New England Realty Associates Limited Partnership — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. The unaudited consolidated statements cover the Partnership and subsidiaries; nine properties in which it owns 40%–50% are accounted for under the equity method. The portfolio includes 2,412 apartment units, 19 condominium units and commercial space, primarily in Eastern Massachusetts and Southern New Hampshire.
Financial performance and position
- Q2 revenue: $10.56 million, up 17.3% year over year. Rental income rose 17.2% to $10.44 million; management attributed much of the increase to the 2013 Hamilton Green acquisition and rent increases.
- Q2 earnings: Income before other income and discontinued operations was $2.72 million, down 5.7%. Net income was $282,000 versus $4.47 million in Q2 2013, which included a $3.68 million gain on the Nashoba sale. Continuing-operations income was $282,000 versus $790,000. Net income per unit was $2.18 versus $34.37.
- First-half revenue and earnings: Revenue was $21.18 million, up 17.5%; income before other income and discontinued operations was $5.29 million, down 10.8%. Net income was $252,000 versus $5.37 million, again reflecting the prior-year Nashoba gain. First-half net income per unit was $1.95 versus $41.28.
- Costs and interest: First-half expenses rose 31.4% to $15.89 million, including higher depreciation and amortization, operating costs, taxes and insurance. Interest expense increased 32.3% to $4.77 million, principally reflecting Hamilton Green debt and a higher average debt level. The filing does not provide a consolidated operating-margin figure.
- Cash flow: First-half operating cash flow was $5.36 million, compared with $5.13 million. Investing used $793,000 and financing used $5.96 million; cash declined $1.40 million to $12.61 million. Property improvements were $1.64 million. Partner distributions were $1.94 million and unit repurchases were $941,000.
- Balance sheet and debt: At June 30, assets were $179.71 million, mortgage notes payable $195.63 million, total liabilities $204.18 million and partners’ capital negative $24.47 million. Cash was $12.61 million; net investment in unconsolidated joint ventures was approximately $9.65 million. Consolidated mortgage debt had a 4.82% weighted-average interest rate, with maturities through 2029; $2.13 million was listed as current maturities in 2015. The Partnership’s proportionate share of joint-venture non-recourse debt was approximately $59.83 million.
- Distributions: $7.50 per unit ($0.25 per depositary receipt) was paid quarterly in March and June; the September distribution was approved. First-half distributions per receipt were $0.50.
Changes versus the prior comparable period
- Management reported same-store revenue growth of 6.2%, same-store operating expense growth of 2.4% and same-store NOI growth of 9.5%. Across the full portfolio, management said occupancy for the first half was on par with 2013; residential occupancy was 96.0% on August 1, 2014 versus 95.7% a year earlier, and commercial vacancy was zero versus 10.7%.
- Hamilton Green, acquired in July 2013 for $62.5 million, contributed approximately $2.04 million of first-half rental income and $3.50 million of first-half operating expenses. Management attributed approximately $899,000 of the first-half interest-expense increase to its mortgage.
- First-half losses from unconsolidated joint ventures narrowed to $271,000 from $653,000, partly due to gains on unit sales at Hamilton Bay. No discontinued-operation income or real estate sale gain was recorded in 2014; the 2013 Nashoba transaction generated the $3.68 million gain.
Outlook, commentary and risks
- Management expected occupancy in both urban and suburban properties to exceed prior-year levels in coming quarters and anticipated continued portfolio revenue gains through year-end. It cited tenant renewals of approximately 66%, with average rent increases of 4.3%; new leases had increases of approximately 7.2%.
- Management expected cash from operations and interest-bearing accounts to cover current operations, distributions, required debt payments and planned improvements. It planned approximately $1.67 million of additional 2014 capital improvements. These are expectations, not guarantees.
- After quarter-end, the Partnership completed a $25 million, three-year revolving credit facility on July 31; no funds had been drawn as of August 5. The facility carries a floating rate, is secured by interests in subsidiaries and joint ventures, and has financial and other covenants. A July 11 refinancing of Westgate Apartments Burlington provided a $2.5 million mortgage at 4.31%.
- Management expected the Hamilton on Main joint-venture refinancing in Q4 2014 to improve annual net cash flow by more than $350,000 over ten years, while reducing interest expense by approximately $84,000. The refinancing was not yet completed at filing.
- Key risks include dependence on New England real estate and tenant demand, rising taxes, insurance and utility costs, debt refinancing and interest-rate conditions, competition, property operating costs and potential environmental or uninsured losses. The Partnership also has joint-venture exposure: it intends, but is not legally obligated, to fund its share of certain future operating deficits.
- Related-party arrangements merit attention: property management, professional services and certain joint ventures involve entities or individuals affiliated with the General Partner’s controlling owners. The filing reports no material pending legal proceedings, no material changes to previously disclosed risk factors, and no impairment loss in the first half.
Important facts for investors to verify
- Hamilton Green’s contribution to rental revenue, operating costs, depreciation and interest, and its effect on ongoing earnings and cash flow.
- Debt maturities, refinancing terms and covenant headroom, including the new $25 million credit facility and its collateral and floating-rate cost.
- Whether management’s occupancy, rent-growth, same-store NOI and capital-improvement expectations are being realized.
- Joint-venture performance, debt exposure, property-sale activity and any future support needs despite the stated absence of a legal funding obligation.
- Related-party fees and transactions, unit repurchases, distributions, and the basis for the reported negative partners’ capital.