New England Realty Associates Limited Partnership — Q3 2016 Form 10-Q
Business context and period. The unaudited filing covers the quarter and nine months ended September 30, 2016, compared with the corresponding 2015 periods. The Partnership owns or controls residential, mixed-use and commercial properties in Eastern Massachusetts and Southern New Hampshire; it also holds 40%–50% interests in nine unconsolidated joint ventures. Its consolidated portfolio includes 2,506 apartments, 19 condominium units and 108,043 square feet of commercial space. Results are interim and not necessarily indicative of full-year performance.
Financial performance and position
| Metric | Three months ended Sept. 30 | Nine months ended Sept. 30 |
|---|---|---|
| Total revenue | $12.37 million, up 10.4% | $36.81 million, up 10.4% |
| Net income | $1.21 million, up 12.8% | $3.42 million, up 32.6% |
| Net income per unit | $9.69 vs. $8.51 | $27.38 vs. $20.37 |
| Net cash from operations | Not separately reported | $10.16 million vs. $9.60 million |
- Revenue and costs: Nine-month rental income rose 10.4%, including approximately $1.73 million from the Captain Parker acquisition and increases at existing properties. Expenses rose 12.8%, led by depreciation and amortization (+21.8%), repairs and maintenance (+19.5%), and taxes and insurance (+12.3%). Excluding Captain Parker, management reported operating-expense growth of 4.7%.
- Operating results and margins: Nine-month income before other income and expense was $9.75 million, up 4.2%; it was $3.10 million in Q3, down 8.3%. Management-defined NOI—income before other income (expense) plus depreciation and amortization—grew 12.0% year to date, while same-store NOI grew 5.8%. Same-store revenue growth was 5.2%. The stronger year-to-date net income also reflected higher joint-venture income and real-estate sale gains.
- Cash flow and investment: Nine-month operating cash flow was $10.16 million. Investing activities used $2.53 million, including $3.56 million of property improvements, partly offset by joint-venture proceeds and $772,000 of net property-sale proceeds. Financing activities used $10.06 million, including repayment of a $25 million line-of-credit balance, partly offset by $20.07 million of mortgage proceeds. Cash decreased $2.42 million to $7.87 million.
- Debt and liquidity: Mortgage notes payable were $213.09 million at September 30, compared with $194.50 million at year-end 2015; the prior $25 million note payable was repaid. Mortgage rates ranged from 2.51% to 5.97%, with a 4.60% weighted average rate. Scheduled mortgage principal maturities include $1.75 million in 2017 and $7.82 million in 2018; most stated maturities are thereafter. The $25 million revolving credit line had no outstanding balance, and the Partnership reported compliance with its covenants. Management expects operating cash and reserves to fund operations, distributions, debt service and planned improvements.
- Capital and distributions: Partners’ capital was a deficit of $30.89 million. Nine-month partner distributions totaled $2.81 million, or $0.75 per Depositary Receipt. A December 2016 quarterly distribution of $0.25 per receipt and a special distribution of $0.80 per receipt were announced after quarter-end.
Material changes and management commentary
- Captain Parker, a 94-unit Lexington apartment property acquired in 2015 for $31.6 million, contributed to revenue and expense growth. Its $20.07 million mortgage refinancing in January 2016 helped repay the revolving credit balance.
- Income from unconsolidated joint ventures rose to $1.22 million for the nine months, from $525,000. The increase included NERA’s share of gains on condominium sales at Hamilton 1025 and Hamilton Bay. The Partnership also recorded a $104,000 gain on its own sale of a house; sale proceeds reduced the related mortgage.
- Management cited strong tenant retention and rental increases: renewals were approximately 63%, with average increases of 4.9%; new leases had increases of approximately 5.8%. Residential occupancy was 97.6% at November 1, 2016, versus 97.1% a year earlier.
- Management expected similar year-to-date operating gains in Q4 and the first half of 2017, attributing them partly to recent rent increases. It said capital spending might be slowed in 2017 after reviewing prior curb-appeal investments. Management expects 2016 taxable income to exceed financial-statement income.
- The Partnership intends to market remaining condominium units at Hamilton Bay and Hamilton 1025, with a complete sellout expected over the next two years. Management said cash-flow and earnings can fluctuate with property sales, refinancings, rent and expense changes, and tenant losses.
Risks, contingencies and unusual items
- Key exposures include local New England real-estate conditions, tenant demand and collections, operating-cost inflation, refinancing availability, competition, weather and utility costs, insurance limitations, interest rates and property-level environmental risks. Management reported no material known environmental liabilities.
- Joint ventures had approximately $130.55 million of mortgage debt in aggregate; NERA’s proportionate share of their non-recourse debt was approximately $56.91 million. The Partnership has no legal obligation to fund joint-venture deficits but says it intends to fund its share if needed. Some investment carrying values are below zero.
- At September 30, the Partnership had $30.07 million of variable-rate debt across the Partnership and joint ventures. Management estimated a 100-basis-point rate change would alter annual interest costs on the Partnership’s variable-rate debt by approximately $251,000; fixed-rate debt fair value could change by approximately $18 million. These are sensitivities, not earnings forecasts.
- A 2015 fire damaged about 10 apartments; insurance had paid approximately $714,000, with an estimated $155,000 recovery receivable remaining. The filing reported no material pending legal proceedings and no material changes to previously disclosed risk factors.
- Related-party arrangements include property management, professional services and joint-venture investments involving the management company’s owners and employees. Review these fees and governance relationships. Disclosure controls were reported effective, with no material third-quarter change in internal control.
Important facts for investors to verify
- Whether same-store rent and NOI gains persist and whether expense growth—especially repairs, insurance and taxes—moderates.
- Debt maturities, variable-rate exposure, the revolving facility’s availability and renewal terms, and covenant headroom; the filing says the credit line’s original term was three years from July 2014.
- Cash available after capital improvements, regular distributions and the announced special distribution, and the assumptions supporting management’s liquidity outlook.
- Joint-venture sale proceeds, remaining condominium inventory and the expected timing and gains from future unit sales; distinguish recurring operating income from sale-related gains.
- Related-party fees, ownership and control arrangements, as well as the Partnership’s intended but non-contractual support of joint ventures with deficit carrying values.
- The impact of the new lease-accounting standard, which the Partnership was evaluating; no quantified impact was provided.