NEN

Business Context and Reporting Period

Company: New England Realty Associates Limited Partnership (NERA)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2004
Business Overview: NERA owns and operates residential apartment buildings, condominium units, and commercial properties primarily in Massachusetts and New Hampshire. The partnership is managed by The Hamilton Company, an entity owned by the majority shareholder of the General Partner.

Key Financial Metrics

Distributions: The partnership paid total distributions of $2,283,692 for the six months ended June 30, 2004. In August 2004, a quarterly distribution of $7.00 per unit was approved for September 30, 2004.

Material Changes vs. Prior Period

• Net Income Decline: Net income decreased by 50.9% ($1.47 million) compared to the prior year period. This was driven by a 52.1% drop in income before other income.
• Revenue vs. Expenses: While total revenue increased slightly by 1.5% ($229,086), total expenses surged by 13.6% ($1.71 million).
  • Repairs & Maintenance: Increased 22.3% ($413,714) due to refurbishment efforts to reduce vacancies.
  • Depreciation & Amortization: Increased 23.1% ($547,326) primarily due to 2003 acquisitions and ongoing improvements.
  • Interest Expense: Increased 13.7% ($478,574) due to higher debt levels from refinancing.
• Occupancy Trends: Residential vacancy rates increased from 1.5% (Feb 2004) to 4.1% (Aug 2004). Commercial vacancy rose to 5.5%. Management attributes revenue pressure on same properties to increased vacancies, rental concessions, and a softening market in the Greater Boston area.
• Investing Activities: Cash used in investing activities decreased significantly to $4.34 million (from $9.92 million in 2003) as major acquisitions occurred in the prior year.

Outlook, Risks, and Contingencies

• Market Outlook: Management anticipates the residential real estate market in Greater Boston will remain soft, potentially leading to continued increases in vacancy rates or rent reductions.
• Liquidity: The partnership maintains approximately $22 million in cash reserves. Management believes cash from operations and investments are sufficient to fund current operations, planned improvements, and dividend payments.
• Capital Projects:
  • Construction of 20 additional units at Westgate Apartments (Woburn) is underway, with total estimated costs exceeding $4 million.
  • Planned capital improvements of approximately $400,000 for the remainder of 2004.
• Subsequent Events:
  • In July 2004, the General Partner extended the Partnership's termination date to 2057.
  • In July/August 2004, the Partnership committed to invest approximately $10 million for 50% ownership in two new joint ventures (Watertown and Lexington, MA).
• Risks: Key risks include dependence on local economic conditions, rising utility costs, environmental liabilities (mold, asbestos), and the availability of financing on favorable terms. Insurance coverage for terrorism and mold is noted as costly or difficult to obtain.

Investor Verification Checklist

• Vacancy Rates: Verify the trend of increasing residential vacancy (4.1% in Aug 2004) and its impact on future rental income stability.
• Debt Maturities: Review the debt schedule; while most debt is fixed-rate, significant maturities are due in 2007 ($4.4M) and 2008 ($4.4M), with a large balance ($99.5M) due thereafter.
• Related Party Transactions: Confirm the terms of the 4% management fee paid to The Hamilton Company and the $2.5M in professional/construction services charged by related parties in the first half of 2004.
• Joint Venture Commitments: Assess the financial impact of the new $10 million commitment to two joint ventures announced in July/August 2004.
• Capital Expenditures: Monitor the completion and cost overruns of the Westgate Apartments expansion ($4M total estimated cost).