Executive Summary / Key Takeaways

• New England Realty Associates (NEN) is a long-standing owner and operator of residential and commercial real estate in Eastern Massachusetts and Southern New Hampshire, focused on stable rental income and strategic portfolio growth.
• The Partnership has proactively built substantial cash reserves, totaling over $100 million in cash and Treasury Bills as of March 31, 2025, through strategic refinancings, positioning it for opportunistic acquisitions in a shifting market.
• Recent performance shows revenue growth (4% in Q1 2025) and net income growth (9.6%), driven by rental increases and expense management, although operating costs saw a significant jump due to weather-related factors.
• A major strategic move is the planned $175 million acquisition of the Hill Estates Properties and additional commercial assets, expected to close in Q2 2025, which will significantly expand the owned portfolio and utilize the built-up cash reserves and new debt.
• While management anticipates slowing rent growth in the near term, the focus remains on executing the Mill Street development project (expected Q4 2025 completion) and integrating the newly acquired assets to drive future value.

A Foundation Built on New England Real Estate

New England Realty Associates Limited Partnership (NERA or the Partnership), established in Massachusetts in 1977, has cultivated a deep-rooted presence in the real estate markets of Eastern Massachusetts and Southern New Hampshire. For decades, NEN has focused on the ownership and operation of a diversified portfolio, primarily comprising residential and mixed-use properties, alongside commercial buildings. This long history has allowed the Partnership to build a portfolio of 31 properties, encompassing 2943 apartment units, 19 condominium units, and approximately 130,000 square feet of commercial space.

NEN's strategy has historically centered on generating stable cash flows through rental income and pursuing growth through both direct property ownership and strategic participation in joint ventures. Beginning in the early 2000s, the Partnership expanded its footprint by acquiring 40% to 50% interests in seven additional properties, adding 688 apartment units and commercial space through equity investments. These joint ventures, while managed under the equity method, represent a significant component of NEN's operational reach and income streams, though some have seen their carrying values fall below zero following distributions, requiring the Partnership to signal its intent to support future operating deficits if necessary.

The competitive landscape for NEN is multifaceted. In the residential sector, it competes with larger, publicly traded REITs like AvalonBay Communities (AVB) and Equity Residential (EQR), which often focus on premium, amenity-rich properties in urban cores. These larger players benefit from economies of scale, potentially achieving lower operating costs per unit and investing more heavily in technology for property management and tenant experience. EQR, for instance, emphasizes sustainability features that can lead to lower energy costs. NEN's competitive advantage in this segment often lies in its local market expertise, potentially faster leasing cycles in its specific submarkets, and a focus on cost efficiency, which contributes to solid Net Operating Income (NOI) margins.

In the commercial and mixed-use space, NEN competes with entities like Boston Properties (BXP) and Simon Property Group (SPG), though BXP's focus is more on large-scale urban office properties and SPG on retail. NEN's mixed-use assets offer a degree of revenue diversification that can buffer against volatility in single property types. While NEN may not possess the scale or technological sophistication of some larger rivals, its established local network and cost-conscious operational approach provide a degree of resilience. The company's competitive positioning is thus characterized by a strong local foundation and operational efficiency, rather than technological differentiation, and appears to be an area where larger competitors may hold an edge.

Performance Reflecting Market Dynamics and Operational Focus

NEN's recent financial performance reflects a combination of steady operational execution and the impact of prevailing market conditions. For the three months ended March 31, 2025, consolidated revenue increased by 4.0% to $20.69 million, up from $19.89 million in the same period of 2024. This growth was primarily driven by a 4.0% increase in rental income, reaching $20.50 million. This rental income growth was supported by residential tenant renewals, which saw an average increase of approximately 6.0% in Q1 2025, although new leases experienced a slight decrease of 0.20%. The overall residential vacancy rate saw a modest increase to 1.60% as of May 1, 2025, compared to 1.20% a year prior, while commercial vacancy also rose slightly to 1.80%.

Operating expenses for the quarter increased by 2.2% to $14.46 million. A notable driver of this increase was a significant 23.9% jump in core operating expenses, which included substantial increases in snow removal ($464,000) and heating expense ($262,000), highlighting the impact of weather and utility costs on the portfolio. Taxes and insurance also contributed to higher costs, increasing by 8.6%. Partially offsetting these increases was a 7.6% decrease in depreciation and amortization expense.

Interest expense saw a slight decrease of 3.0% to $3.79 million, while interest and dividend income decreased by 15.8% to $991,000, primarily due to lower balances in Treasury Bills despite favorable interest rates between 4.19% and 4.37%. The Partnership's share of net income from unconsolidated joint ventures also declined by 17.8% to $362,629, partly attributed to increased mortgage interest expense at one of the joint venture properties following a September 2024 refinancing.

Despite the rise in operating costs and lower joint venture income, the growth in rental revenue and a decrease in depreciation contributed to a 9.6% increase in net income, reaching $3.80 million for the three months ended March 31, 2025, compared to $3.46 million in the prior year period. This demonstrates the underlying profitability of the core rental operations.

