Business context and reporting period
New England Realty Associates Limited Partnership (NERA) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2014. NERA owns residential, mixed-use and commercial properties in Eastern Massachusetts and Southern New Hampshire, and holds 40%–50% interests in nine unconsolidated joint ventures. Its consolidated portfolio includes 2,412 apartments, 19 condominium units and 108,043 square feet of commercial space.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $10.64 million | $9.97 million | $31.82 million | $27.99 million |
| Income before other income/expense and discontinued operations | $2.73 million | $2.48 million | $8.02 million | $8.41 million |
| Interest expense | $2.39 million | $2.14 million | $7.16 million | $5.75 million |
| Net income (loss) | $181,487 | $(32,874) | $433,714 | $5.34 million |
| Operating cash flow | Not presented separately | Not presented separately | $8.22 million | $6.71 million |
- Q3 revenue rose 6.8%, led by a 7.0% increase in rental income. Q3 income before other income and expense increased 9.8%; net income improved from a small loss to a profit.
- Nine-month revenue increased 13.7%, while operating expenses rose 21.6% to $23.81 million. The resulting income before other income and expense declined 4.7%.
- Nine-month net income fell 91.9%, chiefly because 2013 included a $3.68 million gain on the Nashoba Apartments sale; 2014 had no comparable real-estate sale gain. Higher interest expense also weighed on results.
- At September 30, cash and cash equivalents were $13.74 million, versus $14.01 million at year-end 2013. Cash decreased $268,729 over the nine months. Property improvements used $3.70 million; net cash used in investing activities was $1.32 million.
- Mortgage notes payable were $196.10 million, down from $198.52 million at December 31, 2013. The weighted-average mortgage rate was 4.81%; most debt is fixed-rate, and most mortgages have prepayment penalties. Estimated fair value of NERA’s mortgage debt was $205.95 million.
- Total assets were $178.86 million and total liabilities $204.74 million, leaving partners’ capital negative by $25.88 million. NERA also reported its proportionate share of joint-venture non-recourse debt of approximately $60.51 million off balance sheet.
- The Partnership paid $2.90 million in distributions and spent $1.56 million on unit repurchases during the nine months. Distributions totaled $22.50 per unit, or $0.75 per Depositary Receipt.
Material changes, outlook and risks
- NERA refinanced two properties in 2014 and paid off two mortgages using cash reserves. It also entered a three-year, $25 million revolving credit facility on July 31; no amounts were drawn as of September 30. The facility has a floating rate, collateral and financial and other covenants, and cannot fund distributions or equity repurchases.
- Management reported strong Greater Boston rental demand, average vacancy below 2% during the quarter, and average rental increases of 4.3% on new residential leases executed during the rental season. Separately, the November 1 residential vacancy rate was 4.1%; commercial vacancy was zero on that date.
- Management expects same-store rent revenue to continue growing through much of 2015 and expects occupancy over the next three quarters to be broadly comparable with the prior year. It cautioned that additional Greater Boston rental supply could moderate revenue growth by late 2015. Potentially slower growth in utilities and real estate taxes and an average winter could support NOI; these are expectations, not formal earnings guidance.
- Management stated that operating cash and interest-bearing accounts should be sufficient for current operations, distributions, debt service and planned property improvements. Results and cash flows may vary materially with rental trends, costs, property sales or refinancings, and tenant losses.
- Risks include local real-estate conditions, competition and lease renewals, operating and utility costs, financing availability and interest rates, property and environmental exposures, insurance limitations, and acquisition risks. Management said there were no material changes to the risk factors in the 2013 Form 10-K and no material environmental liabilities were known.
- NERA reported no material pending legal proceedings and no impairment loss in the first nine months of 2014. It disclosed ordinary-course litigation and an intention, without legal obligation, to fund its share of potential future operating deficits at a joint venture whose carrying value is below zero.
- Related-party considerations include property management and other services provided by entities associated with the General Partner’s majority shareholder, and joint ventures with management-company affiliates as investors. Management’s disclosure controls were assessed as effective, with no material third-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Whether rental growth and occupancy remain resilient as new Greater Boston housing supply increases, and whether operating-cost growth moderates as management expects.
- Debt-service capacity and refinancing exposure, including the 2015–2019 mortgage maturities, the floating-rate revolver, its covenants and pledged ownership interests.
- The sustainability of distributions and repurchases relative to operating cash flow, capital spending and the Partnership’s negative partners’ capital.
- Joint-venture performance, the Partnership’s approximately $60.51 million proportionate share of joint-venture debt, and any future voluntary support for deficit-making ventures.
- Related-party fees, service arrangements and governance, including the General Partner’s and affiliates’ substantial ownership and control.