New England Realty Associates Limited Partnership (NEN) — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019; unaudited. The partnership owns and operates residential, mixed-use and commercial real estate in Eastern Massachusetts and Southern New Hampshire, and holds 40%–50% interests in eight joint ventures.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $14.99 million | $14.63 million | $29.87 million | $28.69 million |
| Income before other income/expense | $4.58 million | $3.87 million | $8.53 million | $7.63 million |
| Net income | $1.76 million | $53,000 | $3.26 million | $1.93 million |
| Net income per unit | $14.40 | $0.43 | $26.61 | $15.53 |
| Operating cash flow | Not separately stated | Not separately stated | $11.91 million | $12.41 million |
Revenue grew 2.5% in Q2 and 4.1% for the first half. Income before other income/expense increased 18.3% and 11.8%, respectively. Net income rose sharply year over year, primarily reflecting improved joint-venture results and the absence of the prior-year Dexter Park refinancing defeasance charge. Operating margins before other income/expense were approximately 30.5% in Q2 and 28.6% for the first half; net margins were approximately 11.8% and 10.9%, respectively.
Financial position, cash flow and distributions
- At June 30, assets were $244.5 million, mortgage notes payable were $252.0 million, total liabilities were $282.5 million, and partners’ capital was negative $38.0 million.
- Cash and cash equivalents were $12.6 million, up from $9.1 million at year-end 2018. First-half operating cash flow was $11.9 million; capital improvements used $1.7 million, partner distributions were $2.35 million, and unit repurchases totaled $3.31 million.
- The $25 million revolving credit facility had no balance outstanding; it is extended through October 31, 2020. Management reported compliance with its financial covenants.
- Mortgage debt carried a 4.62% weighted-average interest rate. Scheduled mortgage maturities include approximately $79.9 million in 2023 and $25.4 million in 2024. The partnership’s proportionate share of joint-venture non-recourse debt was approximately $71.2 million, separate from consolidated mortgage debt.
- Quarterly distributions approved in 2019 were $9.60 per unit ($0.32 per depositary receipt), compared with $9.00 per unit ($0.30 per receipt) in 2018.
Material changes and management outlook
- Q2 rental income increased 2.6%; same-store revenue, excluding the Hamilton Highlands acquisition, increased 2.2%. Management cited rent increases and demand; Q2 residential vacancy was 3.2% versus 3.6% a year earlier. August 1 occupancy data showed commercial vacancy of 0.9% versus none a year earlier.
- Management reported Q2 renewal rent increases averaging 3.1% and new-lease increases of 4.1%. For the balance of 2019, it expected rents to continue rising, with renewal increases of 2.5%–3.5%.
- In May 2019, the partnership refinanced the Captain Parker property with a $20.75 million, fixed-rate 4.05% interest-only loan due in 2029, replacing approximately $20.07 million of debt. The refinancing generated a $202,000 prepayment penalty, included in other expense, and the partnership guaranteed the new loan.
- Joint ventures sold their remaining residential units at Hamilton Bay and Hamilton 1025 during the first half. The partnership’s joint-venture income also benefited from unit-sale gains, while the lower volume of sales reduced gains compared with 2018.
- Management expects operating cash and cash reserves to fund operations, distributions, debt service and planned property improvements; it may also sell or refinance properties. It planned approximately $1.14 million of additional capital improvements in 2019.
Risks, contingencies and notable disclosures
- Results and cash flow are exposed to regional real-estate conditions, rent collection and leasing, operating-cost increases, competition, interest rates, and the availability and terms of refinancing. Management cautioned that actual results may differ materially from forward-looking statements.
- Most consolidated mortgages are fixed-rate, but the filing reports $30.75 million of variable-rate debt across the partnership and investment properties. A 100-basis-point rate change, assuming caps are not in effect, would change annual interest costs by approximately $257,000; the estimated fair value of fixed-rate debt would change by approximately $12 million.
- Some joint-venture investment carrying values are below zero. The partnership states it has no legal obligation to fund those ventures’ operating deficits, but intends to provide support if needed in certain cases. It also guarantees the Dexter Park joint-venture mortgage.
- A February water-pipe break displaced residents from 40 apartments for about a week. Insurance had paid $75,000 by June 30, and an estimated $103,000 recovery receivable was recorded.
- No material pending legal proceedings or material changes to previously disclosed risk factors were reported. Management said disclosure controls were effective and there were no material second-quarter changes in internal control over financial reporting.
- Related-party arrangements include property management, professional services and reimbursements involving the management company and affiliates. The filing provides amounts and terms; investors may wish to assess governance and pricing.
Important facts for investors to verify
- Confirm the composition and sustainability of joint-venture income, including unit-sale gains and the effect of the prior-year defeasance charge on comparisons.
- Review the 2023–2024 mortgage maturity concentration, refinancing plans, covenant headroom and the October 2020 credit-line expiry.
- Assess total debt exposure, including the partnership’s share of joint-venture debt, guarantees and any expected voluntary support for deficit investments.
- Verify rent growth, vacancy trends, operating expenses and the planned completion and funding of capital improvements.
- Review related-party fees and transactions, unit repurchases, distributions and the partnership’s negative partners’ capital.