New England Realty Associates Limited Partnership — Q2 2018 Form 10-Q
Business context and reporting period
Unaudited results for the quarter and six months ended June 30, 2018. NERA owns residential, mixed-use and commercial properties in Eastern Massachusetts and Southern New Hampshire, and holds 40%–50% interests in eight unconsolidated joint ventures. Its consolidated portfolio included 2,711 apartments, 19 condominium units and 108,043 square feet of commercial space. Residential properties generated about 93% of rental income.
Financial results and liquidity
- Q2 revenue: $14.63 million, up 14.4% year over year; rental income was $14.50 million. Expenses rose 22.0% to $10.76 million, and income before other income and expense declined 2.5% to $3.87 million. Net income was $53,000, down from $2.48 million; net income per unit was $0.43 versus $19.97.
- First-half revenue: $28.69 million, up 12.4%. Expenses increased 18.2% to $21.06 million. Income before other income and expense decreased 1.0% to $7.63 million; net income fell 55.9% to $1.93 million, or $15.53 per unit versus $35.19.
- Cash flow: First-half operating cash flow was $12.41 million, versus $11.58 million. Cash increased $2.65 million to $9.89 million. Investing cash flow was $1.46 million provided, including substantial joint-venture distributions; financing cash outflow was $11.21 million, including line-of-credit repayments and $2.24 million of partner distributions.
- Debt and liquidity: At June 30, mortgage notes payable were $253.19 million and the line of credit was $9.0 million; total liabilities were $289.38 million against assets of $253.76 million, leaving partners’ capital negative $35.62 million. The line was paid down further to $5.0 million after quarter-end. Mortgage rates ranged from 3.76% to 5.81%, with a 4.56% weighted average. Management said cash from operations and interest-bearing accounts should cover current operations, distributions, debt payments and planned improvements.
- Distributions: Quarterly distributions were $9 per unit ($0.30 per depositary receipt); first-half distributions were $0.60 per receipt.
Material changes versus prior comparable periods
- Revenue growth reflected acquisitions of Woodland Park and Webster Green/Hamilton Highlands, together adding about $1.87 million to first-half rental income, as well as rent increases at existing properties. Excluding acquisitions, management reported first-half revenue growth of 5.0%, expense growth of 2.9%, and a 9.9% increase in income before other income and expense.
- Interest expense rose 23.2% in the first half to $6.24 million, largely reflecting acquired properties and higher line-of-credit costs. Depreciation and amortization increased 26.5% to $7.57 million.
- Joint-venture income declined to $539,000 for the first half from $1.73 million. In Q2, the Partnership recorded a $562,000 joint-venture loss, compared with $1.06 million of income in Q2 2017.
- Rental properties increased to $236.04 million from $207.15 million at year-end 2017, including the March acquisition of a 79-unit property in Needham for $34.5 million. The purchase was funded with approximately $13 million cash and assumption of a $21.5 million mortgage.
Outlook, commentary, risks and unusual items
- Management said core portfolio occupancy remained high and expected rents to continue increasing through the balance of 2018, with operating expenses rising with inflation. New-lease and renewal increases were approximately 4.0%; residential vacancy was 3.6% as of August 1, 2018, versus 4.0% a year earlier. No formal earnings guidance was provided.
- The principal unusual item was a roughly $3.83 million defeasance charge incurred by the Dexter Park joint venture refinancing. NERA’s 40% share, approximately $1.53 million, materially reduced Q2 results. The refinancing also generated an approximately $16.5 million distribution to NERA; proceeds helped reduce its line of credit.
- NERA’s joint-venture carrying value was negative $15.19 million after distributions and losses exceeded recorded investments. NERA stated it has no legal obligation to fund certain ventures’ deficits, but intends to provide support if needed for some investments. Separately, NERA and HBC Holdings guaranteed the new $125 million Dexter Park mortgage.
- Management planned approximately $1.29 million of additional property improvements during 2018. It reported no impairment loss in the first half and no material pending legal proceedings. Disclosure controls were deemed effective.
- Risks include dependence on the Eastern Massachusetts and Southern New Hampshire real estate markets, rent collection and lease renewals, rising operating and utility costs, refinancing availability and interest rates, competition, and environmental or insurance exposures. NERA reported $57.9 million of variable-rate debt across the Partnership and joint ventures; a 100-basis-point rate change would affect annual interest costs by about $579,000, assuming caps are not in effect. The 2023 maturity schedule includes approximately $80.0 million of NERA mortgage debt.
- Related-party dealings include property management, professional services and joint ventures involving the management company’s owners and employees. The filing also identifies a new board appointment of Harold Brown’s son. Investors should consider governance and related-party oversight.
Most important facts for investors to verify
- Reconcile the Dexter Park defeasance charge, NERA’s share of the refinancing distribution, and the resulting negative joint-venture carrying value and ongoing support expectations.
- Review the Dexter Park mortgage guarantee, line-of-credit terms and covenants, subsequent paydown, and the large 2023 mortgage maturities.
- Assess whether rental growth and occupancy gains can offset expense, depreciation and interest increases, including costs associated with recent acquisitions.
- Examine related-party fees, services, joint-venture ownership and governance arrangements, including the board appointment disclosed after quarter-end.
- Confirm the sustainability of distributions relative to operating cash flow, capital improvement needs, debt service and refinancing requirements.