Business context and reporting period
New England Realty Associates Limited Partnership (NYSE MKT: NEN) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2021. The Partnership owns residential, mixed-use and commercial properties in Eastern Massachusetts and Southern New Hampshire, plus 40%–50% interests in seven joint ventures. Its consolidated portfolio includes 2,892 apartment units, 19 condominium units and approximately 108,000 square feet of commercial space.
Key financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $15.45 million | $15.76 million | $30.54 million | $32.13 million |
| Income before other income (expense) | $4.19 million | $4.44 million | $7.58 million | $8.79 million |
| Net income | $570,000 | $1.47 million | $276,000 | $2.83 million |
| Net income per unit | $4.68 | $12.03 | $2.26 | $23.26 |
| Cash from operations | Not separately provided | Not separately provided | $9.17 million | $9.52 million |
For Q2, revenue fell 2.0% year over year and income before other income/expense declined 5.8%; net income fell 61.1%, mainly reflecting a swing in joint-venture results to a $238,000 loss from $444,000 of income. For the first half, revenue declined 5.0%, income before other income/expense fell 13.7%, and net income declined 90.3%. The Partnership reported no conventional operating-margin measure; income before other income/expense was $4.19 million for Q2 and $7.58 million for the first half.
At June 30, cash and cash equivalents were $23.37 million, up from $18.65 million at year-end 2020. First-half cash increased $4.72 million: operating activities provided $9.17 million, investing activities used $985,000, and financing activities used $3.46 million, including $2.34 million of partner distributions. Property improvements used $1.39 million. The filing notes that security deposits and escrow accounts include restricted cash.
Total assets were $290.21 million; total liabilities were $333.74 million, leaving partners’ capital negative at $43.53 million. Mortgage notes payable were $282.44 million, and the revolving credit line had $17.00 million outstanding. Mortgage rates ranged from 3.53% to 5.66%, with a 4.43% weighted-average rate. The Partnership’s proportionate share of joint-venture non-recourse debt was approximately $70.97 million and is not included in consolidated debt. First-half interest expense was $6.74 million. Distributions were $9.60 per unit per quarter ($0.32 per depositary receipt), unchanged from 2020.
Material changes versus prior comparable periods
- First-half rental income decreased $1.59 million (5.0%). Management cited pandemic-related weakness, with the largest property-level declines at 62 Boylston Street and 1144 Commonwealth.
- First-half operating expenses decreased 1.7%, principally because depreciation and amortization fell 14.4%; operating costs, renting, and repairs and maintenance increased.
- Joint-venture results shifted from $919,000 of income in first-half 2020 to a $564,000 loss in first-half 2021. Joint-venture rental revenue declined 21.5%, and the Partnership’s share of Dexter Park’s loss was approximately $459,000.
- As of August 1, residential vacancy was 3.3%, versus 6.3% a year earlier; joint-venture vacancy was 2.8%, versus 3.9%. Commercial vacancy moved in the opposite direction, increasing to 11.9% from 3.9%.
Outlook, risks and unusual items
- Management said the local rental market improved as colleges planned to return to campus in fall 2021, but cited uncertainty from COVID-19 variants. It expected low residential vacancy for the balance of 2021 but also anticipated a significant softening of the local real estate market, lower rents and continued concessions; it said it could not project portfolio financial performance.
- The Partnership was not in compliance with its revolving-credit-line covenants at June 30, 2021, which eliminated access to additional advances. On July 30, it signed a term sheet to extend and modify the facility for three years, with one 12-month extension. The $25 million commitment would be restricted to $17 million during a modification period, with eased covenants; the interest margin would fall from LIBOR plus 350 basis points to LIBOR plus 300 basis points, the unused fee would be eliminated, and a $125,000 modification fee would apply. The filing describes a term sheet; final closing status is not clear.
- Debt maturities are concentrated: approximately $79.94 million of mortgage principal is scheduled for 2023. The revolving credit line was scheduled to mature October 31, 2021 before the proposed extension.
- COVID-19 may affect tenant ability to pay, demand and rents. Other stated risks include local economic conditions, operating-cost increases, refinancing availability, tenant competition, interest rates and potential environmental liabilities. Management said it was not aware of material environmental liabilities.
- Related-party arrangements include property management by an entity owned by the General Partner’s majority shareholder; the Partnership reported approximately $1.22 million in management fees for the first half of 2021, as well as reimbursements and other service charges.
- No material pending legal proceedings were reported. Disclosure controls were assessed as effective, with no material second-quarter changes in internal control over financial reporting.
Important facts for investors to verify
- Whether the credit-line modification was definitively executed and whether the Partnership returned to covenant compliance and regained access to advances.
- How the 2023 mortgage maturities will be refinanced or repaid, and the effects of any refinancing costs or prepayment penalties.
- Subsequent rent collections, concessions, residential and commercial occupancy, and the trajectory of rent levels as the pandemic and university reopening evolve.
- The drivers and duration of joint-venture losses, including Dexter Park performance and any expected operating support; the Partnership says it has no legal obligation to fund deficits but intends to support them if needed.
- The extent to which reported cash is available for operations, given restricted security deposits and escrows, and the sustainability of distributions amid low first-half net income and negative partners’ capital.