New England Realty Associates Limited Partnership — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. The unaudited partnership owns and operates residential, mixed-use and commercial properties in Eastern Massachusetts and Southern New Hampshire, and holds 40%–50% interests in nine joint ventures.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $13.42 million | $12.37 million | $38.95 million | $36.81 million |
| Income before other income and expense | $2.93 million | $3.10 million | $10.64 million | $9.75 million |
| Net income | $0.87 million | $1.21 million | $5.25 million | $3.42 million |
| Net income per partnership unit | $7.01 | $9.69 | $42.20 | $27.38 |
| Net cash from operations | Not stated for the quarter | Not stated for the quarter | $12.03 million | $10.16 million |
- Margins: Nine-month income before other income and expense was about 27.3% of revenue. Management’s NOI measure, which adds depreciation and amortization back to that income, was approximately $20.29 million, up 7.28% year over year. Same-store revenue, operating expense excluding depreciation and amortization, and NOI rose 4.2%, 2.8%, and 5.4%, respectively.
- Cash and investment: Cash and cash equivalents were $14.91 million at September 30, versus $7.46 million at December 31, 2016. Operating cash flow was $12.03 million; investing activities used $46.94 million, including $45.57 million to acquire rental property and $4.14 million for property improvements. Financing activities provided $42.36 million.
- Debt and liquidity: Balance-sheet mortgage notes payable were $233.62 million and notes payable were $25.00 million at September 30; total liabilities were $270.16 million, exceeding total assets of $237.78 million, leaving partners’ capital negative at $32.38 million. The $25 million revolving line was paid down by $8 million on October 5, after quarter-end. Management said operating cash and interest-bearing accounts should fund operations, distributions, debt service and current improvements.
- Mortgage rates ranged from 3.24% to 5.97%, with a 4.59% weighted average rate. The line of credit was extended through October 31, 2020. The filing reports compliance with its financial covenants at September 30. Separately, the partnership’s proportionate share of joint-venture non-recourse debt was approximately $54.3 million.
Material changes and significant events
- Revenue rose 8.5% in Q3 and 5.8% year to date. Q3 net income fell 28.0%, while nine-month net income rose 53.4%.
- The Q3 revenue increase included about $617,000 from the Woodland Park acquisition. Q3 operating expenses rose 13.2%, including approximately $875,000 associated with that property; interest expense rose 19.3%, of which about $477,000 was attributable to Woodland Park.
- Year-to-date income from unconsolidated joint ventures rose to $2.72 million from $1.22 million, largely reflecting gains on unit sales. The filing attributes approximately $4.24 million of gains to joint-venture property sales in the 2017 nine-month period, versus $1.14 million in 2016.
- On July 6, the partnership acquired the 126-unit Woodland Park Apartments in Newton, Massachusetts, for $45.6 million. It initially used the line of credit, a $16 million loan from HBC Holdings (controlled by Harold Brown), and cash. The HBC loan was repaid September 29 using proceeds from a $22.25 million KeyBank loan at 3.79%, due in 2027; interest-only payments apply through October 2022.
- Cash distributions to partners were $3.36 million during the first nine months, versus $2.81 million in the prior-year period. Distributions were $0.90 per Depositary Receipt for the nine months, compared with $0.75.
Outlook, risks and other considerations
- Management expected revenue gains to continue through June 2018, but anticipated softer rent increases in the third and fourth quarters of 2018, citing growing Greater Boston housing supply and strained rent affordability. It said rental growth may pause before further significant increases.
- Management reported residential renewals of about 60%, with average rent increases of 4.1%; new leases represented about 40%, with increases of 2.9%. Occupancy at November 1, 2017 was 97.4% for residential units and 100% for commercial space.
- Management expected joint-venture unit sales to meet expectations and estimated a complete sellout of approximately $25.6 million by year-end 2018. In October, the partnership announced a regular distribution of $0.30 per Depositary Receipt and a special distribution of $0.94 per receipt, payable to holders of record December 15, 2017. Management said the special distribution was intended to return funds in light of expected taxable income.
- Key risks include local economic and rental-market conditions, competition and rent affordability, property operating costs, interest rates and refinancing access, acquisition execution, and environmental or insurance exposures. Management reported no material environmental liabilities known to it and no material pending legal proceedings. It reported no impairment loss for the first nine months.
- Related-party transactions are significant: property management is provided by an entity owned by the general partner’s majority shareholder, and HBC Holdings is controlled by Harold Brown. The filing also describes service charges and investments involving the management company and its affiliates.
Important facts for investors to verify
- How much of the year-to-date earnings increase is recurring property performance versus joint-venture unit-sale gains.
- The effect of Woodland Park’s operating contribution and financing on future earnings, cash flow and leverage, including the post-quarter $8 million line-of-credit repayment.
- The timing and funding of scheduled mortgage maturities, refinancing needs, and compliance with line-of-credit covenants.
- Whether rent growth and occupancy hold up amid the supply and affordability pressures management identified.
- The expected taxable income and rationale for the announced special distribution, alongside the partnership’s cash needs for debt service, capital improvements and future acquisitions.