Business Context and Reporting Period
Company: New England Realty Associates Limited Partnership (NERA)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2010
Business Overview: NERA is a Massachusetts limited partnership engaged in acquiring, developing, holding, operating, and selling real estate. Its portfolio consists primarily of residential apartment complexes, condominium units, and commercial properties located in Massachusetts and New Hampshire. The Partnership also holds 40% to 50% interests in nine unconsolidated joint ventures (Investment Properties). As of February 1, 2011, the Partnership owned 2,269 residential units and various commercial spaces.
Key Financial Metrics
| Metric | 2010 | 2009 |
|---|---|---|
| Total Revenues | $33,166,110 | $33,234,485 |
| Net Income (Loss) | $(1,359,232) | $1,612,538 |
| Net Income (Loss) per Unit | $(10.32) | $12.13 |
| Operating Cash Flow | $8,313,602 | $9,572,340 |
| Total Debt Outstanding | $142,349,260 | $144,809,354 |
| Cash and Cash Equivalents | $3,245,361 | $2,879,663 |
| Distributions per Unit | $28.00 | $28.00 |
Occupancy Rates (as of Feb 1, 2011): Residential vacancy rate was 3.5% (79 vacancies); Commercial vacancy rate was 0%.
Material Changes vs. Prior Period
- Net Loss: The Partnership reported a net loss of approximately $1.36 million in 2010, a reversal from a net income of $1.61 million in 2009. This decline was primarily driven by a significant increase in the loss from unconsolidated joint ventures (specifically the Dexter Park investment) and higher interest expenses.
- Joint Venture Loss: The loss from investments in unconsolidated joint ventures increased to $3.87 million in 2010 from $1.69 million in 2009. This was largely due to the amortization of intangible assets associated with the October 2009 acquisition of Dexter Park.
- Revenues: Total revenues were essentially flat, decreasing slightly by 0.2% ($68,375). Rental income decreased by approximately $100,000 due to the amortization of free rent concessions granted in 2009, though underlying rental revenue trends showed increases at several properties.
- Expenses: Total operating expenses increased by 1.9% ($413,408). Notable increases included taxes and insurance (up 13.5%) and repairs and maintenance (up 4.1%), partially offset by a decrease in depreciation and amortization (down 3.7%).
- Debt: Total debt decreased slightly by approximately $2.46 million. The Partnership refinanced several properties in 2010, including Brookside Apartments and Linhart LLP, to extend maturities and manage interest rates.
Guidance, Outlook, and Risks
Management Outlook: Management believes the general real estate market in the Greater Boston area is reaching a supportable level. They anticipate low single-digit vacancy rates and higher rents upon turnover over the next 18 to 24 months. Management expects cash from operations and interest-bearing accounts to be sufficient to fund operations, debt payments, and distributions in the foreseeable future.
Capital Improvements: The Partnership plans to invest approximately $1.76 million in capital improvements in 2011.
Recent Transactions: On March 1, 2011, the Partnership entered into an agreement to sell the Avon Street Apartments for $8.75 million, expecting net proceeds of approximately $5.7 million and a gain of $7.8 million.
Risks and Contingencies:
- Joint Venture Debt: The Partnership has a $4.67 million note payable to HBC Holdings, LLC (an affiliate of the General Partner) related to the Dexter Park investment. This note is payable on demand with six months' notice and is collateralized by the Partnership's interest in 62 Boylston Street.
- Market Risks: The Partnership is subject to risks inherent in real estate ownership, including changes in economic conditions, interest rates, competition, and insurance costs. Properties are concentrated in Eastern Massachusetts and Southern New Hampshire.
- Related Party Transactions: The Partnership pays management fees to The Hamilton Company (owned by the General Partner's majority shareholder) and has significant joint venture investments with affiliates.
Key Facts for Investor Verification
- Joint Venture Amortization: Verify the impact of the $4.07 million amortization of intangible assets from the Dexter Park acquisition on 2010 earnings and confirm the schedule for future amortization expenses.
- Avon Street Sale: Monitor the closing of the Avon Street Apartments sale (expected by May 16, 2011) and the use of the ~$5.7 million net proceeds (debt reduction, acquisitions, or buybacks).
- Related Party Note: Assess the liquidity risk associated with the $4.67 million demand note payable to HBC Holdings, LLC, which is secured by a major property (62 Boylston Street).
- Distribution Coverage: Confirm that operating cash flow remains sufficient to cover the $28.00 per unit annual distribution, especially given the net loss reported for 2010.
- Debt Maturities: Review the debt maturity schedule, noting significant maturities in 2013 ($43.7 million) and the refinancing environment at that time.