New England Realty Associates Limited Partnership — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparative period is Q1 2015. The unaudited statements are prepared under GAAP and include normal recurring adjustments. The Partnership owns residential, mixed-use and commercial properties in Eastern Massachusetts and Southern New Hampshire, plus interests in nine unconsolidated joint ventures.
Financial performance and position
- Revenue: $12.18 million, up 10.0% from $11.08 million. Rental income rose 10.0% to $12.07 million; laundry and sundry income was $110,000. Management attributed much of the rental increase to the Captain Parker acquisition and higher rents at existing properties.
- Profit: Net income was $1.23 million, up 200.4% from $410,000. Income before other income and expense increased 27.0% to $3.41 million. Net margin was approximately 10.1%, versus 3.7% in Q1 2015. Net income per unit was $9.84 versus $3.22; net income per Depositary Receipt was $0.33 versus $0.11.
- Drivers and costs: Operating expenses rose 4.5% to $8.77 million, slower than revenue growth. A mild winter reduced snow-removal costs; repairs and maintenance, depreciation, taxes and insurance increased. Interest expense rose 6.2% to $2.55 million. Equity-method income from joint ventures increased to $370,000 from $125,000, including a $168,000 gain from two condominium sales.
- Cash flow: Operating activities provided $3.34 million, compared with $2.37 million. Investing activities used $593,000, including $1.44 million of property improvements. Financing activities used $6.87 million, including $20.07 million of new mortgage proceeds, repayment of the $25 million line of credit, distributions and unit repurchases. Cash declined $4.13 million to $6.17 million.
- Balance sheet and liquidity: Total assets were $193.83 million, down from $200.73 million at year-end; liabilities were $225.04 million and partners’ capital was negative $31.21 million. Mortgage notes payable were $214.31 million, compared with $194.50 million at December 31, 2015; the $25 million notes payable balance was repaid, and the revolving credit line had no balance. Management said cash from operations and interest-bearing accounts should fund current operations, distributions, debt payments and planned improvements.
- Debt terms and maturities: Partnership mortgage rates ranged from 2.45% to 5.97%, with a 4.59% weighted-average rate; scheduled annual installments totaled about $850,000. About $198.38 million of mortgage maturities fall thereafter (beyond the listed 2021 schedule). Captain Parker obtained a $20.07 million loan due February 2026 at one-month LIBOR plus 201 basis points. The Partnership also reported approximately $59.20 million as its proportionate share of non-recourse joint-venture debt, which is not consolidated.
Changes versus Q1 2015
- Revenue grew 10.0%; management said 4.6% growth came from same-store operations, with most of the balance primarily attributable to Captain Parker, acquired in 2015.
- Operating expenses increased 4.5% overall, but management reported a 3.7% decrease excluding Captain Parker, primarily reflecting lower snow-removal costs.
- Net income rose by $821,000. Besides higher rental performance, the increase reflected higher joint-venture income, including the condominium-sale gain. Interest expense increased by $150,000, about $120,000 of which related to Captain Parker.
- Cash and cash equivalents fell from $10.30 million at year-end, largely reflecting repayment of the revolving credit line and other financing outflows.
Outlook, risks and notable items
- Management said Q1 performance was consistent with expectations and anticipated occupancy and renewal rates similar to 2015, with comparable quarter-over-quarter revenue gains. This is commentary, not formal numerical guidance; management cautioned that quarterly results are not necessarily indicative of the full year.
- At May 1, residential vacancy was 2.2%, compared with 2.9% a year earlier; commercial space was fully occupied. Q1 residential renewals were about 69%, with an average rent increase of 4.62%; new leases were about 31%, with increases of 7.45%.
- The Partnership planned approximately $1.92 million of additional capital improvements in 2016, after spending approximately $1.44 million in Q1. It also anticipated continued share-receipt repurchases under its plan.
- Interest-rate exposure is material: the Partnership reported approximately $30.07 million of variable-rate debt across the Partnership, subsidiaries and joint ventures. A 100-basis-point rate change, assuming caps are not in effect, would change annual interest costs by approximately $251,000; estimated fair value of fixed-rate debt would change by approximately $19 million.
- Principal risks include local real-estate conditions, rent collection and tenant renewals, operating and utility costs, refinancing availability, competition, property damage and environmental exposure. Management was not aware of material environmental liabilities. It identified no material legal proceedings and reported no material change in previously disclosed risk factors.
- A 2015 fire damaged approximately 10 apartments at Westgate. The Partnership reported insurance coverage for repairs and rental loss and an estimated insurance receivable of approximately $155,000 at March 31, 2016. No impairment loss was recorded in Q1.
- Related-party matters warrant attention: an entity owned by the General Partner’s majority shareholder manages the properties, and the Partnership also pays it management and professional-service fees. The filing describes these arrangements and related joint-venture interests. Management reported disclosure controls as effective and no material Q1 change in internal control over financial reporting.
Key facts for investors to verify
- How much of revenue and profit growth is sustainable same-store performance versus Captain Parker and the one-time joint-venture sale gain.
- Mortgage maturity and refinancing exposure, including the large “thereafter” balance, variable-rate debt, covenant compliance and any guarantor obligations.
- Cash available for planned improvements and distributions after debt service, unit repurchases and other financing needs.
- The financial condition and potential funding needs of the joint ventures, including investments with negative carrying values and the Partnership’s stated intent, despite no legal obligation, to support future operating deficits if needed.
- The nature and oversight of related-party management, service and joint-venture arrangements, and the effect of those arrangements on costs and governance.