) versus recurring operations.
• Negative Equity Position: Review the negative Partners' Capital balance ($19.6M) and the sustainability of the stock repurchase program relative to cash flow.
• Debt Refinancing: Assess the ability to refinance the $51.7M in debt maturing in 2013 and 2014 given the current credit market environment.
• Joint Venture Performance: Examine the specific performance of the eight 50%-owned joint ventures, which contributed a $555k loss in the first half of 2009.
• Related Party Fees: Confirm the competitiveness of fees paid to The Hamilton Company for management, legal, and maintenance services.