Business context and reporting period
New England Realty Associates Limited Partnership (NERA) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2012. NERA owns 24 properties and has 40%–50% interests in nine unconsolidated joint ventures, primarily in Eastern Massachusetts and Southern New Hampshire. Its portfolio includes 2,251 apartment units, 19 condominium units, commercial properties, and interests in joint ventures with a further 799 apartment units. Interim results are not necessarily indicative of full-year results.
Financial performance and position
- Revenue: Second-quarter revenue was $8.80 million, up 5.4% year over year; first-half revenue was $17.65 million, up 6.2%. Rental income rose 5.7% in the quarter and 6.4% for the six months.
- Profit: Second-quarter continuing income was $1.05 million versus $356,000; first-half continuing income was $1.67 million versus $461,000. Net income fell to $1.05 million from $8.09 million for the quarter and to $1.67 million from $8.26 million for the first half, primarily because 2011 included a $7.72 million gain on the Avon Street property sale. Net income per unit was $7.97 in Q2 and $12.73 for the half-year, versus $61.55 and $62.84, respectively, in 2011. Per-unit amounts reflect the 2012 depositary-receipt split.
- Expenses and margins: First-half total expenses were essentially flat at $11.28 million, while income before interest, joint-venture losses, and discontinued operations increased 19.4% to $6.38 million. Management reported operating expenses excluding depreciation down 2.8%. Lower heating, water/sewer, leasing, and maintenance costs were partly offset by higher depreciation, taxes and insurance, and administrative expense.
- Cash flow and liquidity: First-half operating cash flow was $5.73 million, compared with $4.08 million. Investing used $152,000; financing used $4.45 million, including debt principal payments and partner distributions. Cash increased $1.13 million to $5.18 million. Management expects operating cash and interest-bearing accounts to fund operations, distributions, debt service, and planned improvements.
- Debt and balance sheet: At June 30, assets were $122.81 million, liabilities $144.49 million, and partners’ capital was negative $21.68 million. Mortgage notes payable were $138.61 million, down from $139.16 million at year-end; the $1.67 million related-party note was fully repaid during the half. Mortgage rates ranged from 4.25% to 7.07% (weighted average 5.53%). Approximately $19.94 million of NERA mortgage debt matures in 2013 and $29.51 million in 2014. NERA’s proportionate share of joint-venture non-recourse debt was approximately $60.69 million; the filing reports approximately $277.82 million of total long-term debt across NERA, subsidiaries, and joint ventures.
- Distributions: The quarterly distribution increased from $0.23 to $0.25 per depositary receipt ($7.00 to $7.50 per unit); first-half distributions were $0.50 per receipt.
Changes, outlook, and risks
- Management attributed revenue growth to the 2011 Battle Green acquisition, rent increases, and improved leasing. In the first half, renewals were about 72%, with average increases of about 3%; new leases had increases of about 6%. Portfolio vacancy was reported at 3% or less during the first half, although the August 1 residential vacancy rate was 3.3%, compared with 2.3% at the prior-year comparison date. Commercial vacancy was 5.0% versus none reported at that comparison date.
- Management expected third- and fourth-quarter results to exceed the first half, citing strong rental demand, limited supply, higher retention, and favorable local employment trends. It expected revenue growth during 2012 and believed occupancy and revenue growth could remain positive over the next 18–24 months. These are management expectations, not guaranteed results.
- Management expected to refinance at least $28 million of long-term debt by year-end, anticipating a lower interest rate, while warning of possible refinancing costs and prepayment penalties. It planned approximately $986,000 of additional 2012 capital improvements, after approximately $829,000 in the first half.
- Key risks include the large 2013–2014 mortgage maturities, refinancing availability and cost, local real-estate and rental-market conditions, operating and utility costs, tenant demand and collections, property competition, interest-rate exposure, and potential environmental or uninsured losses. Management said it knew of no material environmental liabilities. Routine litigation was reported, but no material pending legal proceedings or material changes to previously disclosed risk factors were identified.
- Related-party arrangements are significant: an entity owned by the General Partner’s majority shareholder manages properties, and the Partnership also uses that company for professional and administrative services. The filing also discloses shared ownership and related-party interests in the joint ventures.
Important facts for investors to verify
- Refinancing progress, terms, and funding for the approximately $49.44 million of 2013–2014 NERA mortgage maturities; confirm whether the expected $28 million refinancing occurred.
- Cash available for distributions and capital spending, including the effect of debt service and joint-venture cash needs.
- Joint-venture performance and leverage: NERA recorded an $804,000 share of joint-venture losses in the first half, and its proportionate share of their debt was approximately $60.69 million.
- Occupancy and leasing trends, especially the reported increase in residential vacancy and the 5.0% commercial vacancy rate.
- Related-party management fees, service charges, and joint-venture relationships, including the governance and oversight of these arrangements.
- A disclosure inconsistency: MD&A says Avon Street generated approximately $82,000 of income for the six months ended June 30, 2012, while the income statement and Note 16 report no 2012 discontinued-operations income. Clarification should be sought.