Business Context and Reporting Period
New England Realty Associates Limited Partnership (NERA) filed this Form 10-K for the fiscal year ended December 31, 2015. It owns and operates residential, mixed-use and commercial real estate, principally in Eastern Massachusetts and Southern New Hampshire. At year-end, it owned 2,506 apartment units and 19 leased condominium units, and held 40% to 50% interests in nine joint ventures with 788 residential units.
Financial and Operating Performance
| Metric | FY 2015 | FY 2014 | Change |
|---|---|---|---|
| Revenue | $45.48 million | $42.63 million | +6.7% |
| Expenses | $32.77 million | $31.73 million | +3.3% |
| Income before other income and expense | $12.71 million | $10.90 million | +16.6% |
| Interest expense | $9.81 million | $9.55 million | +2.7% |
| Income from unconsolidated joint ventures | $0.87 million | $(0.33) million | Improved by $1.19 million |
| Net income | $3.77 million | $1.02 million | +268.1% |
| Net income per depositary receipt | $1.00 | $0.27 | +$0.73 |
Revenue growth primarily reflected the September 2015 acquisition of the 94-unit Residence at Captain Parker, which contributed about $677,000 of 2015 rent, and rental rate increases. Rental income increased 6.8%; operating expenses rose 3.3%, including costs from the acquisition and higher repairs and snow removal. Net income growth also reflected the improvement in joint-venture results.
- Occupancy was above 98% at year-end; residential vacancy was 1.6%, versus 2.2% in the prior year. Commercial space was fully occupied.
- Management reported 5.1% same-store revenue growth for 2015 and 6.9% growth in the fourth quarter. Renewal rents increased about 4.5% on average; new-lease rents increased about 5.5%.
- Cash provided by operating activities was $13.81 million, compared with $11.84 million in 2014. Cash and cash equivalents were $10.30 million at year-end, down $3.72 million.
- Capital improvements were about $6.69 million in 2015. The filing identifies $3.52 million of planned 2016 improvements.
Debt, Liquidity and Distributions
- At December 31, 2015, the balance sheet reported $195.94 million of mortgage notes and $25.00 million drawn on a $25 million revolving credit line. Total reported debt was $220.94 million, compared with $196.07 million a year earlier. Mortgage maturities were concentrated after 2020, with $1.18 million of current maturities in 2016.
- The credit line carried a 3.875% rate at year-end, was secured by interests in subsidiary properties and joint ventures, and had financial covenants. NERA reported compliance with those covenants at December 31, 2015.
- In January 2016, NERA obtained a $20.071 million mortgage on Captain Parker at one-month LIBOR plus 201 basis points and used loan proceeds and cash reserves to repay the revolver. The loan matures in 2026; NERA is a limited guarantor of certain obligations.
- Across NERA and its joint ventures, the filing reports approximately $332.19 million of long-term debt and $35 million of variable-rate debt at year-end. A 100-basis-point change in variable rates would change annual interest costs by about $300,000; the estimated fair value of fixed-rate debt would change by about $19 million.
- Cash from operations and interest-bearing accounts were expected by management to fund operations, debt service, distributions and current improvements. The balance sheet showed total liabilities of $232.98 million against assets of $202.17 million and partners’ capital of negative $30.81 million.
- NERA paid distributions of $30 per unit ($1 per depositary receipt), totaling $3.79 million in 2015, unchanged per unit from 2014. A $7.50-per-unit ($0.25-per-receipt) quarterly distribution was approved for payment in March 2016.
Material Changes, Outlook and Risks
- NERA acquired Residence at Captain Parker for $31.6 million in September 2015, using the full revolver and cash reserves. It also repurchased 54,682 depositary receipts during 2015 for $2.75 million and extended its repurchase authorization through March 2020, with the program limit raised to 2 million receipts.
- Management expects occupancy to track or exceed 2015 levels and anticipates the Partnership and joint ventures will outperform 2015, citing leasing activity and operating expense trends. It said 2015 distributions were tax-advantaged, but whether 2016 distributions would receive similar treatment was unclear.
- Management cited rent and occupancy strength, with same-store revenue up 5.1%, while noting previously anticipated pressure on rental rates. Its outlook is forward-looking and subject to economic, market, cost and financing uncertainties.
- Key risks include geographic concentration, competition and rental demand, property operating-cost inflation, refinancing and interest-rate exposure, debt covenants, insurance gaps, environmental and climate-related exposures, and risks from non-controlling joint ventures. Management reported no material environmental claims or material pending litigation.
- Related-party arrangements merit attention: the Hamilton Company, owned by the General Partner’s majority shareholder, manages the properties and received about $1.87 million in management fees and about $0.99 million in administrative and related service fees from NERA and its subsidiaries in 2015. The filing also describes management-affiliated ownership in joint ventures.
- A June 2015 fire damaged about 10 apartments at Westgate. NERA reported insurance coverage for repairs and lost rent, approximately $606,000 received, and an estimated $346,000 insurance recovery receivable at year-end.
- The independent auditor gave an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded disclosure controls and internal controls were effective.
Important Facts for Investors to Verify
- Confirm the post-year-end Captain Parker mortgage terms, limited-guaranty exposure and full repayment of the revolving line.
- Review mortgage maturity and refinancing exposure, variable-rate debt, covenant headroom and the disclosed joint-venture debt.
- Assess whether occupancy, same-store rent growth and operating-cost trends support management’s 2016 outlook and planned capital spending.
- Evaluate distribution coverage against operating cash flow, debt service, capital improvements and ongoing unit repurchases; confirm the tax treatment of 2016 distributions.
- Review related-party fees, affiliated joint-venture interests and governance oversight, as well as the status of the Westgate insurance recovery.