August 29, 2009 - 12:38pm EST by
2009 2010
Price: 55.00 EPS $1.39 $1.39
Shares Out. (in M): 1 P/E 39.3x 39.3x
Market Cap (in $M): 73 P/FCF 8.4x 8.4x
Net Debt (in $M): 126 EBIT 16 16
TEV ($): 210 TEV/EBIT 13.0x 13.0x

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New England Realty is a limited partnership owning residential apartment buildings in the Boston metropolitan area that has been posted several times on VIC over the years. While the stock has now come down substantially and is not far from its 5-year lows even after the recent broad market rally, its net operating income and cash flow been stable, actual recent cap rates in the Boston metro area indicate valuations significantly higher than the stock price reflects, and the company has taken advantage of selling pressure to push through a massive stock buyback plan that has already shrunk the share count by over 20 percent.

Managed by general partners Harold and Ronald Brown, who also own significant blocks (> 38%) of the LP units, NEN owns and manages apartment communities in the Boston area, with a special focus on buildings serving the area's many universities. While after this year's selloff the stock is now the cheapest it's been since 2003, looking over a 10-year chart will show you how successful the Browns have been at consistently building unitholder value over the long term.

You can refer to past writeups for further background details. While the stock has now sold off significantly and remains near its 5-year lows, cash flow and net operating income have remained relatively steady due to high occupancy rates and good cost controls.

FY 2008 :
Gross revenure 32.3MM
Expenses 22.5MM
Operating income 9.78MM
- Depreciation 6.36MM
NOI 16.14
net interest expense 7.53
cash flow 8.61

FY 2007 :

Gross revenure 30.9MM
Expenses 22.2MM
Operating income 8.67MM
- Depreciation 6,75MM
NOI 15.42
net interest expense 6.96
cash flow 8.46

NEN trades as AMEX-listed depository receipts representing 1/10th of an LP unit. After recent heavy stock buybacks further discussed below, the current share count is just 1.32 million ADRs outstanding. Today's quote of $55 per NEN share represents a market cap of $72.6 million, for a $198.6 million EV after $126 million in net mortgages. The current price implies a cap rate of just over 8.1%. Conversely, after rebounding from a 2007 low of 4.75% to 5.7% in the 4th quarter of 2008, average cap rates for multifamily apartments in the Boston metro area have been improving in each of the last two quarters to a recent average of 5.6% and 5.4% in 1Q and 2Q of 2009.

For some recent area-specific market analysis, see references below:
page 9 of the following:

Applying the area average 5.4% cap rate would place NEN's net asset value at $131 per share, for more than +138% of upside; alternately, applying a 6% cap rate would put NAV at over $108, and a conservative 7% cap rate would put NAV at $79.22 , still with a +44% upside from the current price. Cap rates will obviously vary a great deal by each specific property and location, but the consistently superior occupancy rates for NEN's buildings could support a strong valuation.

NEN's properties consistently run at far above average occupancy rates for the Boston metro area, likely due to a combination of carefully chosen properties/areas that have consistently strong demand (e.g. university campus locations convenient for students) and some degree of good long-term property management. NEN's vacancy rate as of last month is just 2.6%, and it has been as low as 1% or less in past years. After absorbing a significant supply of new units in 2007 and 2008, the last of a wave of apartments and condos built during the real estate bubble are coming onto the market this year, forecast to push area average occupancy rates down by 1.2% to an all-time low of 92.4% before they stabilize and recover in 2010. With current average occupancy in the Boston apartment market already the lowest in 20 years and with developers currently more cautious than ever, after absorbing recent construction the market will likely not see any significant new supply for quite some time (indeed, virtually no new apartment supply is currently forecast for completion in 2010).

Meanwhile, the company has been heavily buying back shares, and LP units oustanding have shrunk dramatically from 171,822 in FY2008 to 132,784 in the most recent quarter, representing a current share count of 1.32 million NEN ADRs outstanding. At today's quote of $55 per NEN ADR, the current market cap stands at just $72.6 million, or 4.49 times NOI and 8.4 times cash flow. From the latest 10-K:

The Stock Repurchase Program that was initiated in 2007 has purchased 378,024 depository receipts through February 2009, or 27% of the outstanding class A Depository Receipts. Given the lack of alternative investments, liquidity markets and the current share price, Management continues to support the buyback program and believe it to be accretive to the remaining shareholders. Management continues to be active bidding on commercial real estate within Massachusetts and remains poised to acquire real estate it deems opportune given the current selling and financing environment.

With opportune timing, NEN successfully refinanced a large amount of its mortgage debt in early 2008 fixed for 15 years at rates below 6%, and currently doesn't have any significant maturities pending until 2013 and beyond. With good interest coverage and borrowing power, NEN is well-positioned to opportunistically acquire any further distressed assets that may become available, and has cash flow sufficient to cover its dividend, currently yielding just over 5.1% per year.

Management believes that the purchasing power of the Management Company continues to buffer larger increases in operating expenses. In 2008, the Partnership financed approximately $65,000,000 of mortgage debt for 15 years at sub 6% rates. The Partnership has accordingly mitigated financing concerns and locked in interest rates to the benefit of the shareholders. The next serious refinancing round of approximately $45,000,000 will not occur until 2012/2013. Management anticipates that stability will have returned to the marketplace at that time. For 2009, Management will be recommending that the quarterly distributions continue and will review its status in late 2009.

Overall, NEN represents an opportunity to invest at a significant discount to NAV alongside management with a strong track record of creating long-term shareholder value, while recieving a reliable 5.1% cash yield. The principal risks are:

1) Continued supply this year from the last of the bubble-era apartment construction projects may further compress rents and occupancy, as discussed above. After having grown NOI last year in the face of an even more difficult market, management expects to see modest revenue growth this year; NOI will likely be flat to slightly down, before returning to growth in mid-2010 with the cessation of further supply.

2) Further worsening of metro Boston apartment real estate market valuations from current levels. As described above, NEN's relative valuation leaves a considerable margin of safety, allowing substantial upside even if cap rates were to severely slacken to 7%.

3) Lack of an immediate catalyst. Outside investor David Jarvis previously bought a position in the $70s and $80s, but eventually sold the bulk of it after being unable to force a quick liquidation. The Browns are getting up in years and may eventually decide to liquidate; in the meantime they appear content to continue to build long term value in a tax-advantaged way and have underscored this with their significant share buybacks (and 5.5% cash dividend), in my view the best possible use of capital.


1) Significant share buybacks
2) Accumulation of dividends
3) Eventual liquidation or sale

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