Business context and reporting period
New England Realty Associates Limited Partnership (NERA) filed this Form 10-K for the fiscal year ended December 31, 2014. It owns and operates residential, mixed-use and commercial real estate, primarily in Eastern Massachusetts and Southern New Hampshire. At year-end, NERA reported 2,412 apartment units and 19 leased condominium units, plus commercial properties; it also held 40%–50% interests in nine unconsolidated joint ventures. Depositary Receipts trade on NYSE MKT under the symbol NEN.
Key financial metrics
| Metric | 2014 | 2013 |
|---|---|---|
| Revenue | $42.63 million | $38.36 million |
| Income before other income and discontinued operations | $10.90 million | $11.13 million |
| Net income | $1.02 million | $5.66 million |
| Net income per unit / per Receipt | $7.96 / $0.27 | $43.55 / $1.45 |
| Cash provided by operating activities | $11.84 million | $13.44 million |
| Cash and cash equivalents, year-end | $14.02 million | $14.01 million |
| Mortgage notes payable | $196.07 million | $198.52 million |
| Total assets / total liabilities | $177.78 million / $205.14 million | $185.35 million / $207.19 million |
| Partners’ capital | $(27.37) million | $(21.85) million |
| Annual distributions per unit / per Receipt | $30 / $1.00 | $30 / $1.00 |
Revenue increased 11.1%; reported expenses rose 16.5%. Income before other income declined 2.1%, while net income fell 81.9%. The filing does not provide a conventional gross margin; income before other income and discontinued operations was about 25.6% of revenue, versus 29.0% in 2013. The $9.55 million interest expense substantially offset operating income.
Material changes versus the prior year
- Rental income grew 11.2%, driven in part by a full year of Hamilton Green rental activity versus six months in 2013, as well as rental-rate increases. Same-store rental income increased 5.8%.
- Expenses increased $4.50 million. Hamilton Green’s additional six months of operations accounted for much of the increase; other pressures included repairs, utilities, taxes and insurance, depreciation, and leasing costs.
- Interest expense increased 19.2%, primarily because Hamilton Green had a full year of mortgage interest. The share of joint-venture losses improved to $0.33 million from $1.17 million.
- 2013 net income included a $3.68 million gain on the sale of Nashoba Apartments; no comparable property-sale gain was reported in 2014.
- Operating cash flow decreased $1.60 million. Capital improvements totaled $5.60 million in 2014, and NERA made no new property acquisitions during the year.
- Residential vacancies were 53 of 2,431 units (2.2%) at December 31, 2014, compared with 39 units (1.6%) a year earlier. Commercial space was fully occupied at year-end, versus 1.0% vacancy a year earlier.
Debt, liquidity and capital allocation
- Year-end consolidated mortgage debt was $196.07 million, with a weighted-average interest rate of 4.81%; substantially all debt was fixed-rate and mortgages mature through 2029. Scheduled NERA mortgage maturities include $0.14 million in 2015, $1.18 million in 2016 and $7.86 million in 2018.
- NERA’s proportionate share of non-recourse joint-venture debt was approximately $60.33 million, in addition to consolidated mortgage debt. The filing reports $333.98 million of long-term debt across NERA, subsidiaries and investment properties collectively.
- NERA entered into a three-year, $25 million revolving credit facility in July 2014; none was drawn at year-end. It carries a floating rate and financial covenants, is secured by pledged interests in subsidiaries and joint ventures, and cannot fund distributions or equity repurchases.
- Cash was nearly unchanged year over year at $14.02 million. Distributions of $3.86 million and unit/Receipt repurchases of $2.69 million were paid during 2014. NERA repurchased 44,025 Depositary Receipts during the year.
- Management expected operating cash and cash on hand to fund operations, distributions, debt service and planned improvements. The filing does not provide a current ratio or other conventional current-liquidity measure.
Outlook, risks and unusual items
Management anticipated similar same-store rental growth for much of 2015 and occupancy broadly in line with 2014, and expected the Partnership to outperform 2014. It forecast higher first-quarter 2015 expenses because of severe cold and snowfall, while anticipating stable insurance, leasing, real estate tax and bad-debt expenses. NERA planned approximately $3.94 million of 2015 capital improvements. These are management expectations, not guarantees.
- Principal risks include dependence on rental income, competition and local-market concentration, rising operating costs, refinancing and debt-covenant risks, and the illiquidity of real estate. The Partnership also cites uninsured or underinsured losses, environmental and mold exposure, climate-related costs, joint-venture risks, litigation, tax-law changes and cybersecurity risks.
- Management reported no material pending litigation and no known material environmental liabilities. Routine legal proceedings occur in the ordinary course.
- Related-party governance merits attention: The Hamilton Company, owned by General Partner majority shareholder Harold Brown, manages the properties and received approximately $1.75 million in 2014 management fees, plus approximately $0.93 million in administrative and other fees. The Partnership also paid $75,000 for asset-management consulting to Hamilton’s president; the filing states there was no written agreement with that individual.
- The Partnership adopted new discontinued-operations guidance early in 2014. The 2013 property-sale gain is therefore a significant comparability item. No impairment loss was recorded for 2012–2014.
- On March 10, 2015, after year-end, the repurchase authorization was increased from 1.5 million to 2.0 million Receipts and extended through March 31, 2020. A quarterly distribution of $7.50 per unit ($0.25 per Receipt) was approved for payment in March 2015.
Most important facts for investors to verify
- Review the consolidated and joint-venture debt schedules together, including the $60.33 million proportionate JV debt and near-term maturities, covenant terms and refinancing requirements.
- Assess whether operating cash flow can sustainably cover distributions, debt service, planned capital spending and continued buybacks; reported partners’ capital is negative.
- Separate same-store operating trends from Hamilton Green’s acquisition contribution and the nonrecurring 2013 Nashoba sale gain when comparing earnings.
- Examine related-party fees, ownership interests and approval processes, particularly the Hamilton management relationship and affiliated joint ventures.
- Track occupancy, rent growth, concessions, operating expenses and the execution and funding of the 2015 capital-improvement plan.