Business context and reporting period
New England Realty Associates Limited Partnership (NERA) owns and operates residential, condominium and commercial properties primarily in Massachusetts and New Hampshire, and holds 40%–50% interests in nine unconsolidated joint ventures. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2011; comparisons are with the corresponding 2010 periods.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $8.35 million, up 4.2% | $16.63 million, up 3.3% |
| Income before other income and discontinued operations | $2.84 million, versus $2.72 million | $5.34 million, versus $5.31 million |
| Income (loss) from continuing operations | $356,000, versus a $312,000 loss | $461,000, versus a $720,000 loss |
| Net income (loss) | $8.09 million, versus a $255,000 loss | $8.27 million, versus a $597,000 loss |
| Operating cash flow | Not reported separately for the quarter | $4.08 million, versus $4.20 million |
Net income includes a $7.71 million gain on the May sale of Avon Street Apartments; it is not representative of recurring operating performance. Operating expenses rose 4.2% in the quarter and 4.7% for the half year, outpacing revenue growth. Six-month operating expenses were $11.29 million. Income before other income and discontinued operations was approximately 32% of revenue for the first half, compared with 33% in 2010.
At June 30, total assets were $128.73 million, liabilities $149.23 million and partners’ capital negative $20.50 million. Cash and cash equivalents were $3.99 million, up from $3.25 million at year-end 2010; some cash and other assets are restricted for security deposits, prepaid rent or capital improvements. Mortgage notes payable were $134.66 million and notes payable $8.67 million. Separately, NERA’s proportionate share of unconsolidated joint-venture non-recourse debt was approximately $61.32 million. The filing reports $4.08 million of operating cash flow, $2.40 million of cash used in investing and $933,000 of cash used in financing during the first half. Partner distributions were $1.84 million.
Material changes versus the prior comparable period
- Rental income increased 4.2% for the quarter and 3.4% for the first half. Management attributed growth principally to lower free-rent concessions and, for the half year, the Battle Green acquisition; the Avon Street sale partly offset first-half growth.
- Operating costs increased, notably repairs and maintenance and operating costs, including utilities and snow removal. Management cited unusually high snow-removal costs in 2011.
- Interest expense declined 1.6% for the quarter and 2.1% for the half year, reflecting lower average debt outstanding.
- Equity-method losses from joint ventures declined to $498,000 for the quarter and $952,000 for the half year, from $1.02 million and $2.02 million, respectively. Management said the prior period included significant Dexter Park in-place lease amortization that had ended by November 2010.
- NERA sold the 66-unit Avon Street property for $8.75 million and purchased the 48-unit Battle Green Apartments for $10.0 million. The sale proceeds were applied through a Section 1031 exchange.
Outlook, risks and unusual items
Management described Greater Boston’s multifamily market as improving, citing stronger occupancy, modest rent increases, reduced concessions and leasing commissions, and limited new housing supply. It expected low-single-digit vacancy rates and higher rents upon turnover over the next 18–36 months, and said cash reserves and anticipated rental revenue should support operations, planned improvements and distributions. No quantified earnings or revenue guidance was provided.
Capital improvements of approximately $1.45 million were completed in the first half; management planned approximately $475,000 more during the balance of 2011. The partnership approved quarterly distributions of $7 per unit ($0.70 per depositary receipt). Management identified approximately $50 million of portfolio mortgage maturities in 2013–2014 and said refinancing markets would continue to be monitored. Most debt is fixed-rate; the filing identifies approximately $2 million of variable-rate debt and estimates a one-percentage-point rate change would affect annual interest expense by about $20,000.
After quarter-end, Battle Green was refinanced with a $5.0 million, 4.95% mortgage maturing in 2026; proceeds repaid the $3.999 million related-party acquisition loan and left approximately $1.0 million in proceeds. On August 1, NERA paid a further $1.0 million on its related-party HBC note, reducing its balance to $3.669 million. The filing also describes significant related-party management and service arrangements, including property management by an entity owned by the general partner’s majority shareholder and loans from affiliates.
Risks include local economic and rental-market conditions, tenant collections and lease renewals, operating-cost and weather volatility, property competition, financing availability and refinancing costs, and environmental or insurance exposures. Management reported no known material environmental liabilities, no material pending litigation, no material changes to previously disclosed risk factors, and effective disclosure controls. The filing states that results for the first half are not necessarily indicative of full-year results.
Important facts for investors to verify
- Assess recurring results excluding the Avon Street gain and review the cash and tax consequences of the Section 1031 exchange.
- Confirm the post-quarter Battle Green refinancing and repayment of related-party borrowings, and review remaining demand rights, collateral and related-party terms on the HBC note.
- Review the 2013–2014 mortgage maturity concentration, refinancing plans and potential prepayment costs; consider joint-venture debt in assessing total leverage.
- Evaluate whether rental growth can continue to exceed operating-cost growth and whether lower concessions and high occupancy are sustainable.
- Review joint-venture operating performance, distributions and debt service, including the expected reduction in Dexter Park distributions when principal payments began in November 2011.
- Consider the negative partners’ capital balance, limited unrestricted cash relative to liabilities, capital-improvement needs and ongoing distribution policy.