New England Realty Associates NEN
February 27, 2007 - 11:58am EST by
pirate681
2007 2008
Price: 89.75 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 118 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT

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Description

New England Realty Associates (Ticker: NEN) has been discussed a few times in the last five years (first in Dec 2001 and most recently in Dec 2005).  Since the December 2005 write-up, cap rates have compressed an additional 100bp.  Apartment occupancies have also stabilized as the number of renters transitioning to newly purchased homes has abated.  NEN’s apartments are “fully” occupied with 98.4% occupancy rate as of September 2006.  These favorable factors have created tremendous pricing powers for landlords and, as a result, NEN will be able to raise rents and increase operating margins.

 

On a LTM basis, NOI has grown to $17.4mm, up 3% from last year.  Operating margins have also expanded 80bp to 55.2%.  The last valuation of $113/share was based on lower net operating income, lower operating margins, and higher caps rates.  I estimate that cap rates have moved down 100bp since 2005 and at 5.0% cap rate, NEN’s net asset value is $131/share.  However, this doesn’t take into account the favorable pricing power NEN will experience over the next few years.  If we assume an additional 50bp increase in margin, NEN is valued at $154/share.

 

Equity Residential (EQR $52.16), a proxy for the national apartment markets, is trading at an implied cap rate of 5%.  The following apartment REITs have a significant amount of rental units in the Northeast and trade at even lower cap rates: Avalon Bay (AVB $141.18) trades at a 4% implied cap rate, and Archstone-Smith (ASN $58.62) trades at a 4.5% implied cap rate.

 

In addition to the compression in cap rates for the apartments and favorable operating environment for landlords, Mercury Real Estate Advisors, an activist real estate hedge, is involved in the name and has been trying to get the company to “unlock” shareholder value.

Margin

Expansion

 

-0.50%

-0.25%

0.00%

0.25%

0.50%

0.75%

1.00%

 

6.31%

$78 

$84 

$89.75 

$96 

$103 

$111 

$120 

 

6.00%

$85 

$91 

$98 

$105 

$113 

$122 

$131 

 

5.75%

$91 

$98 

$105 

$113 

$122 

$131 

$142 

 

5.50%

$98 

$105 

$113 

$122 

$131 

$142 

$154 

Cap Rates

5.25%

$105

$113 

$122 

$131 

$142 

$154 

$167 

 

5.00%

$113

$122 

$131 

$142 

$154 

$167 

$182 

 

4.75%

$122

$131 

$142 

$154 

$167 

$182 

$199 

 

4.50%

$131

$142 

$154 

$167 

$182 

$199 

$218 

 

4.25%

$142 

$154 

$167 

$182 

$199 

$218 

$240 

 

4.00%

$154 

$167 

$182 

$199 

$218 

$240 

$266

Catalyst

Cap rate compression, strong operating environment leading to margins expansion, and activist shareholder in the name trying to get the company to "unlock" shareholder value.
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