New England Realty Associates Limited Partnership — Q2 2015 Form 10-Q
Business context and period: Unaudited results for the three and six months ended June 30, 2015, compared with the corresponding 2014 periods. The Partnership owns 24 properties, including 2,412 apartments, 19 condominium units and commercial space, and holds 40%–50% interests in nine unconsolidated joint ventures with 790 apartments. Properties are principally in Eastern Massachusetts and Southern New Hampshire.
Financial performance and position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue, 2015 | $11.06 million | $22.14 million |
| Revenue, 2014 | $10.56 million | $21.18 million |
| Net income, 2015 | $1.10 million | $1.51 million |
| Net income, 2014 | $0.28 million | $0.25 million |
| Cash provided by operating activities | Not separately presented for the quarter | $6.27 million vs. $5.36 million |
- Growth and margins: Revenue increased 4.7% for Q2 and 4.5% for the first half. Income before interest, joint-venture results and other items rose 19.3% for Q2 and 11.5% for the first half. Net margin for the first half was approximately 6.8%, versus 1.2% in 2014.
- First-half expenses: Total expenses increased 2.2% to $16.24 million. Operating costs rose 10.8%, repairs and maintenance 12.7%, and taxes and insurance 4.4%; depreciation and amortization declined 8.5%.
- Cash and liquidity: Cash and cash equivalents were $15.41 million at June 30, up from $14.02 million at year-end. First-half investing cash outflow was $1.03 million and financing cash outflow was $3.84 million. Capital improvements were approximately $2.43 million. A $25 million revolving credit facility was undrawn at quarter-end.
- Debt and capital: Mortgage notes payable were $196.01 million, with a weighted-average stated interest rate of 4.81%. Total liabilities were $206.81 million and partners’ capital was negative $29.64 million. Estimated fair value of the Partnership’s mortgage debt was $209.94 million. Including joint ventures, the Partnership reported approximately $333.05 million of long-term debt across the entities; its proportionate share of joint-venture non-recourse debt was approximately $59.96 million.
- Distributions and units: First-half distributions were $7.50 per unit per quarter, or $0.50 per Depositary Receipt for the six months. The Partnership repurchased equity interests for $1.88 million during the period.
Changes versus the prior comparable period
- First-half net income rose $1.25 million to $1.51 million; Q2 net income rose $0.81 million to $1.10 million. Higher rental income and improved income from unconsolidated joint ventures were key contributors.
- First-half rental income grew $0.97 million, while expenses increased $0.35 million. Severe first-quarter snowstorms added approximately $0.42 million to snow-removal costs; lower utility costs partly offset this increase.
- Joint-venture results improved to $0.35 million income for the first half from a $0.27 million loss in 2014. Management attributed the change mainly to higher rental revenue and lower depreciation and amortization; 2014 results included gains on unit sales.
- Operating cash flow increased to $6.27 million from $5.36 million. Cash rose by $1.39 million in the first half of 2015, compared with a $1.40 million decline in the first half of 2014.
Outlook, commentary and notable matters
- Management reported high occupancy and continued top-line improvement, with renewal and new-market rents continuing to rise. It said revenue growth had begun to exceed earlier expectations and expected revenue and operating-expense trends to continue through the rest of 2015. No numeric earnings or revenue guidance was provided.
- Residential occupancy was 96.5% on August 1, 2015, compared with 96.0% a year earlier. Six-month residential renewals were approximately 67%, with an average rent increase of 3.9%; new leases had average increases of 4.2%.
- Management anticipated cash from operations and interest-bearing accounts would cover current operations, distributions, required debt payments and current improvements. It planned approximately $1.50 million of additional capital improvements in 2015.
- A June 9 fire damaged about 10 apartments at Westgate Woburn. The Partnership recorded a $952,000 insurance-recovery receivable for repairs and rental loss; the affected apartments were expected to remain unoccupied for an extended period.
- Mortgage maturities include approximately $7.90 million in 2019 and $179.82 million thereafter. The credit facility has financial and other covenants; its floating-rate terms create potential exposure if drawn. Most outstanding mortgage debt is fixed-rate and generally non-recourse, subject to customary exceptions.
- Related-party considerations include property management by an entity owned by the General Partner’s majority shareholder and investments in joint ventures with management-company insiders. The filing describes fees and services paid to related parties. Harold Brown, Ronald Brown and a Hamilton executive together held approximately 41% of Depositary Receipts; Harold Brown also controlled 75% of Class B units and 75% of the General Partner’s stock.
- The Partnership reported no material pending legal proceedings, no material changes to previously disclosed risk factors, and no impairment loss in the first half. It noted potential exposure to regional real-estate conditions, leasing and operating costs, refinancing availability, interest rates, insurance limitations, environmental liabilities and joint-venture performance.
Important facts for investors to verify
- Whether the revenue and rental-rate trends described by management continued in the second half, and how occupancy and leasing costs evolved.
- The status and final proceeds of the Westgate Woburn insurance claim and the timing of repairs and return of apartments to service.
- Debt maturity and refinancing plans, compliance with credit-facility covenants, and the effect of any borrowing on interest expense and liquidity.
- Joint-venture results, debt and any expected support needs, particularly given the negative carrying value reported for one investment and management’s stated intent to fund potential operating deficits despite no legal obligation.
- Related-party fees, service arrangements and governance disclosures, and the Partnership’s continued unit-repurchase and distribution decisions.