New England Realty Associates Limited Partnership — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. The Partnership owns and operates residential, mixed-use and commercial real estate, primarily in Eastern Massachusetts and Southern New Hampshire. It reported 24 directly owned properties and 40%–50% interests in nine unconsolidated joint ventures.
Financial performance and position
- Revenue: $8.85 million, up 6.9% from $8.28 million. Rental income rose 7.1% to $8.76 million; laundry and sundry income declined 9.2% to $93,000.
- Profit: Income before other items and discontinued operations was $2.99 million, up 19.3%. Net income was $627,000, versus $173,000; net income per unit was $4.77 versus $1.31. Per-depositary-receipt income was $0.16 versus $0.05, reflecting the three-for-one receipt split effective January 3, 2012.
- Operating expenses and margins: Expenses increased 1.5% to $5.86 million. Income before interest, joint-venture losses and discontinued operations represented approximately 33.8% of revenue, compared with 30.3% a year earlier. Net margin was approximately 7.1%, versus 2.1%.
- Cash flow: Operating activities provided $2.60 million, compared with $2.12 million. Investing activities used $36,000, versus $453,000. Financing activities used $2.04 million, including $986,000 of partner distributions. Cash increased $529,000 to $4.58 million.
- Debt and liquidity: At quarter-end, the balance sheet showed $918,600 of notes payable and $138.89 million of mortgage debt; total liabilities were $145.64 million and total assets $123.97 million. Partners’ capital was negative $21.67 million. Mortgage rates ranged from 4.25% to 7.07%, with a 5.53% weighted-average rate. Scheduled mortgage maturities include $41.19 million in 2014. The $918,600 related-party note was repaid on April 2, 2012. Management said operating cash and interest-bearing accounts should fund operations, distributions, required debt payments and planned improvements.
- Joint ventures: The Partnership recorded a $403,000 share of joint-venture losses, an improvement from $454,000 a year earlier. Its proportionate share of joint-venture non-recourse debt was approximately $60.90 million and is not included in the Partnership’s consolidated debt totals.
Changes, outlook and notable matters
- Rental income growth reflected the 2011 Battle Green acquisition and rent increases. Management cited 6% increases on new leases and approximately 3% on renewals. Q1 tenant renewals were approximately 68%; leasing commissions and concessions declined year over year.
- Management attributed lower operating costs to mild winter weather, reduced snow removal and utility expense, and lower leasing costs. Repairs and maintenance, administrative costs, depreciation and taxes increased.
- Management forecast 2012 revenue growth of approximately 4%, flat overall operating expenses, and approximately 10% growth in net operating income before depreciation, amortization and interest. It expected strong seasonal leasing and continued high occupancy; portfolio vacancy, including joint ventures, was reported below 2% for the quarter.
- The Partnership planned approximately $1.45 million of capital improvements for the remainder of 2012. It was exploring long-term refinancing ahead of maturities, partly to support future growth. Management noted Dexter Park’s higher 2012 mortgage amortization would reduce distributions from that venture.
- The quarterly Class A distribution increased from $7.00 to $7.50 per unit ($0.23 to $0.25 per depositary receipt after the split). The March distribution was paid; an April approval set another distribution for June 30.
- Related-party matters merit attention: the management company is owned by the majority shareholder of the general partner and receives management and service fees. The repaid $918,600 note was owed to an entity owned by Harold Brown, a controlling insider. The filing also describes insider interests in the joint ventures.
- There were no material pending legal proceedings or material changes to previously disclosed risk factors. Risks include regional real-estate conditions, tenant demand and collections, operating costs, refinancing availability, interest rates, competition, environmental exposure and insurance limitations. Management reported effective disclosure controls and no material Q1 changes in internal control.
Investor verification points
- Review the 2014 mortgage maturities and management’s refinancing plans, including the impact of prepayment penalties and available borrowing terms.
- Confirm the post-quarter repayment of the related-party note and assess the Partnership’s continuing related-party fees, governance and joint-venture relationships.
- Track whether the stated 2012 revenue and NOI outlook is achieved, particularly through the peak leasing season, and whether operating costs remain flat.
- Assess cash available after distributions and planned capital spending, including the effect of lower joint-venture distributions from Dexter Park.
- Reconcile the reported negative partners’ capital and substantial liabilities against property values, debt obligations and the Partnership’s liquidity disclosures.