Business Context and Reporting Period
Company: New England Realty Associates Limited Partnership (NERA)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2008
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. As of February 2, 2009, the Partnership owned 2,269 residential units and various commercial spaces. The Partnership also holds 50% ownership interests in nine joint venture properties ("Investment Properties").
Key Financial Metrics
| Metric | 2008 | 2007 |
|---|---|---|
| Total Revenues | $32,297,145 | $30,942,626 |
| Net Income | $6,581,711 | $1,186,732 |
| Income from Continuing Operations | $(3,406,550) | $1,193,591 |
| Net Income from Discontinued Operations | $9,988,261 | $(6,859) |
| Cash Provided by Operating Activities | $4,412,100 | $8,642,625 |
| Total Debt Outstanding | $138,160,262 | $113,579,904 |
| Cash and Cash Equivalents | $10,752,931 | $6,890,525 |
| Partners' Capital | $(17,717,182) | $2,664,859 |
| Distributions per Unit | $28.00 | $28.00 |
Note: Net Income for 2008 was significantly driven by gains on the sale of discontinued operations. Income from continuing operations was negative due to high interest expenses and prepayment penalties.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased by 4.4% to approximately $32.3 million, driven by a 4.4% increase in rental income from continuing operations.
- Operating Expenses: Total operating expenses rose slightly by 1.1% to $22.5 million. Increases were attributed to higher utility costs, snow removal, and administrative fees, partially offset by a 5.8% decrease in depreciation and amortization.
- Discontinued Operations: The Partnership sold two apartment complexes (Oak Ridge and Coach Apartments) and five condominium units in 2008. These sales generated a gain of approximately $10.1 million, resulting in a net income from discontinued operations of nearly $10 million, compared to a negligible loss in 2007.
- Debt Refinancing: The Partnership refinanced approximately $37.8 million of existing mortgages with new debt totaling $60 million, lowering interest rates from an average of 8.44% to between 5.6% and 5.7%. This activity incurred approximately $4.5 million in mortgage prepayment penalties.
- Equity Repurchases: The Partnership repurchased approximately $23 million of its own Depositary Receipts and partnership units in 2008, contributing to a negative Partners' Capital balance of approximately $17.7 million.
Guidance, Outlook, and Risks
Management Commentary: Management anticipates the national recession and credit tightening will continue into 2010, with a slow recovery thereafter. While the local Boston economy is expected to deteriorate further, management believes current cash reserves and rental revenue are sufficient to fund operations and maintain distributions. Management plans to invest approximately $2.6 million in capital improvements in 2009.
Outlook: The Partnership expects rising bad debt, higher vacancy rates in the latter half of 2009, and increased operating costs (utilities, snow removal) to mitigate earnings growth. The next significant refinancing round of approximately $45 million is not due until 2012/2013.
Risks and Contingencies:
- Market Risk: Concentration of assets in Eastern Massachusetts and Southern New Hampshire exposes the Partnership to local economic downturns.
- Debt Risk: Substantially all assets are encumbered by non-recourse mortgage debt. Refinancing risks include potential inability to secure favorable terms or sufficient loan amounts.
- Joint Venture Risk: The Partnership holds 50% interests in nine joint ventures, exposing it to risks associated with co-venturers and potential insolvency of partners.
- Insurance: Certain catastrophic risks (earthquakes, floods, terrorism) and environmental exposures (mold) may be uninsured or underinsured.
Investor Verification Checklist
- Continuing Operations Viability: Verify the sustainability of operations given the negative income from continuing operations ($3.4 million loss) before discontinued gains.
- Debt Maturity Wall: Review the schedule of mortgage maturities, noting significant balances due in 2013 ($43.7 million) and the refinancing environment expected at that time.
- Joint Venture Performance: Assess the financial health of the nine 50% owned Investment Properties, which contributed a net loss of approximately $1.1 million to the Partnership in 2008.
- Capital Structure: Confirm the impact of the negative Partners' Capital balance ($17.7 million) resulting from aggressive share repurchases and its effect on future distribution capacity.
- Related Party Transactions: Review fees paid to The Hamilton Company (management) and loans from Harold Brown (General Partner) for terms and necessity.