New England Realty Associates Limited Partnership — FY2020 Form 10-K
Business and period: Annual report for the year ended December 31, 2020. NERA owns and operates residential and commercial real estate primarily in Eastern Massachusetts and Southern New Hampshire, including 2,911 wholly owned residential units and interests of 40%–50% in seven joint ventures. Residential properties generated about 95% of rental income. The filing also provides fourth-quarter results.
Financial performance
| Metric | 2020 | 2019 |
|---|---|---|
| Revenue | $62.10 million | $60.48 million |
| Total expenses | $47.13 million | $43.21 million |
| Income before other income (expense) | $14.97 million | $17.27 million |
| Net income | $1.42 million | $6.55 million |
| Net income per unit / depositary receipt | $11.70 / $0.39 | $53.48 / $1.78 |
| Operating cash flow | $17.45 million | $22.45 million |
| Capital improvements | $3.24 million | $3.90 million |
- Revenue rose 2.7%, largely because Mill Street, a 181-unit property acquired in December 2019, contributed about $3.72 million. Excluding Mill Street, same-store revenue declined 3.5%.
- Expenses rose 9.1% as reported, including higher depreciation and amortization, taxes and insurance, and costs associated with Mill Street. Excluding that acquisition, expenses declined 3.1%.
- Interest expense increased 12.3% to $13.71 million. Income from unconsolidated joint ventures fell 90.4% to $0.16 million, principally reflecting no comparable condominium sale gains in 2020 and lower earnings at Dexter Park.
- Fourth-quarter 2020 revenue was $14.83 million and net loss was $0.97 million, versus fourth-quarter 2019 revenue of $15.45 million and net income of $1.90 million.
Liquidity, debt and distributions
- Cash and cash equivalents were $18.65 million at year-end, up from $7.55 million. Total assets were $291.67 million; total liabilities were $333.14 million, and partners’ capital was negative $41.47 million.
- Consolidated debt comprised $283.44 million of mortgage notes and a $17.00 million line-of-credit balance. The filing separately reports approximately $71.03 million as NERA’s proportionate share of unconsolidated joint-venture debt; this is not included in consolidated debt.
- Mortgage rates were generally fixed, with a 4.43% weighted average rate on consolidated mortgages. NERA and its subsidiaries and joint ventures collectively had $27 million of variable-rate debt, including the line of credit. Management reported compliance with line-of-credit covenants at year-end.
- The $25 million revolving credit facility had $17 million drawn. Its renewal was not completed by year-end; NERA exercised a one-year extension and continued discussions on a three-year renewal. Proposed lender terms would restrict additional draws until December 31, 2022, subject to stated conditions.
- Mortgage maturities are concentrated: approximately $102.57 million is scheduled in 2023. Total contractual debt payments shown for 2021 are $19.53 million, including the $17 million line-of-credit balance.
- Operating cash flow funded operations, while cash increased by $11.10 million. NERA paid $4.68 million in 2020 distributions, unchanged at $38.40 per unit ($1.28 per receipt); a $9.60-per-unit ($0.32-per-receipt) quarterly distribution was approved for March 2021.
Material changes, outlook and risks
- COVID-19 materially affected leasing around Boston-area colleges and universities. Fourth-quarter rent collections were approximately 94% at wholly owned properties (95% residential, 87% commercial) and 95% at joint ventures. These collections are not necessarily indicative of future receipts.
- Residential vacancy was 6.2% on February 1, 2021, versus 3.0% a year earlier; joint-venture vacancy was 15.6%, versus 1.2%. Management cited elevated vacancies, rent reductions and concessions, and uncertainty about the 2021 leasing season. Fourth-quarter renewal rents increased 1.6% on average, while new-lease rents decreased 12.3%.
- Gross rents receivable were approximately $2.87 million at December 31, up $2.14 million from a year earlier; the allowance for doubtful accounts was approximately $1.45 million, versus $0.24 million in 2019.
- Management expected the local market to remain soft, with further rent decreases and concessions. It anticipated cash from operations and interest-bearing accounts would fund current operations, distributions, debt payments and planned improvements. Planned 2021 capital improvements were approximately $4.2 million; no quantified earnings or revenue guidance was provided.
- The repurchase program was extended through March 2025, but repurchases were temporarily suspended effective April 15, 2020 because of pandemic-related uncertainty. NERA repurchased 5,328 depositary receipts during 2020 before the suspension.
- Other risks include refinancing and interest-rate exposure, LIBOR transition, property operating costs, tenant credit and leasing demand, related-party management arrangements, joint-venture obligations, and concentration in the Greater Boston region. The General Partner guarantees certain property and joint-venture debt; NERA also states it may support some joint ventures despite having no legal obligation to fund certain deficits.
- No material litigation was reported. The auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded controls were effective. The auditor identified property impairment assessment and related-party identification and transactions as critical audit matters; no property impairment was recorded in 2020.
Investor verification priorities
- Review the status and final terms of the line-of-credit renewal, including draw restrictions, covenant changes and the $17 million outstanding balance.
- Monitor 2021 leasing, vacancy, concessions, collections and receivables—especially at student-oriented properties—and the adequacy of the doubtful-account allowance.
- Assess the 2023 mortgage maturity concentration and refinancing capacity, including the separately reported joint-venture debt and guarantees.
- Reconcile cash available for distributions and planned capital spending with the negative partners’ capital balance and debt obligations.
- Examine joint-venture performance, related-party fees and governance, and the assumptions supporting management’s impairment assessments.