New England Realty Associates Limited Partnership — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Unaudited consolidated results; amounts are in U.S. dollars. The Partnership owns residential, mixed-use and commercial properties primarily in Eastern Massachusetts and Southern New Hampshire, and holds 40%–50% interests in nine unconsolidated joint ventures.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $12.744 million | $12.183 million | +4.6% |
| Rental income | $12.631 million | $12.073 million | +4.6% |
| Operating expenses | $9.002 million | $8.769 million | +2.7% |
| Income before other income and expense | $3.742 million | $3.415 million | +9.6% |
| Net income | $1.894 million | $1.231 million | +53.9% |
| Net income per unit | $15.23 | $9.84 | — |
| Net cash from operating activities | $3.977 million | $3.335 million | +$0.642 million |
Net margin was approximately 14.9%, compared with 10.1% a year earlier. Management reported 4.2% same-property NOI growth. Net income benefited substantially from higher equity-method income from joint ventures, including a $711,000 gain on sales of six units at Hamilton 1025; the comparable 2016 joint-venture gain was $168,000.
Cash, debt and liquidity
- Cash and cash equivalents were $7.816 million at March 31, up from $7.464 million at year-end. Cash increased $352,000 during the quarter.
- Investing activities used $2.029 million, including $1.142 million for property improvements and a $2.278 million investment in joint ventures, partly offset by joint-venture proceeds and distributions.
- Mortgage notes payable were $212.322 million, net of financing costs, versus $212.709 million at December 31. The weighted-average mortgage rate was 4.63% (4.72% effective). Reported liabilities of $223.516 million exceeded assets of $190.024 million; partners’ capital was negative $33.493 million.
- The $25 million revolving credit facility had no balance drawn, and the Partnership reported compliance with its covenants. The facility was entered into in July 2014 for a three-year term; investors should verify its renewal or replacement status.
- The Partnership’s proportionate share of unconsolidated joint-venture debt was approximately $54.638 million. Including joint ventures, the Partnership and related property entities reported approximately $337.642 million of long-term debt; approximately $30.071 million was variable-rate debt.
- Management said operating cash and interest-bearing accounts should fund operations, distributions, required debt payments and current improvements. Planned additional 2017 capital improvements were approximately $2.604 million.
Changes, outlook and other material items
- Revenue growth reflected higher rents and demand. Expenses rose more slowly overall, although operating expenses increased 20.3% and taxes and insurance increased 6.6%; repairs and maintenance declined 10.6%.
- For Q1 residential leasing, renewals were approximately 61%, with average increases of 3.8%; new leases were approximately 39%, with increases of 2.1%. Residential vacancy was 2.7% on May 1, 2017, compared with 2.2% on May 1, 2016; commercial space was fully occupied.
- Management expected similar top- and bottom-line growth for the remainder of 2017 as experienced in 2016, based on renewal and market-rent trends. This is management’s outlook, not formal quantified guidance.
- Management forecast complete sellout of the Hamilton Bay and 1025 Hancock joint-venture units in fall 2018, with total sales of approximately $25 million, $1 million above the prior forecast.
- The quarterly distribution was $9.00 per unit ($0.30 per Depositary Receipt), up from $7.50 per unit ($0.25 per receipt) in 2016. On April 10, 2017, the Partnership voted to maintain the March distribution level.
- A water-pipe break damaged 24 apartments at 62 Boylston Street. The Partnership reported insurance coverage, approximately $150,000 received, and an estimated $194,000 receivable at March 31.
- Related-party matters include property management by an entity owned by the General Partner’s majority shareholder and fees and service reimbursements. The filing reports no material pending legal proceedings, no Q1 impairment loss, effective disclosure controls, and no material change in risk factors.
Key investor verification points
- Confirm status and terms of the revolving credit facility, given its stated three-year term from July 2014.
- Review mortgage and joint-venture maturity exposure, refinancing needs, and the effect of interest-rate changes; a 100-basis-point move in variable rates was estimated to change annual interest costs by approximately $251,000.
- Assess the sustainability of earnings growth apart from the $711,000 joint-venture property-sale gain, and monitor continued unit sales and the projected 2018 sellout.
- Evaluate cash available for distributions and planned capital spending against debt service and the Partnership’s negative partners’ capital.
- Consider related-party governance and service arrangements, as well as the Partnership’s stated intention—but no legal obligation—to fund certain joint-venture operating deficits.