New England Realty Associates Limited Partnership — FY 2012 Form 10-K
Reporting period: Year ended December 31, 2012; filed March 27, 2013. The partnership owns and operates residential and commercial real estate, primarily in Eastern Massachusetts and Southern New Hampshire. Its portfolio included 2,251 apartment units, 19 leased condominium units, commercial properties, and 40%–50% interests in nine joint ventures with 799 residential units.
Financial performance and position
| Metric | FY 2012 | FY 2011 | Change / context |
|---|---|---|---|
| Revenue | $35.63 million | $34.04 million | Up 4.7%; rental income rose 4.9% to $35.24 million. |
| Income before other income and discontinued operations | $12.92 million | $11.36 million | Up 13.7%; margin increased to approximately 36.3% from 33.4%. |
| Net income | $3.63 million | $9.29 million | Down 60.9%; 2011 included a $7.72 million gain on the sale of Avon Street. |
| Net income per depositary receipt | $0.92 | $2.36 | 2011 included $1.98 per receipt from discontinued operations. |
| Cash provided by operating activities | $11.95 million | $9.09 million | Increased approximately 31.5%. |
| Cash and cash equivalents | $6.98 million | $4.05 million | Up $2.93 million. |
| Consolidated mortgage debt | $138.06 million | $139.16 million | Partnership-property debt; the $1.67 million related-party note was repaid in 2012. |
| Partners’ capital | $(22.52) million | $(21.31) million | Negative at both year-ends. |
Operating expenses were $22.71 million, nearly unchanged year over year. Lower operating costs (including utilities and snow removal), renting expenses, and bad debts offset higher taxes and insurance, repairs, administration, and depreciation. Interest expense declined 2.0% to $7.80 million. The partnership’s share of joint-venture losses narrowed to $1.49 million from $1.91 million. No impairment loss was recognized.
Cash flows included $2.36 million of property improvements, $3.93 million of partner distributions, and $906,000 of unit and receipt repurchases. Distributions were $1.00 per receipt for 2012, versus $0.93 in 2011; a further $0.25-per-receipt quarterly distribution was approved for March 2013. Cash from operations and interest-bearing accounts were expected by management to fund current operations, distributions, debt payments, and planned improvements.
Material changes and operating trends
- Management attributed rental-income growth to higher rents, including approximately 4.2% rental-rate increases, and the 2011 Battle Green acquisition. Residential renewals were approximately 67%, with average increases of 3.7%; new leases had increases of approximately 5.2%.
- Management reported lower vacancy loss and concessions during 2012. At February 1, 2013, residential vacancy was 1.7%, compared with 1.4% a year earlier; commercial vacancy was 5.0%, versus none a year earlier.
- Fourth-quarter 2012 revenue was $9.10 million and net income was $1.19 million. Management said high occupancy and rental-rate increases supported fourth-quarter results.
- Capital improvements totaled approximately $2.36 million in 2012; approximately $2.3 million was planned for 2013.
Outlook, debt, risks, and unusual items
- Management outlook: Management anticipated positive revenue growth and sustained high occupancy over the following 18–24 months, with 2013 operating expenses expected to be relatively flat. It noted uncertainty about whether the shift toward renting would persist.
- Refinancing: Approximately $41.3 million of partnership-property mortgage debt was scheduled to mature in 2013. At filing, management was pursuing refinancing of Boylston Downtown and Westgate; no firm lender commitment was reported. In March 2013, School Street was refinanced with a $15 million, 3.7% loan due in 2023. The Hamilton Cypress mortgage was paid off in February 2013. The contemplated Boylston and Westgate refinancings could increase borrowing materially; outcomes and proceeds were not certain.
- Leverage and liquidity: The filing reports approximately $276.3 million of mortgage debt across partnership and joint-venture properties on a gross basis; NERA’s proportionate share of non-recourse joint-venture debt was approximately $60.3 million. Most debt is fixed-rate, but substantial maturities, refinancing availability, prepayment costs, and property cash flows remain important risks. Cash and security deposits above federal insurance limits totaled approximately $8 million at year-end.
- Joint ventures and related parties: NERA does not control its nine joint ventures. Its general partner is owned by Harold and Ronald Brown, and Hamilton, the management company, is wholly owned by Harold Brown. Hamilton received approximately $1.45 million in 2012 management fees, in addition to administrative and service fees; the partnership also paid $75,000 for asset-management consulting without a written agreement. These arrangements and joint-venture investments involve related-party conflicts and should be assessed in context.
- Other risks and contingencies: The portfolio is geographically concentrated and exposed to tenant demand, competition, operating-cost inflation, interest rates, environmental and catastrophic losses, insurance limitations, regulation, and property illiquidity. Management reported no material pending litigation and no known material environmental liabilities; the partnership does not carry directors’ and officers’ insurance.
- Other unusual item: The Advisory Committee approved seeking a sale of Nashoba Apartments in 2013. The filing states there is no assurance of a sale at an acceptable price. The 2011 Avon Street sale generated the material gain that elevated that year’s reported net income.
Important facts for investors to verify
- Confirm the status, final terms, and proceeds of the 2013 mortgage refinancings, especially the then-uncommitted Boylston and Westgate transactions and the large 2013 maturities.
- Review debt on both a consolidated and proportionate joint-venture basis, including maturity schedules, covenants, guarantees, and refinancing or prepayment costs.
- Assess whether operating cash flow can sustain distributions, capital spending, repurchases, and debt service; 2012 distributions per receipt exceeded reported net income per receipt.
- Track occupancy, lease renewals, rent growth, commercial vacancy, and the 2013 lease expirations and expirations of major commercial leases.
- Evaluate related-party management fees, consulting arrangements, joint-venture ownership, and the governance implications of concentrated control.
- Consider the proposed Nashoba sale, its expected proceeds, and the effect of any sale on recurring earnings and cash flow.