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, 2020. NERA owns 29 properties in Eastern Massachusetts and Southern New Hampshire, including 2,892 apartments, 19 condominium units and commercial space, and holds 40%–50% interests in seven joint ventures. Results reflect the COVID-19 pandemic and the contribution of the Country Club Garden Apartments acquisition, completed in December 2019.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $15.14 million | $15.16 million | $47.28 million | $45.03 million |
| Income before other income (expense) | $3.23 million | $4.18 million | $12.02 million | $12.71 million |
| Net income (loss) | $(0.44) million | $1.38 million | $2.39 million | $4.65 million |
| Net cash provided by operating activities | Not provided for quarter | Not provided for quarter | $13.30 million | $15.74 million |
- Q3 revenue was nearly flat year over year, while operating expenses rose 8.5% to $11.91 million. Income before other income and expense fell 22.7%; net results shifted to a loss.
- For the first nine months, revenue rose 5.0%, but expenses increased 9.1%, interest expense rose 12.5% to $10.29 million, and net income declined 48.5%.
- Calculated income-before-other-expense margin was about 21.3% in Q3 2020 versus 27.6% in Q3 2019, and 25.4% for the first nine months of 2020 versus 28.2% in 2019.
- At September 30, cash and cash equivalents were $16.85 million, up from $7.55 million at December 31, 2019. Total assets were $293.09 million; total liabilities were $332.42 million, leaving partners’ capital at negative $39.33 million.
- Mortgage notes payable were $283.93 million and the line of credit balance was $17.00 million. Mortgage rates ranged from 3.53% to 5.66%, with a weighted average of 4.43%. The filing reports $71.05 million as NERA’s proportionate share of joint-venture non-recourse debt, off balance sheet.
- Nine-month cash flows included $2.25 million of rental-property improvements, $3.51 million of partner distributions, and a net increase in cash of $9.30 million. Quarterly distributions remained $9.60 per unit ($0.32 per depositary receipt); nine-month distributions were $0.96 per receipt.
Material changes versus prior comparable periods
- Mill Street contributed approximately $944,000 of Q3 rental income and $2.92 million for the first nine months. Excluding Mill Street, management reported Q3 same-store revenue down 6.2%, expenses down 3.8%, and net operating income down 8.0%.
- Higher Q3 depreciation and amortization, interest expense, and weaker joint-venture results contributed to the quarterly loss. NERA’s joint-venture results were a $250,000 loss in Q3 2020, compared with $225,000 income in Q3 2019.
- Nine-month joint-venture income declined to $669,000 from $1.29 million, partly because 2019 included gains from condominium sales that did not recur in 2020.
- The allowance for doubtful accounts increased to approximately $1.10 million from $240,000 at year-end 2019. Rents receivable increased approximately $1.02 million from December 31, 2019.
Outlook, risks and unusual items
- Management said it cannot reliably estimate the pandemic’s full effect on results, cash flows, financial condition or liquidity. Q3 rent collections were approximately 95% for wholly owned properties—95% residential and 93% commercial—and 90% for joint ventures.
- Residential vacancy at November 1, 2020 was 8.3%, compared with 3.4% a year earlier; joint-venture vacancy was 22.8%, compared with 0.9%. Dexter Park alone reported 112 vacant units, or 27.4%. Management expected elevated vacancies through the balance of 2020 and the first half of 2021 and reported offering lower rents and up to two months’ free rent.
- Management reported Q3 rent increases averaging 2.3% on renewals and decreases of 3.1% on new leases. It described the local market as softening and said future occupancy, rent levels and leasing outcomes were uncertain.
- The $25 million revolving credit facility had $17 million drawn at quarter-end and was due to expire October 31, 2020. After quarter-end, NERA exercised a one-year extension and paid an approximately $37,500 fee; a longer renewal remained under discussion. Proposed covenant relief would restrict further draws through December 31, 2022, subject to lender terms and approval. NERA reported compliance with facility covenants at September 30.
- Mortgage maturities are concentrated in 2023, when approximately $102.65 million is due. NERA reported total mortgage debt of $285.33 million before deferred financing costs in its maturity schedule.
- The repurchase program was extended to 2025 but temporarily suspended from April 15, 2020 due to economic uncertainty. NERA reported no material pending legal proceedings and effective disclosure controls.
- Key risks include pandemic-related rent collection and leasing weakness, tenant concessions and delayed evictions, property impairment, refinancing availability, interest-rate exposure and covenant compliance. Management provided no quantitative earnings or occupancy guidance.
Most important facts for investors to verify
- Whether rent collections, vacancies, concessions and bad-debt allowances improved or worsened after September 30, particularly at Boston-area student-oriented properties and Dexter Park.
- Final terms and covenant requirements for the credit-facility extension or renewal, including restrictions on additional draws and available liquidity.
- Plans and financing capacity for the approximately $102.65 million of 2023 mortgage maturities.
- Whether operating cash flow can sustain distributions, capital improvements and debt service if rental income remains pressured.
- Potential additional support needs or guarantees associated with joint ventures, including the reported proportionate share of $71.05 million of joint-venture debt.