New England Realty Associates Limited Partnership — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a standalone fourth-quarter filing. The Partnership owns and operates primarily residential real estate, with commercial properties and 40%–50% interests in unconsolidated joint ventures, mainly in Eastern Massachusetts and Southern New Hampshire.
Financial and operating highlights
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $60.48 million | $58.01 million |
| Expenses | $43.21 million | $43.10 million |
| Income before other income/expense | $17.27 million | $14.92 million |
| Net income | $6.55 million | $4.17 million |
| Net income per unit / depositary receipt | $53.48 / $1.78 | $33.52 / $1.12 |
| Cash from operating activities | $22.45 million | $25.63 million |
| Cash and cash equivalents at year-end | $7.55 million | $9.06 million |
- Revenue increased 4.2%; rental income rose 4.3%. Management attributed growth to acquisitions and higher rents. Consolidated expenses grew just 0.3%; income before other income/expense increased 15.8%. Net income rose 57.0%.
- Net margin was approximately 10.8%, versus 7.2% in 2018; income before other income/expense was approximately 28.6% of revenue, versus 25.7%.
- Year-end consolidated debt was $299.77 million: $281.77 million of mortgage notes and $18.00 million drawn on a $25 million revolving credit line. Partners’ capital was negative $37.82 million. The balance sheet reported total assets of $294.29 million and total liabilities of $332.12 million.
- Separately, the Partnership disclosed approximately $71.13 million as its proportionate share of non-recourse joint-venture debt. Its market-risk disclosure reports approximately $450.48 million of combined long-term debt across the Partnership, subsidiaries and Investment Properties; these figures have different scopes.
- Mortgage maturities include $4.67 million in 2020 and $102.56 million in 2023. The revolving credit line, with an October 2020 expiration, had $18 million outstanding at year-end. Management reported compliance with its financial covenants.
- Operating cash flow declined about 12.4%. Investing activities used $29.28 million, principally reflecting the Mill Street acquisition and property improvements. The Partnership paid $4.70 million in distributions and spent $4.05 million on unit repurchases.
- Residential vacancy was 3.0%, up from 2.1%; commercial vacancy was 1.8%, up from 1.3%. The filing reports 2,911 residential units for rental statistics. It separately describes 2,892 apartments plus 19 leased condominium units.
Material changes and notable transactions
- In December 2019, the Partnership acquired the 181-unit Country Club Garden Apartments in Woburn for $59.55 million. Funding included $31 million of fixed-rate mortgage debt at 3.586%, $18 million drawn on the credit line and $10.55 million of cash reserves. The mortgage matures in 2035 and is guaranteed by the Partnership.
- Captain Parker was refinanced in May 2019 with a $20.75 million, 4.05% interest-only loan due in 2029; the refinancing generated a roughly $202,000 prepayment penalty.
- Capital improvements totaled approximately $3.90 million in 2019. Management planned approximately $4 million for 2020.
- Joint ventures sold five remaining residential units in 2019, generating approximately $735,000 in gains. The filing says the residential units at two such ventures were sold out.
- Distributions increased from $36.00 per unit ($1.20 per receipt) in 2018 to $38.40 per unit ($1.28 per receipt) in 2019. A $9.60-per-unit ($0.32-per-receipt) quarterly distribution was approved in January 2020.
Outlook, risks and unusual items
- Management said 2019 renewal rents rose an average 3.7% and new-lease rents 2.7%; it expected 2020 renewal increases of 2%–3%. It anticipated similar same-store operating results in 2020 and improved performance from the recent acquisition, absent significant economic harm related to coronavirus. This was a conditional outlook, not formal earnings guidance.
- COVID-19 was identified as a potential material risk, including possible effects on tenants, local economies, operations and international students renting apartments. The filing was signed March 12, 2020, before the pandemic’s later impacts could be assessed.
- Other principal risks include concentration in Eastern Massachusetts and Southern New Hampshire, tenant demand and rent collection, property expenses, refinancing and debt covenant exposure, variable rates and LIBOR transition, joint-venture exposure, competition, insurance/environmental risks, and property illiquidity.
- Management described the local rental market as showing some softening: leasing commissions rose 25.7% to $578,000 in 2019, partly because landlords bore more of the cost. Residential vacancy also increased.
- Net income improved partly because 2018 included a $1.53 million share of a joint-venture defeasance charge; 2019 included the $202,000 Captain Parker prepayment penalty and joint-venture sale gains. These items affect year-over-year comparability.
- Harold Brown, who owned 75% of the General Partner’s voting securities, died in February 2019; his estate held voting control. The Partnership relies on Hamilton, an affiliated management company, and disclosed material related-party management and service fees. No material litigation was reported.
- Management and the auditor concluded that disclosure controls and internal control over financial reporting were effective as of year-end. The auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Reconcile debt measures and scope, especially the $299.77 million consolidated balance, the $71.13 million proportionate joint-venture debt, and the $450.48 million combined long-term debt disclosure.
- Review refinancing and liquidity needs: the credit line expires in October 2020, the 2023 mortgage maturity schedule is substantial, and year-end cash was $7.55 million.
- Assess whether occupancy, leasing costs and rent growth support management’s conditional 2020 outlook, particularly in light of the COVID-19 risk disclosed at filing.
- Evaluate the Mill Street acquisition’s performance against its purchase price, financing, guarantee and planned contribution to results.
- Consider related-party arrangements, General Partner control and the effect of negative partners’ capital when assessing governance, distributions and unit repurchases.