Business context and reporting period
New England Realty Associates Limited Partnership (NYSE MKT: NEN) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2020. The partnership owns and operates residential, mixed-use and commercial properties primarily in Eastern Massachusetts and Southern New Hampshire, and holds 40%–50% interests in seven unconsolidated joint ventures.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $15.76 million | $14.99 million | $32.13 million | $29.87 million |
| Income before other income (expense) | $4.44 million | $4.58 million | $8.79 million | $8.53 million |
| Net income | $1.47 million | $1.76 million | $2.83 million | $3.26 million |
| Net income per unit | $12.03 | $14.40 | $23.26 | $26.61 |
- Revenue and operating results: Q2 revenue rose 5.1%, while total operating expenses increased 8.7%; income before other income and expense fell 2.9% and net income fell 17.0%. For the first half, revenue grew 7.6%, expenses rose 9.4%, and net income declined 13.2%. The filing attributes much of the revenue and expense growth to the December 2019 Mill Street acquisition.
- Margins: Income before other income and expense was about 28.2% of revenue in Q2 2020 versus 30.5% a year earlier, and about 27.3% for the first half versus 28.6%. These percentages are calculated from reported figures.
- Cash flow: First-half operating cash flow was $9.52 million, down from $11.91 million. Investing activities used $0.45 million, mainly reflecting $1.50 million of property improvements and joint-venture distributions. Financing activities used $1.22 million, including $2.34 million of partner distributions and $1.13 million of mortgage principal payments. Cash increased $7.85 million to $15.40 million, with the Brookside refinancing contributing to the increase.
- Debt and liquidity: At June 30, cash was $15.40 million; mortgage notes payable were $284.40 million and other notes payable, principally the credit line, were $17.00 million. Mortgage rates ranged from 3.53% to 5.66%, with a 4.42% weighted average. The $25 million revolving credit line had $17 million drawn and was extended only through October 31, 2020; management was seeking a further three-year extension. The partnership reported compliance with its credit-line covenants. Its proportionate share of unconsolidated joint-venture debt was about $71.08 million.
- Capital and distributions: Partners’ capital was negative $37.72 million. The partnership paid quarterly distributions of $9.60 per unit ($0.32 per depositary receipt) in March and June 2020, matching the 2019 rate.
Material changes versus the prior comparable period
- Mill Street, acquired in December 2019 for $59.55 million, contributed approximately $0.98 million of Q2 rental income and $1.95 million for the first half, according to management. Excluding Mill Street, management reported Q2 same-store revenue down 1.4% and operating expenses down 4.3%; first-half expenses excluding the acquisition also declined.
- Interest expense increased 9.3% in Q2 and 12.1% for the first half, reflecting primarily Mill Street debt and, for the first half, higher line-of-credit expense.
- Joint-venture income fell 13.5% in both the quarter and first half, mainly because condominium-sale gains recorded in 2019 did not recur.
- Rents receivable were $1.01 million at June 30, versus $0.48 million at year-end; the allowance for doubtful accounts increased to approximately $730,000 from $240,000.
Outlook, risks, contingencies and unusual items
- COVID-19 and leasing: Management said the pandemic’s effects on 2020 results, cash flows and liquidity could not be reliably estimated. Q2 rent collections for wholly owned properties were approximately 90% of amounts due (about 92% residential and 62% commercial); joint-venture collections were about 91%. Management cautioned that Q2 collections may not predict future receipts.
- Residential vacancy was 6.3% on August 1, 2020, compared with 3.2% a year earlier; commercial vacancy was 3.9% versus 0.9%. Management said the rental season started slowly, inventory of unrented apartments was significantly higher than usual, and rents and concessions were softening. About 15% of owned apartment units and 57% of joint-venture units were leased to students, creating exposure to college reopening decisions. Massachusetts’ eviction moratorium was extended through October 17, 2020.
- Management expected cash from operations and interest-bearing accounts to cover current operations, distributions, required debt payments and planned improvements, while noting cash flow may fluctuate with rents, expenses, property sales and refinancing. No quantified earnings or revenue guidance was provided.
- Brookside refinanced in March 2020 with a $6.175 million, 3.53% fixed-rate mortgage due in 2035; proceeds paid off about $2.39 million of existing debt, with the remainder added to cash reserves. The partnership guarantees this loan. Mortgage maturities include approximately $79.93 million in 2023.
- Interest-rate sensitivity: the filing estimates a 100-basis-point move in variable borrowing rates would change annual interest cost by approximately $220,000; the estimated fair value of fixed-rate debt would change by approximately $20 million. The partnership’s mortgage debt is generally non-recourse, subject to customary exceptions; some joint-venture investments have negative carrying values, and management says it intends to fund deficits if needed but has no legal obligation in certain cases.
- The share repurchase program was extended to 2025 but temporarily suspended from April 15, 2020 due to economic uncertainty. The filing reports no material pending litigation and no material change to internal controls.
Important facts for investors to verify
- Progress and terms of the credit-line extension before its October 31, 2020 expiration, and the partnership’s capacity to meet debt maturities and covenants.
- Subsequent rent collections, delinquency and bad-debt trends, vacancy levels, concessions, and the effect of the eviction moratorium and university reopening decisions.
- Whether the maintained quarterly distribution remains supported by operating cash flow amid pandemic-related uncertainty and property investment needs.
- Joint-venture debt, guarantees and potential support commitments, including exposure where investment carrying values are below zero.
- Related-party management, service and construction fees, and the effects of the Mill Street acquisition on ongoing results and leverage.