New England Realty Associates Limited Partnership — Q2 2017 Form 10-Q
Business context and reporting period
Unaudited results cover the three and six months ended June 30, 2017, compared with the same 2016 periods. The Partnership owns 25 properties, including 2,506 apartments, and holds 40%–50% interests in nine joint ventures with additional residential and mixed-use properties, primarily in Eastern Massachusetts and Southern New Hampshire.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenue | $12.79 million, up 4.4% | $25.53 million, up 4.5% |
| Income before other income and expense | $3.97 million, up 22.8% | $7.71 million, up 16.0% |
| Net income | $2.48 million, up 153.3% | $4.38 million, up 98.0% |
| Interest expense | $2.55 million, up 0.1% | $5.07 million, down 0.6% |
| Net cash from operating activities | Not provided for quarter | $8.26 million, versus $6.82 million |
For the six-month period, operating income before other items was approximately 30.2% of revenue, versus 27.2% in 2016; net margin was approximately 17.1%, versus 9.0%. Net income growth included substantially higher equity-method income from joint ventures, driven largely by gains on condominium sales: the Partnership’s share of JV income was $1.73 million, up $1.07 million. Management reported same-store revenue growth of 4.5%, NOI growth of 7.5%, and same-store operating expense growth of 1.2%, excluding depreciation and amortization.
At June 30, cash and cash equivalents were $10.95 million, compared with $7.46 million at year-end 2016. Total assets were $190.98 million; mortgage notes payable were $211.93 million, net of financing costs; total liabilities were $223.11 million and partners’ capital was negative $32.13 million. The $25 million revolving credit line had no balance at June 30. The Partnership reported compliance with its credit-line covenants at that date. Its mortgage rates ranged from 2.80% to 5.97%, with a weighted average rate of 4.63%. Separately, its proportionate share of joint-venture non-recourse debt was approximately $54.47 million.
Material changes versus the prior comparable period
- Revenue increased as rental demand and rates improved. Six-month rental income rose 4.6% to $25.31 million.
- Six-month operating expenses were nearly flat, up 0.2%: higher operating costs, utilities, snow removal, taxes and insurance were largely offset by lower repairs, maintenance and depreciation.
- Higher JV income reflected gains on sales of 17 units totaling approximately $2.37 million, compared with gains of about $0.24 million on three units in the 2016 period. This makes the net-income increase partly dependent on asset-sale activity.
- Operating cash flow increased, while investing outflows included property improvements and contributions to joint ventures. Cash distributions to partners were $2.24 million, versus $1.87 million; distributions were $0.60 per Depositary Receipt for the six months, versus $0.50.
Outlook, risks, contingencies and unusual items
- Management expected rental growth to continue through the balance of 2017 and anticipated similar performance for the Partnership’s holdings. It cited residential renewals of approximately 63% with average rent increases of 4.0%; new leases had increases of approximately 2.9%.
- On July 6, 2017, after quarter-end, the Partnership acquired the 126-unit Woodland Park Apartments in Newton for $45.5 million. Funding included a $25 million KeyBank line-of-credit draw, a $16 million loan from HBC Holdings, LLC, controlled by Harold Brown, and cash reserves. The related-party loan bears 4.75% interest, interest-only, and matures July 16, 2018. Management said it was pursuing refinancing and a new long-term loan, expected to close in Q3 2017.
- The $25 million credit line’s original July 31, 2017 expiry was extended for 90 days while renewal discussions continued. This creates refinancing and liquidity execution risk, particularly alongside the short-term related-party borrowing.
- Management raised its expected sellout value for remaining Hamilton Bay and 1025 Hancock Street condominium units from $23 million to $25 million, expecting sellout by end-2018 and approximately $8 million of proceeds attributable to the Partnership by then. These are estimates, not guaranteed proceeds.
- Risks include New England market and tenant conditions, rent collection and leasing, operating-cost inflation, interest rates, refinancing availability, property competition, insurance limitations, environmental exposure and acquisition risks. Management reported no material pending legal proceedings, no material environmental liabilities known to it, and no impairment loss in the first six months. A broken pipe damaged 24 apartments at 62 Boylston Street; insurance payments received through June 30 were approximately $344,000.
- Related-party relationships are significant: the management company is owned by the General Partner’s majority shareholder, and related parties receive management and service fees. Management stated disclosure controls were effective and reported no material second-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Whether the credit line was renewed or replaced, and the final terms and timing of refinancing the Woodland Park acquisition and $16 million related-party loan.
- How much future earnings and cash available for distributions depend on condominium-sale gains versus recurring property operations.
- Joint-venture debt maturities, refinancing exposure and any expected funding needs, given the Partnership’s stated intention to support certain ventures despite having no legal obligation to fund their deficits.
- Actual rent growth, occupancy and operating costs relative to management’s outlook; residential vacancy was 4.0% on August 1, 2017, versus 3.0% a year earlier.
- The extent and terms of related-party fees, loans and other transactions, as well as the assumptions behind estimated condominium-sale proceeds.