New England Realty Associates Limited Partnership — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet figures compare March 31, 2020 with December 31, 2019. The unaudited partnership owns and operates residential, mixed-use and commercial real estate, primarily in Eastern Massachusetts and Southern New Hampshire, and holds 40%–50% interests in seven unconsolidated joint ventures.
Financial results and position
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Total revenue | $16.38 million | $14.88 million; up 10.0% |
| Income before other income and expense | $4.34 million | $3.95 million; up 9.9% |
| Net income | $1.37 million | $1.50 million; down 8.8% |
| Net income per unit | $11.23 | $12.21 |
| Operating cash flow | $4.23 million | $5.03 million |
| Cash and cash equivalents | $11.25 million | $7.55 million at Dec. 31, 2019 |
| Total assets | $294.68 million | $294.29 million at Dec. 31, 2019 |
| Mortgage notes payable | $284.91 million | $281.77 million at Dec. 31, 2019 |
| Line-of-credit notes payable | $17.00 million | $18.00 million at Dec. 31, 2019 |
Operating expenses were $12.03 million, up 10.1%; income before other items represented approximately 26.5% of revenue, versus 26.6% a year earlier. Net margin was approximately 8.4%, compared with 10.1%. Interest expense rose 15.0% to $3.45 million. Cash increased by $3.70 million, reflecting operating cash flow and refinancing proceeds, partly offset by property improvements, partner distributions and unit repurchases.
Debt is predominantly fixed-rate. Mortgage maturities include approximately $67.0 million in 2023 and $38.3 million in 2024. The $25 million revolving credit facility had $17 million outstanding and was scheduled to expire October 31, 2020; the Partnership reported compliance with its covenants at quarter-end. Joint ventures had approximately $166.4 million of mortgage debt, of which the Partnership’s proportionate share was approximately $71.1 million. Total Partnership, subsidiary and joint-venture long-term debt was approximately $453.6 million. Partners’ capital was negative $38.0 million.
Changes versus prior year
- Rental income rose 10.1%, including approximately $974,000 attributable to the Mill Street acquisition completed in December 2019. Management reported same-store revenue growth of 3.4%, excluding Mill Street.
- Management said same-store operating expenses fell 2.2% excluding Mill Street, while same-store net operating income, excluding depreciation and amortization, increased 7.6%.
- Depreciation and amortization increased 24.0% to $4.57 million; interest expense increased by $450,000. Management attributed much of the interest increase to Mill Street financing and borrowing on the credit line.
- Joint-venture income declined 13.5% to $475,000, principally because the prior-year period included the Partnership’s share of gains on condominium sales; there were no comparable unit sales in Q1 2020.
- Operating cash flow decreased by $800,000. The Partnership received no distributions from joint ventures in Q1 2020, compared with approximately $1.24 million in Q1 2019.
Outlook, risks and notable items
- COVID-19: Management said the pandemic’s duration and financial effects were uncertain and expected a significant softening in the local real-estate market. April rent collections at wholly owned properties were 94% overall—96% residential and 57% commercial; joint-venture collections were approximately 90%. Management cautioned that April collections may not indicate future results.
- Approximately 15% of the Partnership’s apartment units and 57% of joint-venture apartment units were leased to students. Management warned that delayed or limited university reopening could adversely affect occupancy and rental income. Many residential leases were due to mature in Q2 and Q3, and management could not forecast renewal or new-lease rents.
- First-quarter rent increases averaged 4.1% for renewals and 0.4% for new leases. Vacancy was 3.8% on May 1, 2020, versus 2.8% a year earlier; commercial vacancy was 3.6% versus 1.3%.
- Management expected cash from operations and interest-bearing accounts to fund operations, distributions, debt service and current improvements, but the filing provides no specific earnings or rent guidance. Results may be affected by rent collection, tenant distress, leasing conditions, refinancing availability and debt covenants.
- The Partnership refinanced Brookside with a $6.175 million, 3.53% fixed-rate mortgage due in 2035; proceeds repaid an approximately $2.39 million prior loan, with the remainder added to cash reserves. The Partnership guaranteed the loan. It also guaranteed certain joint-venture debt and stated it intends, though is not legally obligated, to fund joint-venture operating deficits if needed.
- The unit repurchase program was extended through March 2025, but repurchases were temporarily suspended effective April 15, 2020 because of COVID-19 uncertainty. The Q1 distribution was $9.60 per unit ($0.32 per depositary receipt).
- Related-party management arrangements include property management fees of approximately $649,000 and other professional, payroll and accounting charges. The filing describes the manager’s affiliation with the General Partner’s majority shareholder.
- No material pending legal proceedings were reported. Management reported disclosure controls as effective and no material Q1 change in internal control over financial reporting.
Key facts for investors to verify
- Subsequent rent collections, concessions, delinquencies and lease renewals, especially as student housing demand and commercial tenant conditions evolve.
- Liquidity and refinancing plans for the $17 million credit-line balance due under a facility scheduled to expire in October 2020, and compliance with debt covenants.
- The substantial scheduled mortgage maturities in 2023 and 2024 and the terms and availability of refinancing.
- Whether cash flow can support distributions, capital improvements and any joint-venture funding needs if collections weaken; Q1 operating cash flow was below the prior-year period.
- Joint-venture performance and distributions, including the extent of guarantees and the Partnership’s exposure to ventures with negative carrying values.
- Impact of COVID-19 on property valuations, impairment assessments, commercial rent receivables and the Partnership’s ability to maintain distributions.