Business context and reporting period
New England Realty Associates Limited Partnership (NERA) filed this unaudited Form 10-Q for the three months ended March 31, 2018. NERA owns and operates residential, mixed-use and commercial properties primarily in Eastern Massachusetts and Southern New Hampshire, and holds 40%–50% interests in unconsolidated real estate ventures. Results are not necessarily indicative of the full year.
Financial performance and condition
- Revenue: $14.06 million, up 10.3% year over year. Rental income rose 10.4% to $13.94 million; management attributed about $689,000 of the increase to the Woodland Park and Webster Green acquisitions, with additional growth from rents and demand.
- Expenses and operating results: Operating expenses increased 14.4% to $10.30 million, outpacing revenue growth. Income before interest and joint-venture results was $3.76 million, up 0.5%; this was 26.8% of revenue, compared with 29.4% in Q1 2017.
- Net income: $1.88 million, down 0.8%; net income per unit was $15.10 versus $15.23. The filing reports no income-tax provision for the partnership.
- Cash flow: Operating cash flow was $3.85 million versus $3.98 million. Investing used $12.63 million, including $13.21 million for a property purchase, partly offset by joint-venture proceeds and distributions. Financing provided $6.36 million, including an $8.00 million line-of-credit draw. Cash declined $2.41 million to $4.83 million. Partner distributions were $1.12 million.
- Debt and liquidity: At March 31, mortgage notes payable were $253.58 million and the revolving credit line was fully drawn at $25.00 million; total stated debt was $278.58 million. Mortgage rates ranged from 3.61% to 5.81%, with a 4.52% weighted average. The credit line expires October 2020 and NERA reported compliance with its covenants. The filing anticipates operating cash and interest-bearing accounts will cover current operations, distributions, debt service and planned improvements.
- Balance sheet: Assets were $256.12 million, up from $226.81 million at year-end, largely reflecting property additions. Partners’ capital was negative $34.56 million. The filing also reports approximately $53.94 million as NERA’s proportionate share of non-recourse joint-venture debt, outside consolidated debt balances.
Material changes versus the prior comparable period
- Revenue increased $1.32 million, while expenses rose $1.30 million. Repairs and maintenance increased 24.6%, depreciation and amortization 18.0%, and interest expense 18.4%.
- Management attributed about $1.02 million of the expense increase to the Woodland Park and Webster Green acquisitions. Excluding acquisition-related effects, it cited higher repairs, snow removal and other operating costs.
- Income from unconsolidated ventures rose 63.6% to $1.10 million, primarily due to gains from condominium-unit sales. NERA’s share included about $1.65 million of gains on unit sales, versus about $711,000 in Q1 2017; these gains supported reported income.
- On March 29, NERA acquired the 79-unit Webster Green Apartments for $34.5 million, funded with approximately $13.0 million cash and assumption of a $21.5 million mortgage. It drew $8.0 million on its credit line for part of the cash payment.
Outlook, commentary, risks and unusual items
- Management reported high occupancy and expects revenue increases to continue through 2018. It said same-store residential revenue increased 3.23%; excluding four outliers, the average year-over-year increase was 4.6%. It expects second- and third-quarter same-store results to improve. These are management expectations, not formal earnings guidance.
- Residential vacancy was 2.4% at May 1, 2018; commercial vacancy was reported at 0%. Management cited snow removal and real estate taxes as expense pressures and planned approximately $2.38 million of additional capital improvements during 2018.
- A planned $125 million Dexter Park joint-venture refinancing at a fixed 3.99% rate was expected to generate approximately $16 million for NERA, to be used to reduce its credit-line balance. The refinancing was expected to lower the venture’s annual debt service, but a projected $3.75 million defeasance charge would result in an estimated $1.5 million NERA share and materially reduce Q2 2018 net income.
- Management expected Hamilton Bay and Hamilton 1025 joint-venture unit sales to trend toward a third-quarter 2018 sellout estimated at $25.6 million.
- Risks include local real estate and tenant conditions, operating-cost increases, competition, insurance and environmental exposures, interest-rate and refinancing risk, acquisition execution, and potential tax-law changes. For tax years beginning after 2017, IRS audit adjustments may be collected directly from the partnership and reduce cash available for distributions.
- NERA disclosed ordinary-course litigation but no material pending proceedings, and reported no impairment loss in Q1. Management stated disclosure controls were effective and that no material change in internal control occurred during the quarter. Related-party management and service arrangements, including transactions with entities associated with the general partner’s owners, are disclosed.
Important facts for investors to verify
- Whether the Dexter Park refinancing closes on the anticipated terms, and the realized defeasance charge and Q2 earnings impact.
- Credit-line usage, interest-rate exposure, covenant compliance and repayment plans, given the full $25 million draw and the October 2020 maturity.
- Acquisition performance and the effect of higher repairs, taxes, depreciation and interest costs on operating margins and cash generation.
- The timing and proceeds of the joint-venture unit sales, and how much of reported venture income reflects one-time sale gains.
- Joint-venture debt exposure, potential support for ventures with negative carrying values, and the terms and oversight of related-party services.