Business Context and Reporting Period
Company: New England Realty Associates Limited Partnership (NERA)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Business Overview: NERA is a Massachusetts limited partnership engaged in acquiring, developing, holding, operating, and selling real estate. The portfolio consists primarily of residential apartment complexes, condominium units, and commercial properties located in Massachusetts and New Hampshire. As of January 25, 2010, the Partnership owned 2,269 residential units in 20 complexes and 19 condominium units. Additionally, it holds 40% to 50% interests in nine unconsolidated joint ventures (Investment Properties) totaling 799 units.
Key Financial Metrics
| Metric | 2009 | 2008 |
|---|---|---|
| Total Revenues | $33,234,485 | $32,297,145 |
| Net Income | $1,612,538 | $6,581,711 |
| Net Income per Unit | $12.13 | $47.77 |
| Net Income per Depositary Receipt | $1.21 | $4.78 |
| Distributions per Unit | $28.00 | $28.00 |
| Operating Cash Flow | $9,572,340 | $4,412,100 |
| Total Debt Outstanding | $144,809,354 | $138,160,262 |
| Cash and Cash Equivalents | $2,879,663 | $10,752,931 |
| Partners' Capital | ($21,332,824) | ($17,717,182) |
Note: The negative Partners' Capital is primarily due to cumulative equity repurchases exceeding the book value of equity.
Material Changes vs. Prior Period
- Net Income Decline: Net income decreased by approximately $4.97 million (75.5%) from 2008 to 2009. This decline is largely attributable to the absence of a $10.1 million gain on the sale of real estate from discontinued operations recorded in 2008 (Oak Ridge and Coach Apartments sales).
- Operating Performance: Despite the drop in net income, core operating performance improved. Income before other income and discontinued operations increased by 14.3% to $11.17 million. Total operating expenses decreased by 2.0% to $22.06 million, driven by lower depreciation (due to assets becoming fully depreciated) and reduced heating costs.
- Revenue Growth: Rental income from continuing operations increased by 2.9% ($914,000) to $32.81 million, aided by the acquisition of the "Barn" medical office building in late 2008.
- Joint Venture Losses: The loss from unconsolidated joint ventures increased to $1.69 million in 2009 from $1.08 million in 2008, partially due to the new investment in Dexter Park.
- Liquidity: Cash and cash equivalents decreased by $7.87 million, primarily due to a $15.9 million investment in the Dexter Park joint venture and capital improvements of $3.1 million.
Guidance, Outlook, and Risks
- Market Outlook: Management anticipates the Greater Boston real estate market will remain soft through 2010. However, they believe multifamily rents and occupancy have stabilized and will increase modestly over the next 12-18 months.
- Capital Allocation: The Partnership plans to invest approximately $2.2 million in capital improvements in 2010. Management intends to continue quarterly distributions of $7.00 per unit ($0.70 per receipt), subject to review in the third quarter of 2010.
- Debt Maturity: The Partnership has locked in interest rates on approximately $65 million of debt for 15 years at sub-6% rates. The next significant refinancing round of approximately $45 million is not expected until 2012/2013.
- Key Risks:
- Concentration: Properties are concentrated in Eastern Massachusetts and Southern New Hampshire, linking performance to local economic conditions.
- Debt: Substantially all assets are encumbered by non-recourse mortgage debt. Refinancing risk exists if properties do not generate sufficient cash flow.
- Insurance: The Partnership does not carry directors and officers insurance, and coverage for catastrophic events (earthquakes, floods) or mold may be inadequate or unavailable.
- Related Parties: Significant transactions involve the General Partner and its affiliates (The Hamilton Company), including management fees and joint venture investments.
Investor Verification Checklist
- Discontinued Operations Impact: Verify the sustainability of earnings by excluding the one-time $10.1 million gain from 2008 property sales that inflated prior-year net income.
- Joint Venture Exposure: Review Note 14 for details on the $15.9 million investment in Dexter Park (40% interest) and the associated $7.2 million related-party loan from HBC Holdings, LLC.
- Related Party Fees: Confirm the total fees paid to The Hamilton Company (management, administrative, legal, and maintenance), which totaled approximately $2.0 million in 2009.
- Debt Maturities: Assess the schedule of mortgage maturities, noting that while significant refinancing is delayed until 2012/2013, a $7.2 million note payable to HBC Holdings is due on six months' notice.
- Negative Equity: Understand that the negative Partners' Capital balance ($21.3 million) is a result of aggressive share repurchases and does not necessarily indicate insolvency, given the positive operating cash flow.