Business Context and Reporting Period
Company: New England Realty Associates Limited Partnership (NERA)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 1997
Business Overview: NERA owns and operates residential apartment buildings, condominium units, and commercial properties primarily in Massachusetts, Connecticut, New Hampshire, and Maine. The partnership also holds interests in a real estate partnership and a joint venture.
Key Financial Metrics (Six Months Ended June 30, 1997)
| Metric | 1997 (Unaudited) | 1996 (Unaudited) |
|---|---|---|
| Total Revenues | $8,531,937 | $8,423,135 |
| Net Income | $516,923 | $736,314 |
| Net Income per Unit | $2.96 | $4.16 |
| Operating Cash Flow | $2,360,746 | $2,000,656 |
| Total Assets | $58,094,598 | $58,788,939 |
| Mortgages Payable | $52,253,949 | $52,538,499 |
| Cash and Equivalents | $2,099,831 | $1,830,605 |
Margin Analysis: Operating income for the six months was $461,888 (approx. 5.4% of revenue), down from $636,435 in the prior year. Net income margin decreased to approximately 6.1% from 8.7%.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased by $108,802 (1.3%). Rental income rose by $124,380 due to increased rates at residential properties, partially offset by a decline in commercial rental income.
- Profit Decline: Net income decreased by $219,391 (30%). This was driven by a $174,000 decrease in operating income and a $44,844 decrease in other income.
- Expense Increases: Total expenses rose by $283,349. Key drivers included:
- Administrative expenses increased by $124,748 (staffing and professional fees).
- Depreciation and amortization increased by $211,030 (new acquisition and capital improvements).
- Management fees increased by $13,079.
- Joint Venture Loss: The Timpany Plaza joint venture reported a loss of $6,181 for the six months ended June 30, 1997, compared to income of $11,535 in the prior year, due to high vacancy and lower negotiated rates.
- Cash Flow Improvement: Net cash provided by operating activities increased by $360,090, attributed to a decrease in rents receivable and the utilization of escrow funds for prepaid expenses.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Capital Improvements: The partnership completed approximately $394,000 in capital improvements in Q2 1997. It plans to invest an additional $1,200,000 in 1997 ($965,000 for residential, $235,000 for commercial), funded by cash reserves and escrow accounts.
- Acquisitions: In November 1996, NERA acquired a 36-unit residential complex in Lowell, MA, for approximately $790,000 using cash reserves.
- Distributions: A regular semi-annual distribution of $3.90 per unit and a special distribution of $1.00 per unit were declared in March 1997.
- Share Repurchase: The partnership continues a plan to repurchase up to $500,000 of Depositary Receipts. In 1997, it repurchased 9,648 receipts and other units for a total cost of $105,230.
Risks and Contingencies
- Timpany Plaza Vacancy: The Timpany Plaza Shopping Center in Gardner, MA, was 47% vacant as of July 15, 1997. Management estimates 1997 rental income could be $200,000 lower than 1996 if space remains unoccupied. An impairment review under FAS No. 121 may be required.
- Lewiston Mall Tenant: A major tenant in Lewiston, ME (approx. $240,000 annual rent), can terminate its lease with nine months' notice effective January 1, 1997. Renewal negotiations are ongoing with no assurance of success.
- Concentration Risk: No single tenant accounted for more than 5% of revenues, but the partnership is subject to general economic risks in the New England region.
Investor Verification Checklist
- Timpany Plaza Occupancy: Verify current vacancy rates and leasing progress at the Timpany Plaza Shopping Center to assess the risk of the projected $200,000 income shortfall.
- Lewiston Lease Status: Confirm the outcome of negotiations with the major tenant in Lewiston, ME, regarding lease renewal.
- Capital Expenditure Funding: Review the balance of escrow accounts and cash reserves to ensure the planned $1.2 million in capital improvements can be fully funded without new debt.
- Impairment Testing: Monitor future filings for any asset write-downs related to the Timpany Plaza property if vacancy persists.
- Related Party Transactions: Note that management fees (4% of revenue) and escrow holdings are managed by entities owned by the majority shareholder of the General Partner.