Another look at New England Realty Associates LP – NEN

I don’t often go back and look at my old blog posts. When reading my posts from several years ago, I wince a bit as I see how far I’ve come as an investor since. That’s not to say I am not proud of these writings. There are a lot of them 8 years in, though that output has slowed as I have taken on the role of a business owner and a pretty typical American family man. In particular, I am proud of a few pieces of analysis that I believe really captured some kind of value that was being missed by the market.

One of these is New England Realty Associates LP, ticker NEN. In a 2015 blog post, I laid out how the market was missing the value contained in New England Realty Associates LP’s somewhat complicated structure. For several reasons, “NERA” units screened poorly, and the substantial value of its equity-accounted real estate investments were not reflected in the financial statements. (Digging into the accounting for consolidated investments with minority interests and equity-accounted investments is one of my favorite mental puzzles. What can I say, we value dorks are a special type.) Despite significant growth in net asset value, NERA units actually trade lower than they did at the time of my post.

I’m going to keep this post on the short side, because I doubt anyone really wants to read a property-level analysis of NERA’s holdings. So here are the basics:

NERA owns 25 apartment complexes containing 2,892 units, all in the Boston metro area. NERA also owns 19 condo units, plus a smattering of commercial properties. Finally, NERA holds 40-50% interests in a further 7 apartment complexes containing 688 units, plus a parking lot.

In 2019, NERA’s wholly-owned assets produced $60.5 million in rental and sundry income (laundry rooms, etc.) Cash property operating expenses, including management fees, were $28.5 million leaving net operating income of $32 million. This compares favorably to $23.5 million in 2015.

NERA reported equity income of $1.7 million from its 40-50% owned investments. However, this figure materially underestimates the net operating income these properties produce. Here is a look at the underlying net operating income of these properties, and the percentage of this NOI (and the associated debt) attributable to NERA.

NERA’s equity-accounted properties produced net operating income attributable to NERA of $5.6 million in 2019 and $71.1 million in mortgage debt.

Summing up, NERA earned net operating income of $37.6 million in 2019. The balance sheet shows $299.8 million in debt. Adding the portion of NERA’s investment property debt attributable to the partnership brings the total to $370.9 million. There is no excess cash to speak of.

Today, NERA’s enterprise value is $458.7 million. On $37.6 million in trailing net operating income, this implies a cap rate of 8.2%. I challenge anyone to find a collection of investment-grade properties in the Boston area that can be purchased at a yield anywhere close. Just as a valuation exercise, here is what NERA’s equity value looks like under a variety of cap rate assumptions.

Clearly, I think there is plenty of upside to the current unit trading price in the low $40s. This is a good quality portfolio, and it is reasonably financed. Using a 5% cap rate valuation, loan-to-value is only 49%.

Now, there is a very obvious and legitimate caveat to all of this: COVID-19. The effects of the virus and the ongoing economic shutdown will absolutely have an effect on NERA’s tenants and their ability to pay their rent in a timely fashion. Occupancy may fall and cash collection may slow. But for anyone who believes the economy will eventually recover and that the Boston metro will continue to experience tight housing conditions, I think it’s very difficult to lose with New England Realty Associates LP at current prices. NERA pays a modest dividend and buys back a small number of units annually. The stock is unlikely to double in the short-term. On the other hand, I have a hard time seeing how an investment like this could be permanently impaired under all but the worst economic circumstances.

One last consideration. NERA is majority-owned and controlled by the estate of Harold Brown, the company’s founder. Mr. Brown passed away in February, 2019. By all accounts Mr. Brown was an extraordinary man. It seems the most likely scenario is business as usual for NERA, but the potential sale of the company could provide a catalyst.

Alluvial Capital Management, LLC does not hold units of New England Realty Associates LP for clients. David Waters does own units of New England Realty Associates LP personally. Alluvial Capital Management, LLC may hold any securities mentioned on this blog and may buy or sell these securities at any time. For a full accounting of Alluvial’s and Alluvial personnel’s holdings in any securities mentioned, contact Alluvial Capital Management, LLC at info@alluvialcapital.com.

6 thoughts on “Another look at New England Realty Associates LP – NEN”

  1. One catch is that a taxable investor will have to pay Massachusetts income tax. There is no minimum amount under which no tax return needs to be filed. That will be an annual nuisance. I used to own it and sold it partly for that reason.

  2. seemed better before the new young ceo paid 25x ebitda for recent acquisition. now there is also risk that the new generation is hellbent on growth.

  3. One wonders what role junior’s uncle, i.e., Harold Brown’s brother is playing in the company. I am a shareholder and am concerned about the Woburn apartment purchase at the top of the market. Even before COVID-19, it was not clear how much the rents could be raised given the community – it is ok, not just one that is considered very desirable.
    To add to what has been written above, It should be noted that since the firm own properties in Massachusetts now has strong anti-eviction measures related to COVID-19. As noted this will affect revenues.

  4. You should get a K-1 (it’s been years since I owned it) since it’s a partnership. To what extent Massachusetts will attempt to collect say $ 100 or so in state tax is not known. On the other hand it’s also known as Taxachusetts.
    To add to the comment by Rosenthal I believe I sold years ago because it seemed to me that they had paid a high price for an apartment building. Granted it’s priced cheaply with a great longterm record. Some of their apartments are intended for students so the lockdown will affect current results too, along with nonpayments by tenants (and at least part of the Democratic Party is advocating for continued nonpayment).

    1. Yes, I get my K-1 every year. You are absolutely correct about the short-term issues at play. Owning this requires some confidence that in the medium and long terms, the partnership will be more or less unaffected.

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