Business Context and Reporting Period
Company: New England Realty Associates Limited Partnership (NERA)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 1996
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, Connecticut, New Hampshire, and Maine. As of March 14, 1997, the Partnership owned 1,647 apartment units across 18 complexes and various commercial centers. The Partnership is managed by NewReal, Inc., wholly owned by Ronald and Harold Brown, who also own the management company, The Hamilton Company.
Key Financial Metrics
| Metric | 1996 | 1995 |
|---|---|---|
| Total Revenues | $16,634,883 | $12,459,478 |
| Net Income (Loss) | $912,430 | $(2,874,811) |
| Income (Loss) from Operations | $725,649 | $(3,116,087) |
| Total Assets | $58,788,939 | $59,750,970 |
| Total Debt Outstanding | $52,538,499 | $53,072,037 |
| Cash and Cash Equivalents | $1,830,605 | $2,706,124 |
| Partners' Capital | $3,898,498 | $4,323,402 |
| Distributions per Unit | $6.80 | $6.80 |
Operating Margins: The filing does not explicitly state a net profit margin percentage. However, operating income for 1996 was approximately 4.4% of total revenues ($725,649 / $16,634,883).
Material Changes vs. Prior Period
- Turnaround in Profitability: The Partnership reported a net income of $912,430 in 1996, a significant improvement from a net loss of $2,874,811 in 1995. The 1995 loss was heavily impacted by a non-cash impairment charge of $3,250,000 related to the Lewiston Mall shopping center.
- Revenue Growth: Total revenues increased by approximately $4.17 million (33.5%) to $16.63 million. This was primarily driven by the inclusion of full-year rental income from six properties acquired in 1995, which contributed approximately $3.97 million in rental income.
- Expense Increases: Total expenses rose to $15.91 million from $15.58 million. Excluding the 1995 impairment loss, operating expenses increased due to the integration of new properties, resulting in higher interest expense ($4.73 million vs. $3.43 million), depreciation, and maintenance costs.
- Debt Levels: Total debt remained relatively stable, decreasing slightly by approximately $533,000 to $52.54 million.
Outlook, Risks, and Management Commentary
- Timpany Plaza Vacancy Risk: A major tenant at the Timpany Plaza Shopping Center (Gardner, MA) filed for Chapter 11 bankruptcy in March 1996 and ceased operations in December 1996. As of March 14, 1997, the center was 47% vacant. Management estimates that if the space remains unoccupied, 1997 rental income could be approximately $200,000 lower than 1996. The Partnership is actively negotiating with new tenants.
- Lewiston Mall Lease Uncertainty: A major tenant at the Lewiston Mall (Lewiston, ME), contributing approximately $240,000 in 1996 rent, can terminate its lease with nine months' notice effective January 1, 1997. Management is negotiating a long-term renewal but cannot guarantee success.
- Capital Improvements: The Partnership spent approximately $2.4 million on capital improvements in 1996. It plans to invest approximately $2.2 million in 1997, funded by escrow accounts and cash reserves.
- Share Repurchases: In 1996, the Partnership repurchased 15,915 Depositary Receipts for $110,060 under a plan to repurchase up to $500,000 of securities.
- Tax Consequences: Taxable income for 1996 exceeded statement income by approximately $1 million due to the realization of previously deducted losses on equity investments. A special distribution of $1.00 per unit was declared in March 1997 to assist partners with potential tax liabilities.
Investor Verification Checklist
- Timpany Plaza Re-leasing: Verify the status of negotiations to fill the 47% vacancy at Timpany Plaza and the potential impact on 1997 cash flow.
- Lewiston Mall Tenant Renewal: Confirm whether the major tenant at Lewiston Mall has renewed its lease or if the $240,000 annual rent is at risk.
- Related Party Transactions: Review the fees paid to The Hamilton Company (management) and the terms of the 1995 property acquisitions from entities affiliated with the General Partner's majority shareholder.
- Debt Maturities: Note that while total debt is stable, a significant portion ($7.33 million) matures in the year 2000, requiring refinancing or repayment planning.
- Tax Basis vs. Book Basis: Understand the $2.1 million difference between cumulative tax basis and statement basis, which affects future taxable income distributions.