Business context and reporting period
New England Realty Associates Limited Partnership (NERA) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2015, compared with the same 2014 periods. NERA owns primarily residential and mixed-use properties in Eastern Massachusetts and Southern New Hampshire; it also holds 40%–50% interests in nine unconsolidated joint ventures. The filing describes one operating segment.
Financial performance and position
- Revenue: Third-quarter revenue was $11.21 million, up 5.3%; nine-month revenue was $33.35 million, up 4.8%. Rental income rose 5.4% and 4.9%, respectively.
- Income: Third-quarter net income was $1.07 million ($8.51 per unit), versus $181,000 ($1.41 per unit). Nine-month net income was $2.58 million ($20.37 per unit), versus $434,000 ($3.36 per unit). Operating income before other income and expense was $3.34 million for the quarter and $9.23 million year to date. That represents approximately 29.7% and 27.7% of revenue, respectively, compared with 25.6% and 25.2% in 2014.
- Cash flow: Nine-month operating cash flow was $9.60 million, up from $8.22 million. Investing used $8.99 million, including $4.67 million of property improvements and the Captain Parkers acquisition. Financing used $5.46 million, including distributions and unit repurchases. Cash declined $4.86 million to $9.16 million.
- Debt and liquidity: At September 30, mortgage notes were $195.97 million and the revolving credit line was fully drawn at $25.00 million, for $220.97 million of reported debt. The line bears 3.875% and matures in 2017. Mortgage rates ranged from 3.76% to 5.97%, with a weighted average of 4.81%. NERA reported compliance with the credit-line covenants. It also reported $59.80 million as its proportionate share of non-recourse joint-venture debt, which is not consolidated debt.
- Balance sheet: Total assets were $202.40 million, versus $177.78 million at year-end 2014; partners’ capital was negative $30.15 million. Cash was down from $14.02 million, while rental properties increased to $177.50 million. Estimated fair value of NERA’s mortgage debt was $210.45 million, above its $195.97 million carrying amount.
- Distributions and repurchases: NERA paid $7.50 per unit each quarter through September, or $22.50 per unit year to date ($0.75 per Depositary Receipt). It spent $2.52 million on unit repurchases during the nine months.
Material changes versus the prior comparable period
- Revenue growth reflected rent increases, demand at several properties, and approximately $99,000 of rental income from the newly acquired Captain Parkers property.
- Nine-month expenses increased 1.3%, slower than revenue growth. Higher repairs, operating costs (including severe-winter snow removal), and leasing costs were partly offset by lower depreciation and administrative costs. Third-quarter expenses were slightly lower year over year.
- Income from unconsolidated joint ventures improved to $525,000 for the nine months, from a $423,000 loss. Management attributed the change principally to higher rental revenue and lower depreciation and amortization; results also included a $77,000 property-sale gain.
- Cash fell more sharply than in 2014, mainly because of the acquisition and higher property improvements, despite higher operating cash flow.
Outlook, commentary, risks and unusual items
- Management said third-quarter performance was consistent with expectations and anticipated same-property revenue and operating-expense trends to continue through year-end. It cited renewal increases of about 4.3% and new-lease increases of about 5.7% for the first nine months.
- NERA bought the 94-unit Residences at Captain Parkers in Lexington for $31.6 million, funded with the full $25 million credit line plus cash. Management expected operating changes and heating and electrical improvements to reduce certain costs and produce an above-average return; it anticipated a first-quarter 2016 refinancing that would substantially repay the credit line. These are expectations, not reported outcomes.
- Management said operating cash and interest-bearing accounts should cover current operations, distributions, required debt payments, and planned improvements. It planned approximately $500,000 of additional 2015 capital improvements. Cash flow may vary with property sales or refinancings, rents, expenses, and significant tenant losses.
- Interest-rate risk is material: NERA reported $35 million of variable-rate debt across the partnership, subsidiaries, and joint ventures. A 100-basis-point rate change could change annual interest costs by approximately $300,000, assuming caps are not in effect. The filing also estimates about a $20 million change in the fair value of fixed-rate debt for the same rate movement.
- A June 2015 fire damaged about 10 Westgate apartments. NERA reported insurance coverage for repairs and rental loss, approximately $591,000 received, and an estimated $361,000 recovery receivable at September 30; the balance-sheet insurance receivable was $412,502.
- NERA stated it has no legal obligation to cover joint-venture liabilities or operating deficits, but intends to fund its share of future deficits if needed. Certain venture investment carrying values are below zero.
- The filing reported no material pending legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls. The partnership structure generally results in no entity-level income-tax provision; tax treatment and future taxable income can differ from financial-statement income.
Important facts for investors to verify
- Whether the planned first-quarter 2016 refinancing occurs, and the resulting repayment, interest rate, and covenant headroom on the fully drawn credit line.
- Captain Parkers’ realized operating savings, capital requirements, and return compared with management’s expectations.
- The sustainability of rent growth, leasing costs, occupancy, and expense trends; reported residential vacancy was 2.9% at November 1, 2015.
- Joint-venture debt exposure, negative investment balances, and any actual funding commitments or cash calls.
- Progress and final proceeds on the Westgate insurance recovery and repairs.
- Related-party management and service fees, and the governance implications of the disclosed ownership and control relationships.