NEN

Business Context and Reporting Period

Company: New England Realty Associates Limited Partnership (NERA)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2001
Business Overview: NERA is a Massachusetts limited partnership engaged in acquiring, developing, holding, operating, and selling real estate. As of March 1, 2002, the Partnership owned 2,123 residential apartment units in 20 complexes, 20 condominium units, and various commercial properties primarily in Massachusetts, Connecticut, and New Hampshire. The Partnership also holds a 50% interest in a 40-unit apartment building in Cambridge, MA, acquired in late 2001.

Key Financial Metrics

Margins: Operating margin improved to approximately 21.4% in 2001 compared to 17.0% in 2000. Net income margin was 23.7% in 2001 versus 22.4% in 2000.

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased by 8.5% ($2.19 million) driven by a 9% increase in rental income. Residential rental income now represents 91% of total rental income, up from 87% in 2000.
• Net Income Increase: Net income rose 14.6% ($846,000) to $6.65 million. This increase was primarily due to higher operating income and interest income, offset by increased operating expenses.
• Expense Changes: Total expenses increased 2.7% ($588,000). Notable increases included repairs and maintenance (up 14% due to staff salaries and refurbishing) and administrative expenses (up 11%). Depreciation and amortization decreased 4% due to the sale of commercial properties in 2000.
• Portfolio Activity: Unlike 2000, which saw significant sales of commercial properties (Lewiston Mall and Timpany Plaza), 2001 saw no property sales. The Partnership acquired a 50% interest in a 40-unit Cambridge property in November 2001.
• Dividends: Total distributions increased to $3.06 million in 2001 from $2.54 million in 2000. In February 2002, the Partnership changed its dividend policy from semi-annual to quarterly.

Guidance, Outlook, and Risks

Outlook and Management Commentary:

• Market Conditions: Management noted a softening of the residential real estate market in the Greater Boston area during the fourth quarter of 2001, anticipating similar conditions in 2002. This may lead to increased vacancy rates or reduced rents, though management does not foresee a significant impact on cash flow.
• Liquidity: The Partnership maintains strong liquidity with $16.7 million in cash. Management believes current reserves and anticipated revenue are sufficient to fund operations and planned improvements.
• Capital Improvements: Planned capital improvements for 2002 total approximately $3.59 million, with $1.82 million designated for 62 Boylston Street. Additionally, the Partnership plans to construct 20 additional units at Westgate Apartments at an estimated cost of $3.5 million.

Risks and Contingencies:

• Market Risk: Dependence on local economic conditions in New England; potential inability to refinance debt on favorable terms.
• Operational Risk: Increases in heating and utility costs may not be fully recoverable through rent increases.
• Legal: A discrimination claim settled in March 2002; no other material litigation is pending.

Unusual Items:

• 2000 Extraordinary Item: The 2000 results included an extraordinary loss of $1.59 million related to the extinguishment of debt (prepayment penalties and deferred financing costs) from refinancing 11 properties. No such item occurred in 2001.

Investor Verification Checklist

• Acquisition Status: Verify the closing of the March 2002 agreement to acquire a 69-unit complex in Norwood, MA, for $7.2 million, including the assumption of a $3.8 million mortgage.
• Dividend Policy: Confirm the implementation of the new quarterly dividend policy declared in February 2002 ($6.40 per unit).
• Debt Maturities: Review the debt schedule, noting significant maturities in 2005 ($13.1 million) and the reliance on refinancing or cash reserves for balloon payments.
• Related Party Transactions: Review fees paid to The Hamilton Company (management) and NewReal, Inc. (General Partner), which totaled approximately $1.8 million in management and administrative fees in 2001.
• Market Softening: Monitor vacancy rates and rental rate trends in the Greater Boston area for 2002 to assess the impact of the noted market softening.