Business context and reporting period
New England Realty Associates Limited Partnership (NERA) filed its annual report for the fiscal year ended December 31, 2018. It owns and operates predominantly residential rental properties, plus commercial properties, in Eastern Massachusetts and Southern New Hampshire. At year-end, NERA reported 2,711 apartment units and 19 leased condominium units; it also held 40%–50% interests in eight joint ventures accounted for under the equity method.
Financial and operating performance
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue | $58.0 million | $52.8 million | +9.8% |
| Expenses | $43.1 million | $38.7 million | +11.4% |
| Income before other income and expense | $14.9 million | $14.1 million | +5.5% |
| Interest expense | $12.4 million | $11.1 million | +11.5% |
| Income from unconsolidated joint ventures | $1.6 million | $3.9 million | -58.0% |
| Net income | $4.2 million | $6.9 million | -39.9% |
| Net income per depositary receipt | $1.12 | $1.86 | -39.8% |
Rental income was $57.5 million, up 9.9%. Management attributed much of the growth to acquisitions, including Hamilton Highlands and the prior-year Woodland Park purchase, as well as higher rents. Excluding those acquisitions, management reported same-store revenue growth of 4.4% and same-store operating-expense growth of 0.7%. The filing gives same-store NOI growth of 5.3% when excluding depreciation and amortization. Residential vacancy was 2.1%, versus 1.7% a year earlier; commercial vacancy was 1.3%, versus none.
Operating cash flow was $25.6 million, compared with $23.6 million in 2017. Investing activities used $2.4 million; financing activities used $21.4 million, including $4.5 million of partner distributions. Cash increased by $1.8 million to $9.1 million. Capital improvements were approximately $4.1 million.
At year-end, consolidated mortgage notes payable were $252.4 million and notes payable, including the revolving credit line, were $2.0 million; reported total debt was $254.4 million. Total assets were $247.0 million, total liabilities $282.7 million, and partners’ capital was negative $35.6 million. The filing also reports NERA’s proportionate share of non-recourse joint-venture debt at approximately $71.2 million, separate from consolidated debt. Mortgage maturities include $102.6 million in 2023. Cash and the line of credit are not a full measure of liquidity: the $2.0 million line balance was repaid in January 2019.
Material changes versus the prior comparable period
- Revenue growth was more than offset at the bottom line by higher expenses and interest costs and a sharp decrease in joint-venture income.
- The joint-venture income decline reflected a $1.5 million NERA share of a defeasance charge on the Dexter Park refinancing, partly offset by gains from condominium-unit sales. Joint-venture unit-sale gains were approximately $4.4 million in 2018, versus $6.1 million in 2017.
- NERA acquired the 79-unit Webster Green Apartments in March 2018 for $34.5 million, funded with cash, an $8.0 million line draw, and assumption of a $21.5 million mortgage.
- Distributions fell to $36.00 per unit ($1.20 per receipt) from $64.50 per unit ($2.15 per receipt). The 2017 total included a special distribution; 2018 distributions were quarterly regular payments.
Outlook, commentary, risks and unusual items
Management expected 2019 renewal rents to increase approximately 3%–4% and said it expected similar same-store operating results, with stronger performance from recent acquisitions. It planned approximately $3.5 million in 2019 capital improvements. Management also projected the remaining units in two condominium-sale joint ventures would sell in the first and second quarters of 2019. These are expectations, not guarantees.
The filing notes early signs of market softening: leasing commissions rose 24.3% to approximately $460,000. Key risks include geographic concentration, rental competition, higher operating and insurance costs, refinancing and interest-rate exposure, illiquid real estate, and potential uninsured losses. NERA reported approximately $52.9 million of variable-rate debt across the Partnership and its joint ventures; a 100-basis-point rate change would affect annual interest cost by approximately $479,000, assuming caps are not in effect. NERA guaranteed the $125 million Dexter Park joint-venture loan with HBC Holdings.
Related-party arrangements are significant: Hamilton, an affiliate of the general partner, manages the properties and received approximately $2.3 million in management fees and $1.4 million in administrative and other charges from NERA in 2018. Harold Brown, who controlled 75% of the general partner’s voting securities, died in February 2019; his estate holds voting control, and Jameson Brown was elected treasurer and CFO. The Partnership reported no material litigation. Its auditor issued unqualified opinions on the financial statements and internal controls; management also concluded controls were effective.
Important facts for investors to verify
- Review the 2023 mortgage maturity concentration, refinancing plans, and debt covenants; confirm the line of credit was repaid in January 2019.
- Assess the Dexter Park guarantee and other joint-venture exposure, including the reported $71.2 million proportionate share of joint-venture debt and investments with negative carrying values.
- Evaluate the recurring earnings impact of the Dexter Park defeasance charge and the contribution of condominium-sale gains to joint-venture income.
- Check 2019 occupancy, rental growth, leasing commissions, capital spending, and progress on the remaining condominium sales against management’s outlook.
- Review governance and succession following Harold Brown’s death, the estate’s voting control, and the terms and oversight of related-party management and service fees.