Liquidity remains a key strength for NEN. The Partnership ended Q1 2025 with $30.86 million in cash and cash equivalents, a significant increase from $17.62 million at the end of 2024. This cash position is bolstered by substantial investments in U.S. Treasury Bills, totaling $58.03 million at quarter-end, down from $83.59 million. These Treasury Bills have been reclassified to "available for sale," explicitly signaling their intended use for upcoming strategic initiatives. The Partnership also secured a new $25.00 million revolving line of credit in November 2024, providing additional financial flexibility for acquisitions and working capital, and was in compliance with its financial covenants as of March 31, 2025.

Strategic Maneuvers and Future Growth Catalysts

NEN's strategy has been characterized by a forward-looking approach to capital management, particularly in anticipation of market shifts. Recognizing the low interest rate environment in 2021-2022, the Partnership strategically refinanced fifteen properties, increasing loan balances and generating approximately $130 million in cash reserves. This move was explicitly aimed at building a war chest for future property acquisitions when opportunities arose, a strategy now coming to fruition.

A significant strategic initiative currently underway is the Mill Street Development project in Woburn, MA. This project involves the construction of a 72-unit apartment building under the Chapter 40B program, including affordable units. Construction commenced in January 2024, with an estimated total construction cost of approximately $30.30 million. Approximately $15.30 million of this cost is anticipated to be incurred in 2025. The project, which is being funded initially from cash reserves, is expected to be completed during the fourth quarter of 2025, adding a new, modern asset to NEN's owned portfolio.

The most impactful strategic development, however, is the recently announced Purchase and Sale Agreement to acquire the Hill Estates Properties and additional commercial properties. Entered into on April 15, 2025, this acquisition carries a total purchase price of $175.00 million, with $172.00 million allocated to the residential and three commercial buildings (including 396 residential condominium units across 28 buildings) and $3.00 million for two non-contiguous commercial properties. This represents a substantial expansion of NEN's owned portfolio. The Partnership plans to finance this acquisition using a combination of cash, proceeds from the sale of its Treasury Bills, and new debt. As a concrete step towards financing, NEN signed a Rate Lock Authorization Agreement with Key Bank on May 2, 2025, for a $18.76 million refinancing and a $40.00 million borrow up on an existing master credit facility, requiring additional property pledges. The closing of this significant acquisition is anticipated on June 18, 2025, subject to standard closing conditions, with an option to extend.

Beyond acquisitions and development, NEN also utilizes a stock repurchase program as part of its capital allocation strategy. On March 12, 2025, the General Partner authorized a new program allowing for repurchases up to $5.00 million or 10.00% of cash and Treasury Bills, whichever is less, over the next 12 months, at a price not exceeding $95.00 per depositary receipt. This program provides flexibility to return capital to partners if attractive acquisition opportunities are not available.

Outlook, Risks, and the Path Forward

Management's outlook for the remainder of 2025 anticipates a rental market characterized by slowing rent growth. This suggests that while NEN may continue to see modest increases, the pace experienced in recent periods could decelerate, potentially impacting revenue growth compared to prior years. The successful completion of the Mill Street Development in Q4 2025 and the integration of the Hill Estates Properties acquisition are expected to be key drivers for future performance, adding new income-generating assets to the portfolio.

However, the path forward is not without risks. As highlighted in the Partnership's filings, NEN is subject to the inherent risks of the real estate industry, particularly its dependence on local economic conditions in Eastern Massachusetts. The ability to attract and retain tenants and maintain favorable rental rates is crucial and can be impacted by competition and economic downturns. Fixed expenditures like debt service, real estate taxes, insurance, and maintenance represent significant costs that are not easily reduced in times of revenue pressure.

Specific risks related to ongoing initiatives include the potential for construction costs at the Mill Street Development to exceed budget and the successful execution and integration of the large Hill Estates acquisition. Financing and refinancing risks are also pertinent, particularly in a potentially rising interest rate environment, which could affect the cost and availability of debt needed for acquisitions and managing existing maturities. While NEN has taken steps to secure financing for the Hill Estates purchase, future capital needs will depend on market conditions.

Other risks include potential increases in heating and utility costs, uninsured or underinsured losses from natural disasters or terrorism, environmental liabilities, and the increasing cost and difficulty of obtaining adequate insurance coverage. Changes in income tax laws could also affect the after-tax value of distributions to partners.

Conclusion

New England Realty Associates stands at a pivotal juncture, leveraging years of disciplined capital management to execute a significant expansion phase. The strategic decision to build substantial cash reserves through prior refinancings has positioned the Partnership to undertake the $175 million Hill Estates acquisition, a move that promises to materially increase its asset base and income potential. Coupled with the nearing completion of the Mill Street Development, NEN is actively reshaping its portfolio for future growth.

While the near-term outlook includes expectations of slowing rent growth and ongoing operational cost pressures, the core investment thesis rests on NEN's established presence in attractive New England markets, its operational efficiency, and the potential value creation from integrating new assets. Investors should monitor the successful closing and integration of the Hill Estates acquisition, the performance of the Mill Street property upon completion, and NEN's ability to navigate competitive pressures and manage its cost structure in a dynamic economic environment. The Partnership's history of prudent financial management and strategic positioning provides a solid foundation, but execution of these large-scale initiatives will be key to realizing future value.