Business context and reporting period
New England Realty Associates Limited Partnership (NERA) filed this Form 10-K for the fiscal year ended December 31, 2017. It owns and operates residential, mixed-use and commercial real estate, primarily in Eastern Massachusetts and Southern New Hampshire. At year-end, it owned 2,632 apartment units, 19 leased condominium units and 108,043 square feet of commercial space, and held 40%–50% interests in nine joint ventures with 722 residential units.
The filing is annual; it also provides unaudited fourth-quarter results. Class A interests trade through depositary receipts on NYSE American under NEN.
Financial and operating performance
- Revenue: $52.83 million in 2017, up 6.6% from $49.56 million. Rental income was $52.37 million, up 6.6%.
- Expenses and earnings: Expenses rose 6.6% to $38.68 million. Income before other income and expense increased 6.7% to $14.14 million. Net income rose 40.1% to $6.94 million, or $55.77 per unit ($1.86 per depositary receipt).
- Drivers: Woodland Park, acquired in July for $45.6 million, contributed about $1.27 million of rental income and $1.81 million of operating expenses. Income from unconsolidated joint ventures increased to $3.91 million from $1.79 million, primarily reflecting $6.14 million of gains on joint-venture condominium sales.
- Cash flow: Operating cash flow was $16.14 million. Investing activities used $45.53 million, including the Woodland Park purchase and $5.80 million of property improvements. Financing activities provided $29.16 million. Cash and cash equivalents ended the year at $7.24 million, down $0.22 million.
- Debt and liquidity: Consolidated mortgage notes payable were $233.22 million and the revolving credit line balance was $17.00 million, for total reported debt of approximately $250.22 million. Mortgage debt carried a 4.59% weighted-average rate; the $25 million credit line was extended to October 2020. NERA reported compliance with its credit-line covenants. Its proportionate share of joint-venture non-recourse debt was approximately $54.12 million, outside consolidated debt.
- Capital and distributions: Partners’ capital was negative $35.32 million. NERA paid $7.99 million in distributions, or $64.50 per unit ($2.15 per receipt), including a special year-end distribution. The January 2018 quarterly distribution was $9.00 per unit ($0.30 per receipt).
- Occupancy: Residential vacancy was 1.7%, versus 1.4% in the prior year; commercial space was fully occupied. Fourth-quarter revenue was $13.87 million and net income was $1.69 million.
Material changes versus 2016
Revenue and expenses each increased 6.6%; expenses excluding Woodland Park increased approximately 1.6%. Interest expense increased 9.0% to $11.11 million, reflecting the acquisition financing and greater line-of-credit use, partly offset by mortgage principal repayments. Joint-venture income more than doubled, principally due to higher condominium-sale gains. Cash used in investing rose substantially because of the Woodland Park acquisition; financing cash flow turned positive, largely reflecting new borrowing.
Outlook, risks and unusual items
- Management expected 2018 same-store revenue to be broadly comparable to 2017, operating expenses to remain in check, and the Woodland Park acquisition to improve performance. Management cited strong rental demand and renewal increases above 3%, while cautioning about affordability pressures and the pace of rent growth.
- NERA planned approximately $3.45 million of capital improvements in 2018. It also reported a March 2018 purchase agreement for a 79-unit Needham apartment complex at $34.5 million, with an expected $21.5 million mortgage assumption; closing remained subject to customary conditions.
- Joint-venture unit sales generated material gains in 2017. Management anticipated further sellout proceeds from the Hamilton Bay and 1025 Hancock ventures, and was reviewing refinancing options for Dexter Park’s mortgage, which matures in 2019.
- Principal risks include geographic concentration, competition and rental-market changes, higher operating costs, property damage or environmental liabilities, refinancing and interest-rate exposure, and joint-venture risks. Much of the property debt is mortgage-secured; the credit line is floating-rate and secured by subsidiary and joint-venture interests.
- Related-party matters warrant attention: Hamilton, owned by the General Partner’s majority owner, manages the properties and received management and other fees. A $16 million related-party loan used in the Woodland Park acquisition was repaid after long-term financing was obtained. NERA also disclosed negative carrying values for certain joint-venture investments and an intention, without legal obligation, to fund its share of future operating deficits if needed.
- No material litigation was reported. The 2017 financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting.
Investor verification priorities
- Review the debt schedule and refinancing plans, especially the 2019 Dexter Park maturity, the 2020 credit-line maturity and the line’s variable-rate exposure.
- Assess whether operating cash flow and available borrowing capacity can sustain distributions, planned capital spending and the proposed Needham acquisition.
- Separate recurring property performance from joint-venture sale gains when evaluating 2017 net income growth.
- Examine related-party management fees, services and governance safeguards, alongside the General Partner’s concentrated control.
- Confirm the closing, financing and expected returns of the Needham acquisition, and monitor residential vacancies and rent growth against management’s outlook.