Business context and reporting period
New England Realty Associates Limited Partnership (NERA) filed this Form 10-K for the fiscal year ended December 31, 2011. It owns and operates residential and commercial real estate, primarily in Eastern Massachusetts and Southern New Hampshire. At year-end, its directly owned portfolio included 2,251 apartment units, 19 rented condominium units and 110,949 square feet of commercial space; it also held 40%–50% interests in nine joint ventures with 799 apartments.
Financial results and key metrics
| Metric | 2011 | 2010 |
|---|---|---|
| Revenue | $34.04 million | $32.26 million |
| Income before other income and discontinued operations | $11.36 million | $10.34 million |
| Income (loss) from continuing operations | $1.49 million | ($1.58) million |
| Net income (loss) | $9.29 million | ($1.36) million |
| Cash from operating activities | $9.09 million | $8.31 million |
| Cash and cash equivalents at year-end | $4.05 million | $3.25 million |
- Rental income rose 5.6% to $33.61 million. Total expenses increased 3.4% to $22.67 million. Income before other income and discontinued operations was 33.4% of revenue, versus 32.1% in 2010.
- 2011 net income included a $7.72 million gain on the sale of Avon Street Apartments. Excluding discontinued operations, income from continuing operations was $1.49 million; the prior year recorded a $1.58 million loss.
- Management reported an 8.8% increase in core net operating income. Residential vacancies were 1.4% in February 2012, down from 3.5% a year earlier; commercial space was fully occupied.
- Cash used in investing activities was $2.98 million, including property acquisitions and improvements, net of sale proceeds. Capital improvements totaled approximately $2.62 million in 2011.
- Year-end liabilities were $146.69 million against assets of $125.38 million, leaving partners’ capital negative at $21.31 million. Direct debt—mortgage notes and a related-party note—totaled approximately $140.83 million. The weighted-average mortgage rate was 5.53%; substantially all debt was fixed-rate.
- Direct mortgage maturities include approximately $41.28 million in 2013 and $14.67 million in 2014. NERA separately reported its proportionate share of unconsolidated joint-venture non-recourse debt at approximately $61.11 million.
- Distributions were $28 per unit, or $0.93 per depositary receipt, in both 2011 and 2010. A $7.50-per-unit quarterly distribution ($0.25 per receipt after the split) was approved for March 2012.
Material changes versus the prior comparable period
- Revenue increased 5.5% overall, primarily due to the Battle Green acquisition, lower vacancies and rent increases. Expenses rose more slowly, although operating costs, repairs and maintenance, and depreciation increased.
- The share of joint-venture losses improved to $1.91 million from $3.87 million, largely because acquisition-related in-place lease amortization at Dexter Park had largely ended in 2010.
- Avon Street was sold for $8.75 million in May 2011; proceeds were used in a Section 1031 exchange to acquire the $10.0 million Battle Green Apartments. NERA reported no unit repurchases in 2011, versus $0.54 million of repurchases in 2010.
- Cash increased by $0.80 million during 2011. Direct debt rose slightly overall, while the related-party note payable declined from $4.67 million to $1.67 million after principal payments.
Outlook, risks and unusual items
- Management expected 2012 revenue to exceed 2011, citing rent growth already in place, stronger local demand and low vacancies. It expected operating expenses to remain broadly stagnant absent a winter as severe as 2011, and planned approximately $1.84 million of capital improvements.
- Management anticipated balancing debt levels and refinancing opportunities in 2012. It noted that increased principal amortization at Dexter Park could reduce joint-venture distributions.
- In February 2012, NERA made an additional $750,000 payment on a $6% related-party loan from HBC Holdings. The remaining balance was subject to repayment demand with six months’ notice.
- The principal risks include local-market and tenant demand, rental competition, property operating costs, insurance gaps, refinancing and debt maturity exposure, illiquid real estate, and risks from non-controlling joint ventures. NERA does not carry directors’ and officers’ insurance.
- Related-party matters are significant: the Hamilton Company, owned by the General Partner’s majority shareholder, manages the properties and receives management and service fees. The General Partner’s owners also have interests in joint ventures. Consider these arrangements and their oversight when assessing governance.
- NYSE Amex notified NERA of a minimum-equity listing deficiency in 2011. The exchange advised in January 2012 that the depositary-receipt split resolved the deficiency under a market-capitalization exception. The 3-for-1 receipt split took effect January 3, 2012; per-receipt historical figures in the filing reflect the split.
- Management reported effective disclosure controls and internal control over financial reporting. The independent auditor gave an unqualified opinion on the financial statements; it was not engaged to provide an audit opinion on internal controls. No material litigation was reported.
Important facts for investors to verify
- Review the audited statements and debt schedules, particularly the 2013–2014 maturities, refinancing plans and the distinction between direct debt and joint-venture debt.
- Assess recurring operating performance separately from the $7.72 million Avon Street sale gain and consider whether the reported improvement in occupancy and rents continued.
- Verify the sustainability of distributions relative to recurring cash flow, capital spending, debt service and joint-venture distributions.
- Review related-party loan terms, management fees, joint-venture ownership and governance safeguards, including the HBC repayment provision.
- Confirm subsequent listing status, the effects of the receipt split on per-receipt comparisons, and the timing and funding of planned 2012 capital improvements.