Business Context and Reporting Period
Company: New England Realty Associates Limited Partnership (NERA)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: NERA owns and operates residential apartment buildings, condominium units, and commercial properties primarily in the Greater Boston area of Massachusetts and New Hampshire. The Partnership also holds 50% interests in eight unconsolidated joint ventures.
Key Financial Metrics
| Metric | Nine Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2008 |
|---|---|---|
| Total Revenues | $24,946,608 | $24,083,393 |
| Net Income | $1,597,365 | $6,228,033 |
| Net Income per Unit | $11.99 | $45.06 |
| Cash from Operating Activities | $6,926,084 | $(577,435) |
| Cash and Cash Equivalents (End of Period) | $8,035,415 | $13,256,237 |
| Total Assets | $121,766,753 | $125,243,457 |
| Total Liabilities | $142,188,324 | $142,960,639 |
| Mortgage Notes Payable | $137,547,734 | $138,160,262 |
| Partners' Capital | $(20,421,571) | $(17,717,182) |
Note: Partners' Capital is negative due to significant share repurchases exceeding accumulated earnings.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased by 3.6% ($863,215) compared to the prior year, driven by a 3.6% increase in rental income. This growth was partially offset by higher vacancies and increased rental concessions in the third quarter.
- Net Income Decline: Net income decreased by 74.4% ($4,630,668). The prior year period included a one-time gain of approximately $10.05 million from the sale of real estate (discontinued operations), which was absent in the current period.
- Operating Expenses: Total operating expenses decreased by 1.8% ($310,332), primarily due to a 6.9% reduction in depreciation and amortization as assets became fully depreciated.
- Joint Venture Losses: The loss from unconsolidated joint ventures increased by 15.1% to $880,902, reflecting higher interest expenses and lower gains on unit sales compared to 2008.
- Interest Expense: Interest expense increased by 2.8% to $5,885,831 due to higher debt levels from property acquisitions and refinancing in 2008.
Outlook, Risks, and Unusual Items
Management Commentary and Outlook
- Market Conditions: Management notes a softened real estate market in the Greater Boston area, resulting in increased vacancies (residential vacancy rate rose to 4.9% from 2.1%) and the need for rental concessions. Recovery is not expected until mid-2010.
- Liquidity: Despite a reduction in cash reserves due to a recent major investment, management believes cash from operations and interest-bearing accounts are sufficient to fund operations, planned improvements, and distributions.
- Distributions: Quarterly distributions of $7.00 per unit ($0.70 per receipt) were maintained for the first three quarters of 2009.
Unusual Items and Subsequent Events
- Major Acquisition (Subsequent Event): On October 28, 2009, NERA invested approximately $17.4 million for a 40% interest in a joint venture acquiring the Dexter Park residential complex (409 units) in Brookline, MA, for a total purchase price of $129.5 million. This transaction reduced cash reserves to approximately $2.0 million as of November 6, 2009.
- Financing: To fund the Dexter Park investment, NERA borrowed $7.8 million from HBC Holdings, LLC (an affiliate of the General Partner) at 6% interest, pledging ownership of 62 Boylston Street as security.
- Refinancing: In October 2009, NERA received a commitment to refinance the Linhart, LLP property with a new $2.0 million loan.
Risks
- Economic Sensitivity: Dependence on the local Greater Boston economy, which faces high unemployment and corporate downsizing.
- Financing Risk: Potential inability to refinance debt on favorable terms or at all in a tight credit market.
- Related Party Transactions: Significant reliance on The Hamilton Company (managed by the General Partner's family) for management, legal, and maintenance services.
Investor Verification Checklist
- Cash Position: Verify the impact of the $17.4 million Dexter Park investment on liquidity, noting cash reserves dropped to ~$2.0 million post-transaction.
- Debt Maturities: Review the schedule of mortgage maturities, noting significant debt due in 2013 ($43.75 million) and the reliance on refinancing.
- Related Party Loans: Confirm the terms and security of the $7.8 million loan from HBC Holdings, LLC and the pledge of 62 Boylston Street.
- Occupancy Trends: Monitor the trend of increasing vacancy rates (4.9%) and the effectiveness of rental concessions in maintaining revenue.
- Joint Venture Performance: Assess the continued losses in unconsolidated joint ventures and the progress of unit sales in those ventures.