New England Realty Associates Limited Partnership — 2016 Form 10-K
Business context and reporting period
Annual report for the fiscal year ended December 31, 2016, filed March 10, 2017. NERA owns and operates residential and commercial real estate, primarily in Eastern Massachusetts and Southern New Hampshire. At year-end it owned 2,506 apartment units, 19 leased condominium units and 108,043 square feet of commercial space, and held 40%–50% interests in nine unconsolidated joint ventures (JVs).
Key financial metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Revenue | $49.56 million | $45.48 million | +9.0% |
| Income before other income and expense | $13.26 million | $12.88 million | +2.9% |
| Net income | $4.95 million | $3.77 million | +31.2% |
| Net income per unit / per depositary receipt | $39.62 / $1.32 | $29.86 / $1.00 | Higher |
| Cash from operating activities | $15.34 million | $13.81 million | Higher |
| Cash and cash equivalents | $7.46 million | $10.30 million | Down $2.83 million |
| Consolidated mortgage debt | $212.71 million | $194.50 million | Higher |
Management-defined NOI—income before other income and discontinued operations plus depreciation and amortization—was approximately $25.44 million, up 8.5% from 2015. Revenue growth was 9.0%; operating expenses rose 11.3%, including depreciation and amortization. Consolidated interest expense was $10.20 million, up 2.2%. The filing reports partners’ capital of negative $34.22 million, versus negative $30.81 million in 2015; total assets were $190.56 million and total liabilities $224.79 million.
The $25 million revolving credit line had no balance at December 31, 2016. The Partnership’s mortgages had a 4.60% weighted-average stated rate; most are property-specific and non-recourse, subject to customary exceptions. Separately, NERA reported approximately $57.03 million as its proportionate share of JV non-recourse debt. The filing also reports approximately $344.89 million of long-term debt across the Partnership, subsidiaries and JVs collectively. Cash-flow uses included $5.16 million of property improvements, $6.73 million of partner distributions and $1.63 million of unit repurchases.
Fourth-quarter 2016 revenue was $12.75 million and net income was $1.53 million, or $0.41 per depositary receipt, compared with $12.13 million, $1.19 million and $0.32, respectively, in fourth-quarter 2015.
Material changes versus prior period
- Rental income increased $4.05 million (9.0%). The principal driver was a full year of Captain Parker apartment revenue in 2016 versus approximately three and a half months in 2015; management also cited rental-rate increases.
- Expenses increased $3.70 million (11.3%). Captain Parker’s full-year operations were a major factor; excluding that property, management attributed increases in part to repairs, maintenance, real estate taxes and depreciation.
- JV income rose to $1.79 million from $0.87 million, primarily reflecting approximately $1.66 million of JV gains on unit sales in 2016, compared with approximately $0.17 million in 2015.
- Cash distributions increased to $54 per unit ($1.80 per receipt) from $30 per unit ($1.00 per receipt), including a special December 2016 distribution of $24 per unit ($0.80 per receipt).
- Captain Parker obtained a $20.07 million floating-rate mortgage in January 2016, used with cash reserves to repay the $25 million revolving-line balance. A single-family property sale generated approximately $104,000 of reported gain, with proceeds applied to mortgage principal.
Guidance, risks and unusual items
Management forecast approximately 5% revenue growth in 2017, with similar normalized operating expenses and a similar pace of unit renovations. It planned approximately $3.75 million of 2017 capital improvements and said operating cash and cash on hand were expected to support operations, distributions, debt payments and current improvements. Management described occupancy and tenant retention as strong and said it would weigh acquisitions, repurchases, debt reduction, reserves and distributions; these are expectations, not guarantees.
Residential vacancy was 1.4% as of February 1, 2017, compared with 1.6% a year earlier; commercial space was fully occupied at that date. Risks include geographic concentration, competition and rental-market changes, property operating-cost inflation, refinancing and interest-rate exposure, illiquid real estate, uninsured or underinsured losses, environmental and litigation exposure, JV dependence, and the possibility of reduced distributions. Variable-rate debt was reported at approximately $30.07 million; a 100-basis-point rate move was estimated to change annual interest costs by about $251,000, assuming rate caps were not in effect.
Important contingencies and governance considerations include a $701,000 estimated insurance receivable for water damage at 62 Boylston Street, for which no payment had been received by year-end; no material pending litigation was reported. The manager, Hamilton, is affiliated with the General Partner’s controlling owner and received management and other fees; the Partnership also reported a $75,000 asset-management consulting fee paid to Hamilton’s president without a written agreement. The Partnership said it had no legal obligation to fund JV deficits but intended to contribute if needed in certain cases. A JV mortgage was paid off on March 1, 2017, requiring an approximately $2.22 million Partnership contribution. The company reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Reconcile consolidated debt, the separately disclosed JV debt and the reported collective long-term debt; review maturity and refinancing exposure, particularly the JV loan due in 2017 and the Dexter Park mortgage due in 2019.
- Assess whether the elevated 2016 distribution is sustainable: it exceeded reported net income per unit and included a special distribution. Review cash reserves, recurring operating cash flow and future capital needs.
- Separate recurring operating performance from Captain Parker’s full-year contribution and JV unit-sale gains when evaluating growth and earnings quality.
- Review related-party management arrangements, fees, JV ownership overlaps and the General Partner’s control over decisions and distributions.
- Confirm the status and recoverability of the 62 Boylston insurance claim and the completed Hamilton Bay mortgage payoff and contribution.