NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP quarterly report, Q1 FY2013

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, 2013. It owns 24 properties, including 2,251 apartments, 19 condominium units and commercial space, and holds 40%–50% interests in nine unconsolidated joint ventures with 798 apartments and commercial space. Its properties are primarily in Eastern Massachusetts and Southern New Hampshire.

Key financial results and position

Revenue growth reflected higher rents. Operating expenses rose 3.4% to $5.980 million; the largest increase was operating expense, up $206,000, mainly because of snow removal and utilities in the colder, snowier winter. Interest expense declined 4.8% to $1.841 million, and the equity-method loss from joint ventures narrowed to $317,000 from $403,000. The reported income statement implies an operating margin before other income and discontinued operations of approximately 33.7%, versus 33.8% a year earlier.

At March 31, cash and cash equivalents were $3.379 million, down $3.602 million from year-end. Total assets were $116.574 million; mortgage notes payable were $133.867 million, and total liabilities were $139.562 million. Partners’ capital was negative $22.989 million. The balance sheet therefore reports liabilities exceeding assets. NERA’s proportionate share of unconsolidated joint-venture non-recourse debt was approximately $60.036 million; NERA reports approximately $271.599 million of long-term debt across the Partnership, subsidiaries and investment properties.

Mortgage rates on NERA’s properties ranged from 3.25% to 7.07%, with a 5.3% weighted average. The filing lists approximately $22.304 million of NERA mortgage maturities as current in 2014. Cash distributions were $975,000, including $0.25 per Depositary Receipt ($7.50 per unit). The quarterly distribution exceeded reported net income per Depositary Receipt of $0.23.

Material changes versus the prior comparable period

• Revenue increased 3.3%, while total operating expenses increased 3.4%; higher rental rates drove revenue growth, and winter weather drove much of the operating-cost increase.
• Net income rose 43.8%, aided by lower interest expense and a smaller joint-venture loss.
• Cash from operations increased, but capital spending and financing outflows contributed to a $3.602 million decline in cash. The Partnership paid off a roughly $3.697 million mortgage and refinanced School Street with a $15 million loan.
• Residential vacancy was 3.1% on May 1, 2013, compared with 2.6% on May 1, 2012; commercial vacancy rose to 8.9% from 5.0%.

Outlook, risks and unusual items

Management expects second-quarter revenue to be similar to the first quarter and anticipates further gains in the third and fourth quarters, when many residential leases expire. It cited high occupancy, strong renewals, local employment and university-student demand, and expects positive revenue growth and sustained high occupancy over the next 12–16 months. Management expects 2013 operating expenses to be relatively flat and net operating income to improve. These are forward-looking expectations, not guarantees.

NERA is pursuing refinancing of approximately $27 million of debt with proposed new loans totaling about $47 million, which would add approximately $20 million of debt. No lender commitment had been obtained as of March 31; management expected a possible closing by the end of Q3 2013 and anticipated lower rates. Refinancing may not be available on the expected terms or timeline, and approximately $125,000 of prepayment penalties may apply.

After quarter-end, NERA agreed to sell Nashoba Apartments for $4.3 million, with a May 2013 closing expected. Management estimated net proceeds of approximately $2.15 million and a gain of approximately $3.83 million. The property had a reported book value of $475,237 at March 31. NERA also plans approximately $1.032 million of capital improvements in 2013.

Risks include regional real estate and employment conditions, tenant demand and collections, competition, weather-related costs, debt refinancing and interest-rate exposure, and potential environmental or insurance exposures. Management said it was unaware of material environmental liabilities. The Partnership reported no material pending litigation and no material change to the risk factors in its 2012 Form 10-K. Its properties are managed by Hamilton, an entity owned by the General Partner’s majority shareholder; the filing discloses related-party management and professional-service fees and overlapping ownership and management interests. Management stated disclosure controls were effective and that no material internal-control changes occurred in the quarter.

Important facts for investors to verify

• Whether the proposed $47 million refinancing closes, its final terms, added debt, and any related penalties, particularly given the listed 2014 maturities.
• Whether Nashoba’s sale closes at the expected price and proceeds, and whether the estimated gain is realized.
• How residential and commercial vacancy, renewal rates and rents develop; first-quarter residential performance remained strong, while reported commercial vacancy increased.
• Whether operating costs normalize after the severe winter and whether planned capital improvements remain within budget.
• Liquidity and distribution sustainability: cash declined to $3.379 million, and the per-receipt distribution exceeded quarterly income per receipt.
• The scale and terms of related-party dealings, and NERA’s exposure through joint ventures, including its proportionate share of their non-recourse debt.