Business context and reporting period
New England Realty Associates Limited Partnership (NERA) filed its Form 10-K for the fiscal year ended December 31, 2013. It owns and operates residential and commercial real estate, primarily in Eastern Massachusetts and Southern New Hampshire. At year-end, NERA reported 2,412 apartment units, 19 leased condominium units and commercial properties; it also held 40%–50% interests in nine joint ventures. The publicly traded depositary receipts trade as NEN on NYSE MKT.
Financial performance and position
| Metric | 2013 | 2012 | Change or context |
|---|---|---|---|
| Revenue | $38.36 million | $35.17 million | Up 9.1%; rental income rose 9.1%, including about $1.88 million from Hamilton Green, acquired in July. |
| Expenses | $27.23 million | $22.39 million | Up 21.6%; includes higher depreciation, operating and maintenance costs, taxes and administration. |
| Income before other income and discontinued operations | $11.13 million | $12.78 million | Down 12.9%. |
| Income from continuing operations | $1.96 million | $3.60 million | Down 45.7% after interest and joint-venture losses. |
| Net income | $5.66 million | $3.63 million | Up 55.5%, primarily due to a $3.68 million gain on the Nashoba Apartments sale. |
| Net income per depositary receipt | $1.45 | $0.92 | 2013 included $0.95 per receipt from discontinued operations, chiefly the property-sale gain. |
| Cash from operating activities | $13.44 million | $11.95 million | Cash and cash equivalents ended 2013 at $14.01 million, versus $6.98 million. |
| Consolidated mortgage debt | $198.52 million | $138.06 million | Increase largely reflects the Hamilton Green acquisition and financing activity. |
| Partners’ capital | $(21.85) million | $(22.52) million | Negative at both year-ends. |
Management reported approximately 98% occupancy at year-end 2013, broadly level with the prior year. Same-store revenue increased 3.7%, but same-store operating expenses rose by more than 10%, reducing same-store NOI by 2.3%; including acquisitions, overall NOI increased 3.8%. The filing does not provide a clear consolidated operating-margin measure beyond its stated income measures.
NERA paid distributions of $30 per unit ($1.00 per receipt), totaling $3.89 million, in 2013; the 2012 total was $3.93 million. A quarterly distribution of $7.50 per unit ($0.25 per receipt) was approved for payment March 31, 2014.
Material changes and financing
- NERA acquired the 193-unit Hamilton Green apartment property for $62.5 million in July 2013. It sold Nashoba Apartments in May for $4.3 million and used the exchange proceeds toward Hamilton Green under a Section 1031 exchange.
- Hamilton Green’s December refinancing provided a $38.5 million mortgage at 4.67%, with two years of interest-only payments and subsequent amortization. NERA contributed approximately $1.85 million of additional cash toward payoff and refinancing costs.
- Four property refinancings generated approximately $28.2 million in net cash after repayment of existing mortgages. NERA also paid off the Hamilton Cypress mortgage.
- At December 31, consolidated mortgage debt maturities included $8.65 million in 2014, $2.14 million in 2015 and $7.86 million in 2018; $176.91 million was due thereafter. Consolidated mortgage rates ranged from 3.25% to 5.97%, with a 4.83% weighted average rate.
- Joint ventures had $137.88 million of mortgage debt in total; NERA’s proportionate share of joint-venture non-recourse debt was approximately $60.20 million. The filing reports approximately $336.40 million of long-term debt across NERA, subsidiaries and investment properties.
Outlook, risks and unusual items
- Management expected overall NOI and net cash flow after debt service to grow in 2014. It anticipated real-estate tax increases would abate, while severe winter weather and storms early in 2014 could again weigh on costs. It planned approximately $3.3 million of capital improvements.
- Management was negotiating refinancing of three loans maturing in 2014 and 2015, anticipating about $2 million of additional funds and lower rates without principal amortization. These were expectations, not completed transactions.
- Cash from operations and interest-bearing accounts was expected to fund operations, distributions, required debt payments and current improvements. The partnership also considers property sales or refinancing, acquisitions and receipt repurchases when deploying cash.
- Key risks include regional market concentration, tenant demand and rent collection, competition, operating-cost and weather volatility, refinancing and covenant risk, property illiquidity, uninsured or underinsured damage, and joint-venture exposure. Substantially all property debt is mortgage-secured; the filing states that most debt is non-recourse, subject to customary exceptions.
- Joint ventures are not controlled by NERA. One investment’s carrying value fell below zero after a distribution; NERA has no legal obligation to cover future deficits but says it intends to fund its share if needed.
- Related-party arrangements warrant attention: The Hamilton Company, owned by the General Partner’s majority shareholder, manages the properties and receives management and service fees. The filing reports approximately $1.58 million in 2013 management fees and approximately $1.43 million in charges for professional and property services; the Hamilton Company also received fees from joint ventures.
- The Nashoba sale gain materially increased reported net income, while continuing-operations income declined. Depreciation and amortization rose 39.3%, and management cited harsh winter snow-removal and heating costs and professional fees related to an abandoned refinancing.
- No material pending litigation was reported. Management assessed disclosure controls and internal control over financial reporting as effective; the independent auditor gave an unqualified opinion on the financial statements but was not engaged to opine on internal-control effectiveness.
Most important facts for investors to verify
- How much of 2013 earnings and per-receipt income is recurring, excluding the Nashoba sale gain and discontinued operations.
- Whether management achieves the projected 2014 NOI and cash-flow growth despite weather, operating-cost increases and capital spending.
- Refinancing outcomes and terms for loans maturing in 2014–2015, and the ability to meet scheduled maturities and debt service.
- Cash available for distributions after property improvements, debt obligations, acquisitions and receipt repurchases; distinguish unrestricted cash from tenant deposits and other restricted balances.
- The performance, debt exposure and potential support needs of the nine unconsolidated joint ventures, including the investment with a negative carrying value.
- The economics and oversight of Hamilton Company related-party fees, services and ownership interests in joint ventures.
- Share and receipt counts and repurchase-program disclosures: the filing contains differing outstanding-count figures in different sections, so current amounts should be checked against subsequent filings.