Business context and reporting period
New England Realty Associates Limited Partnership (NERA) filed this unaudited Form 10-Q for the quarter ended March 31, 2015. NERA owns 24 properties, including 2,412 apartments, 19 condominium units and commercial space, primarily in Eastern Massachusetts and Southern New Hampshire. It also holds 40%–50% interests in nine joint ventures.
Key financial metrics
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Revenue | $11.08 million | $10.62 million; up 4.3% |
| Income before other income and expense | $2.65 million | $2.56 million; up 3.1% |
| Net income (loss) | $409,658 | $(29,614) |
| Net income (loss) per unit | $3.22 | $(0.23) |
| Operating expenses | $8.43 million | $8.05 million; up 4.7% |
| Interest expense | $2.36 million | $2.39 million; down 1.1% |
| Cash from operating activities | $2.37 million | $2.05 million |
| Property improvements | $872,165 | $548,564 |
| Cash and cash equivalents, March 31 | $14.04 million | $14.02 million at December 31, 2014 |
| Mortgage notes payable, March 31 | $196.04 million | $196.07 million at December 31, 2014 |
| Partners’ capital, March 31 | $(29.13) million | $(27.37) million at December 31, 2014 |
Mortgage rates on NERA’s properties ranged from 3.76% to 5.97%, with a 4.81% weighted average. The $25 million revolving credit facility was undrawn at quarter-end. NERA reported approximately $333.5 million of long-term debt across the Partnership, subsidiaries and joint ventures; its stated proportionate share of joint-venture non-recourse debt was approximately $60.1 million. The filing does not present a conventional current-liquidity ratio.
Material changes versus the prior comparable period
- Rental income rose 4.4%, while total revenue increased 4.3%.
- Operating expenses increased 4.7%, principally because severe winter weather drove snow-removal costs up approximately $490,000. Management said expenses excluding this snow-related increase declined 1.4%.
- Income from unconsolidated joint ventures improved to $125,234 from a $208,252 loss, a positive swing of approximately $333,000; management cited higher rental revenue and lower depreciation and amortization.
- Net income improved by approximately $439,000 to $409,658. NERA said lower interest expense also reflected prior-year mortgage payoffs and refinancing.
- Operating cash flow increased, and cash was nearly unchanged over the quarter after investing and financing outflows. Financing included $1.22 million of unit/receipt repurchases and $951,330 of partner distributions.
Outlook, commentary and risks
Management reported average vacancy below 2% during the quarter and average rental increases of approximately 5% on new residential leases. It expected continued revenue growth in 2015, occupancy broadly keeping pace with the prior year, improving rental gains and slower operating-expense growth. These are expectations, not guidance with quantified earnings or revenue targets.
Management expects cash from operations and interest-bearing accounts to support current operations, distributions, required debt payments and current property improvements. It may also sell or refinance properties. The quarterly distribution was $7.50 per unit, or $0.25 per Depositary Receipt.
Key risks include dependence on Eastern Massachusetts real-estate markets, tenant collections and lease renewals; fixed property costs; weather-driven utilities and maintenance; competition; refinancing availability and interest rates; and potential environmental or uninsured losses. Most debt is fixed-rate, but changing rates can affect debt fair value and financing conditions. NERA reported no material pending legal proceedings, no material change to the prior annual report’s risk factors, and effective disclosure controls. It has no legal obligation to fund joint-venture operating deficits, but intends to contribute if needed; one investment’s carrying value is below zero.
Related-party matters merit attention: the properties are managed by an entity owned by the General Partner’s majority shareholder, and NERA paid related parties management and service fees. The filing also describes common ownership and management links with joint-venture investors.
Most important facts for investors to verify
- Review the debt maturity schedule, mortgage covenants, prepayment provisions and the availability and terms of the undrawn credit line.
- Assess the recurring impact of snow and other operating costs, and whether rent growth and occupancy support management’s 2015 outlook.
- Examine the joint ventures’ debt, performance, refinancing needs and possible future funding requirements, especially the investment with a negative carrying value.
- Evaluate the scale and governance of related-party management, service and joint-venture arrangements.
- Reconcile the substantial negative partners’ capital and mortgage balances with property values, cash generation and distributions; the filing reports estimated fair value of NERA’s mortgage debt of $215.8 million versus its $196.0 million carrying amount.