New England Realty Associates Limited Partnership — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. The unaudited interim financial statements cover a Massachusetts/New Hampshire real estate partnership focused on residential apartments, condominiums and commercial properties. At quarter-end, it owned 2,251 apartment units and 19 condominium units directly, plus interests in nine unconsolidated joint ventures.
Financial results and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $8.65 million | $8.00 million | $25.28 million | $24.10 million |
| Income before other income and discontinued operations | $2.98 million | $2.35 million | $8.32 million | $7.66 million |
| Continuing operations income (loss) | $0.46 million | $(0.83) million | $0.92 million | $(1.55) million |
| Net income (loss) | $0.46 million | $(0.78) million | $8.72 million | $(1.38) million |
| Operating cash flow | Not reported for quarter | Not reported for quarter | $5.92 million | $5.84 million |
- Revenue and operating performance: Nine-month revenue increased 4.9%; rental income rose 5.0%. Expenses increased 3.1%, led by higher snow-removal and other operating costs. Reported income before other income and discontinued operations was 32.9% of revenue, versus 31.8% in the prior-year period. Q3 revenue increased 8.0%, while that income measure rose 27.0%.
- Unusual earnings item: Nine-month net income included a $7.71 million gain on the May sale of Avon Street Apartments. The property sold for $8.75 million; proceeds were reinvested in Battle Green Apartments through a Section 1031 exchange. Excluding discontinued operations, continuing-operations income improved, but the reported net-income swing primarily reflects the property-sale gain.
- Cash flow and investment: Nine-month operating cash flow was $5.92 million. Investing activities used $2.72 million, including the Battle Green acquisition and property improvements; financing activities used $2.13 million. Cash increased $1.07 million to $4.32 million. Capital improvements totaled approximately $2.06 million; management planned a further $375,000 for the rest of 2011.
- Debt and liquidity: At September 30, notes payable were $3.67 million and mortgage notes payable were $139.42 million. Mortgage debt carried a 5.53% weighted-average stated rate; maturities include $41.36 million in 2013 and $7.89 million in 2014. The balance sheet reports total liabilities of $148.66 million against assets of $127.70 million and negative partners’ capital of $20.96 million. Estimated fair value of the Partnership’s mortgage debt was $155.94 million. Separately, the Partnership’s proportionate share of joint-venture nonrecourse debt was approximately $61 million.
- Distributions: The Partnership approved quarterly distributions of $7.00 per unit ($0.70 per depositary receipt); nine-month distributions paid totaled $2.76 million.
Material changes and management outlook
- The Partnership sold the 66-unit Avon Street property and acquired the 48-unit Battle Green property for $10 million. Battle Green was initially financed partly with a $3.999 million, 6% loan from Treasurer Harold Brown; a new $5 million mortgage at 4.95% was completed in July, and the affiliate loan was repaid. The new mortgage matures in 2026.
- Management cited Greater Boston apartment demand, historically low vacancies and rent growth, with occupancy of 97.8% at the Partnership’s residential properties versus 97.0% a year earlier. It expected rental-rate pressure to continue for 18–36 months and operating-expense growth to remain below revenue growth.
- Management forecast 2011 revenue to exceed core 2010 revenue by more than $1 million (4%) and full-year net operating income before depreciation and amortization of $17.5 million, up 7% from 2010. These are forecasts, not reported results. Management said cash reserves and expected rental income should fund operations, debt service, planned improvements and distributions.
- Management anticipated a significant refinancing round of approximately $50 million in 2013–2014 and said it would monitor debt markets. The filing notes that most mortgages have prepayment penalties and the Partnership does not separately reserve for refinancing costs.
- Listing risk: NYSE Amex notified the Partnership that it did not meet the continued-listing minimum equity requirement as of June 30, 2011; the filing cites equity below $2 million and losses in two of the three most recent fiscal years. The Partnership submitted a compliance plan on October 4 and expected a decision in Q4 2011. Delisting could materially affect its financial condition and results.
- Related-party and other risks: The management company is owned by the General Partner’s majority shareholder, and it receives management fees and other service payments. The Partnership also has affiliate borrowing, including HBC Holdings debt with a right to demand repayment on six months’ notice; it paid an additional $1 million in October 2011, reducing that balance to $2.669 million. Ordinary-course litigation was not material; management reported no known material environmental liabilities. Risks include local real-estate conditions, occupancy and collections, operating costs, refinancing availability, interest rates, insurance and property hazards.
Important facts for investors to verify
- NYSE Amex’s decision on the submitted compliance plan and the Partnership’s current listing status.
- Actual full-year 2011 results versus management’s revenue and NOI forecasts, and the extent to which earnings depend on property-sale gains.
- Funding and refinancing plans for the 2013–2014 mortgage maturities, including potential prepayment costs and the affiliate lender’s demand rights.
- Cash available for distributions after debt service, capital spending and reduced joint-venture distributions as Dexter Park begins principal amortization.
- Terms, oversight and financial impact of related-party management, professional-service and lending arrangements.