New England Realty Associates Limited Partnership — Q1 2014 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2014, compared with Q1 2013. The Partnership owns residential, mixed-use and commercial properties primarily in Eastern Massachusetts and Southern New Hampshire, and holds 40%–50% interests in nine unconsolidated joint ventures.
Key financial results
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Total revenue | $10.62 million | $9.02 million | +17.7% |
| Expenses | $8.05 million | $5.98 million | +34.7% |
| Income before other income and discontinued operations | $2.56 million | $3.04 million | −15.6% |
| Interest expense | $2.39 million | $1.84 million | +29.6% |
| Equity-method loss from joint ventures | $0.21 million | $0.32 million | Loss narrowed |
| Net income (loss) | $(29,614) | $901,625 | Declined $931,239 |
| Net income (loss) per unit | $(0.23) | $6.92 | — |
| Cash from operating activities | $2.05 million | $2.97 million | Down $0.91 million |
Revenue growth primarily reflected the July 2013 acquisition of Hamilton Green, which added approximately $1.04 million of rental income in the quarter. Expenses included approximately $1.75 million associated with that property; depreciation and amortization rose 87.3% to $2.72 million. Excluding depreciation, reported operating costs also increased, including taxes, utilities and repairs.
Management reported same-store rental increases of 6.1%, same-store operating expense growth of 6.9%, and same-store NOI growth of 5.3%. These management-defined same-store measures are not equivalent to the consolidated GAAP results.
Financial position and liquidity
- At March 31, 2014, total assets were $180.15 million, cash and cash equivalents were $10.99 million, mortgage notes payable were $195.07 million, and partners’ capital was negative $23.23 million. Total liabilities were $203.38 million.
- Cash declined $3.03 million during the quarter. Investing activities used $0.28 million, including $0.55 million of property improvements; financing activities used $4.80 million, including $3.45 million of mortgage principal payments, $0.38 million of unit repurchases and $0.97 million of partner distributions.
- Partnership mortgage rates ranged from 3.76% to 5.97%, with a 4.85% weighted average rate. Approximately $7.22 million of Partnership mortgage principal was scheduled to mature in 2015. Management also disclosed approximately $60.03 million as its proportionate share of joint-venture non-recourse debt; the filing reports approximately $332.57 million of combined long-term debt for the Partnership, subsidiaries and investment properties.
- The quarterly distribution was $7.50 per unit, or $0.25 per Depositary Receipt. Management said operating cash and interest-bearing accounts should fund current operations, distributions, required debt service and planned property improvements.
Changes, outlook and risks
- The principal year-over-year change was the shift from profit to a small net loss. Higher rental income was more than offset by higher expenses and interest costs. Management attributed approximately $449,000 of the interest expense increase to Hamilton Green and cited higher debt following 2013 refinancings.
- Management described the multifamily market as strong, said occupancy was broadly comparable with the prior-year period, and expected Q2 occupancy to trend similarly to Q2 2013. It expected overall NOI and net cash flow to grow in 2014; this is commentary, not quantified earnings guidance.
- Management planned approximately $2.76 million of capital improvements for 2014 and was pursuing refinancings, including a planned Dean Street loan closing in June and a Courtyard at Westgate refinancing expected in Q3. It anticipated about $2 million of additional funds from three loan refinancings, with lower interest rates and no principal amortization, subject to completion.
- Risks include local market and tenant conditions, rent collection and lease renewals, operating-cost increases, interest rates and refinancing availability, property competition, weather and uninsured losses, environmental exposure, and acquisition and leverage risks. Management reported no material pending legal proceedings and no material change in the risk factors from its 2013 Form 10-K.
- The Partnership disclosed related-party arrangements with the management company, which is owned by the General Partner’s majority shareholder, including management fees and reimbursements for services. One joint-venture investment had a negative carrying amount; the Partnership said it intends to fund its share of future operating deficits if needed, but has no legal obligation to do so. No impairment loss was recorded in Q1.
Important facts for investors to verify
- Reconcile the MD&A’s stated March 31 cash figure of $10.09 million with the audited-format balance sheet and cash flow statement, both of which report $10.99 million.
- Assess debt-service capacity and the 2015 maturity schedule, including the status and terms of the pending refinancings and planned capital spending.
- Review how acquisition-related depreciation, interest and operating costs affect reported earnings versus management’s same-store NOI commentary.
- Examine related-party service fees and joint-venture exposure, particularly the negative investment balance and management’s stated intention to support future deficits.
- Consider that reported partners’ capital is negative and mortgage debt exceeds consolidated total assets; confirm the implications for leverage, liquidity and distributions.