New England Realty Associates Limited Partnership — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Unaudited interim financial statements. The Partnership owns and operates residential, mixed-use and commercial real estate primarily in Eastern Massachusetts and Southern New Hampshire, and holds 40%–50% interests in nine unconsolidated joint ventures.
Key financial metrics
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenue | $9.00 million | $8.69 million | $18.02 million | $17.42 million |
| Income before other income and discontinued operations | $2.89 million | $3.34 million | $5.93 million | $6.28 million |
| Income from continuing operations | $0.79 million | $1.02 million | $1.67 million | $1.63 million |
| Net income | $4.47 million | $1.05 million | $5.37 million | $1.67 million |
| Net income per unit | $34.37 | $7.97 | $41.28 | $12.73 |
Q2 net income included a $3.68 million gain on the sale of Nashoba Apartments; six-month net income likewise includes that gain. The improvement in reported net income therefore does not reflect comparable growth in recurring operations.
For the six months, net cash from operating activities was $5.13 million, down from $5.73 million. Investing activities used $1.94 million; financing activities used $6.88 million. Cash and cash equivalents fell $3.69 million to $3.29 million. Capital improvements were approximately $2.19 million.
At June 30, total assets were $118.14 million, mortgage notes payable were $131.67 million, total liabilities were $137.64 million, and partners’ capital was negative $19.50 million. Mortgage rates ranged from 3.25% to 7.07%, with a 5.3% weighted average rate. Approximately $27.52 million of mortgage maturities were scheduled for 2014. Joint venture debt is not consolidated: the Partnership’s proportionate share was approximately $61.43 million.
The quarterly distribution was $7.50 per unit ($0.25 per depositary receipt); six-month distributions totaled $1.95 million, or $0.50 per receipt. Cash included $4.10 million of deposits and escrow held for real estate acquisition, including approximately $2.10 million from the Nashoba sale.
Changes versus comparable periods
- Q2 revenue rose 3.6%; six-month revenue rose 3.4%, largely from higher residential rents and demand.
- Q2 expenses increased 14.2% and six-month expenses increased 8.5%, outpacing revenue. Management cited higher professional fees, repairs and maintenance, real estate taxes and insurance, and winter operating costs.
- Income before other income and discontinued operations decreased 13.4% in Q2 and 5.6% for the first half. Continuing-operations income rose 2.6% for the first half, partly as interest expense and joint venture losses declined.
- Cash declined from $6.98 million at year-end 2012. Mortgage debt decreased from $138.06 million to $131.67 million, reflecting repayments and refinancing activity.
Outlook, transactions and risks
- Management described residential renewals and leasing demand as strong: 2013 renewals were approximately 70%, with average rent increases of 4.5%; new leases were approximately 30%, with increases of 6.4%. Management expected Q3 revenue to be similar to Q2 and anticipated further revenue gains in Q4, while acknowledging results may vary.
- Management expected positive rental growth and high occupancy, citing local employment, university enrollment and a rental-market supply-demand imbalance. It expected operating income before depreciation and interest to remain strong for the rest of 2013.
- After quarter-end, the Partnership bought the 193-unit Windsor Green apartment complex for $62.5 million. It used approximately $40 million of short-term financing, Nashoba exchange proceeds and cash reserves; the acquisition loan matured October 15, 2013, and long-term financing was being pursued. Management expected permanent financing by the end of Q3.
- In July, the Partnership refinanced 62 Boylston Street with a $40 million loan at 3.97%, interest-only for three years, then amortizing, with maturity in 2028. It was also seeking a $15 million Westgate refinancing, but had no lender commitment; management anticipated a Q4 closing. Management estimated combined annual debt service after amortization begins would rise to approximately $3 million from $2 million.
- Management planned approximately $600,000 of additional capital improvements for the remainder of 2013. It anticipated operating cash and interest-bearing accounts would fund operations, distributions, debt payments and current improvements, while noting cash flow can fluctuate with rents, costs, property sales and refinancing.
- Risks include refinancing availability and terms, interest-rate changes, property-market and occupancy conditions, rising taxes, insurance and operating costs, environmental exposure, and acquisition and leverage risks. Most debt is fixed-rate; the filing reports approximately $272.13 million of long-term debt for the Partnership, subsidiaries and joint ventures collectively.
- The Nashoba sale generated a $3.68 million GAAP gain; proceeds were placed with a qualified intermediary for a potential Section 1031 exchange, deferring the gain for tax purposes in 2013. Partnership tax treatment generally means no entity-level income-tax provision.
- Related-party arrangements are significant: Hamilton, owned by the General Partner’s majority shareholder, manages properties and receives management and service fees. Joint venture partners include management-company personnel. The filing reports no material pending litigation, no impairment loss in the first half, and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether Windsor Green’s short-term acquisition loan was replaced with permanent financing, and at what amount, rate and terms.
- Whether the Westgate refinancing closed, and the final proceeds, prepayment costs and debt-service impact.
- How much of reported earnings and future cash flow is attributable to property-sale gains, joint venture distributions and recurring property operations.
- Near-term mortgage maturity coverage, liquidity after the acquisition and planned capital spending, and the effect of negative partners’ capital.
- Occupancy, rent growth and expense trends, particularly commercial vacancies and rising taxes, insurance, repairs and maintenance.
- Related-party fees and transactions, including management and joint venture arrangements, and their terms relative to independent alternatives.