New England Realty Associates Limited Partnership — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. The unaudited filing covers a Massachusetts-based property partnership with 27 owned properties and 40%–50% interests in eight joint ventures, primarily in Eastern Massachusetts and Southern New Hampshire.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $15.16 million | $14.55 million | $45.03 million | $43.23 million |
| Income before other income and expense | $4.18 million | $3.22 million | $12.71 million | $10.85 million |
| Net income | $1.38 million | $0.66 million | $4.65 million | $2.59 million |
| Net income per unit | $11.32 | $5.31 | $37.93 | $20.84 |
| Net cash from operating activities | Not provided for the quarter | Not provided for the quarter | $15.74 million | $20.82 million |
Revenue increased 4.2% in both the quarter and year-to-date periods. Net income rose 109.6% in Q3 and 79.3% year to date. Net income margins were approximately 9.1% for Q3 2019 versus 4.5% in Q3 2018, and 10.3% year to date versus 6.0%. Income before other income and expense was 27.6% of Q3 revenue and 28.2% of year-to-date revenue.
- Cash and liquidity: Cash and cash equivalents were $14.15 million at September 30, 2019, up from $9.06 million at December 31, 2018. The Partnership reported $5.09 million of net cash increase for the first nine months. The $25 million revolving credit line had no balance outstanding; it expires October 31, 2020. Management expects operating cash and cash reserves to cover current operations, distributions, debt payments and planned property improvements.
- Debt: Mortgage notes payable were $251.51 million net of deferred financing costs. Scheduled mortgage principal maturities total approximately $252.80 million, including $102.64 million in 2023. The weighted-average rate on Partnership mortgages was 4.62%. The line-of-credit covenants were reported as satisfied.
- Balance sheet: Total assets were $243.67 million and total liabilities $281.85 million, with partners’ capital of negative $38.18 million. Mortgage debt exceeds reported asset carrying value. The balance sheet also reports $19.79 million of distributions and losses in excess of investments in unconsolidated joint ventures.
- Distributions and capital: Three 2019 quarterly distributions of $9.60 per unit ($0.32 per Depositary Receipt) were approved. Nine-month distributions were $3.53 million. Repurchases of Depositary Receipts and partnership units totaled $3.68 million in the first nine months.
Material changes versus prior comparable periods
- Q3 rental income grew $0.61 million; management attributed growth to higher rents and demand, plus approximately $0.08 million from the Hamilton Highlands acquisition. Year-to-date rental income increased $1.82 million, including approximately $0.62 million from that acquisition.
- Q3 operating expenses decreased 3.1%; year-to-date expenses were nearly flat, down 0.2%. Management cited lower depreciation and repairs, partly offset by higher taxes, insurance and administrative costs, including new property-management software.
- Same-store Q3 revenue increased 3.8%, operating expenses decreased 1.7%, and income before other income and expense increased 20.0%, excluding Hamilton Highlands. Management reported same-store NOI growth of 6.7% excluding depreciation and amortization. Residential vacancy was 3.4%, compared with 3.3% a year earlier.
- Year-to-date operating cash flow declined from $20.82 million to $15.74 million, while cash increased. Management cited changes in joint-venture distributions and operating factors. Joint-venture distributions received were approximately $3.27 million, compared with $22.78 million in the prior-year period, which included substantial refinancing-related proceeds.
- Joint-venture income increased year to date to $1.29 million from $1.07 million. The comparison reflects condominium-sale gains in both periods and a $3.83 million Dexter Park refinancing defeasance charge in 2018. Q3 joint-venture income declined to $0.22 million from $0.53 million, primarily because no units were sold in Q3 2019.
Outlook, risks and unusual items
- Management reported Q3 rent increases averaging 3.5% for renewals and 2.7% for new leases; for the balance of 2019 it expected renewal increases of 2.0%–3.0%. No formal earnings or financial guidance was provided.
- On October 2, 2019, an affiliate agreed to acquire Country Club Garden Apartments, a 181-unit property in Woburn, for $59.55 million. The Partnership made a $600,000 purchase deposit and a $630,000 rate-lock deposit for a planned $31 million mortgage; it intended to fund the balance from cash reserves and the credit line. Management expected closing by year-end, subject to the agreement and due diligence.
- In May, Captain Parker refinanced approximately $20.07 million of existing debt with a $20.75 million, fixed-rate 4.05% mortgage due in 2029, with interest-only payments. The Partnership guaranteed the loan and incurred an approximately $202,000 prepayment penalty.
- The Partnership’s debt and joint ventures expose it to interest-rate and refinancing risks. The filing reports approximately $30.66 million of variable-rate debt across the Partnership, subsidiaries and joint ventures; a 100-basis-point rate change would affect annual interest costs by approximately $257,000, assuming caps are not in effect. The Partnership’s proportionate share of joint-venture debt was approximately $71.15 million. It has guarantees on certain joint-venture and property debt and says it intends to fund some joint-venture operating deficits, though it generally has no legal obligation to do so.
- Principal risks include dependence on Greater Boston-area real estate and tenants, operating-cost inflation, financing availability and rates, competition, environmental and insurance exposures, and acquisition execution. Management reported no material pending legal proceedings, no material change in previously disclosed risk factors, and effective disclosure controls.
- A water-pipe break at Hamilton Oaks temporarily displaced residents from 40 apartments. Insurance covered repairs and rental loss; at September 30, the Partnership had received $75,000 and recorded an estimated $103,000 insurance recovery receivable.
Important facts for investors to verify
- Whether the Country Club Garden acquisition closed, its final financing terms, and the resulting impact on liquidity and debt.
- The timing and funding plan for the large 2023 mortgage maturities, and continued compliance with credit-line covenants.
- The scope and potential financial effect of guarantees, joint-venture deficits, and distributions that have reduced investment carrying values below zero.
- Whether rent growth, occupancy and same-store NOI trends continued after the reporting period, alongside rising taxes, insurance, leasing and administrative costs.
- The implications of negative partners’ capital and total liabilities exceeding reported assets, including the valuation assumptions used for real estate and joint-venture interests.