New England Realty Associates Limited Partnership — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Financial statements are unaudited. The partnership owns residential, mixed-use and commercial properties primarily in Eastern Massachusetts and Southern New Hampshire, plus 40%–50% interests in nine unconsolidated joint ventures.
Financial performance and position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $12.25 million, up 10.8% year over year | $24.44 million, up 10.4% |
| Income before other income and expense | $3.23 million, down 1.8% | $6.65 million, up 11.2% |
| Net income | $0.98 million, down 10.6% | $2.21 million, up 46.8% |
| Net income per unit | $7.85, versus $8.66 | $17.69, versus $11.87 |
| Operating cash flow | $6.82 million for the six months, versus $6.27 million in 2015 |
Approximate net margin was 8.0% for Q2 (versus 9.9% a year earlier) and 9.1% for the first half (versus 6.8%). First-half results benefited from higher rental revenue and increased joint-venture income, including gains from unit sales; Q2 earnings declined despite revenue growth.
At June 30, cash and cash equivalents were $7.89 million, down from $10.30 million at year-end. Total assets were $193.57 million and total liabilities $224.74 million, resulting in negative partners’ capital of $31.17 million. Mortgage notes payable were $214.13 million, compared with $194.50 million at year-end; the prior $25 million note payable was repaid. The $25 million revolving credit facility had no balance outstanding, and the partnership reported compliance with its covenants. The partnership’s proportionate share of unconsolidated joint-venture non-recourse debt was approximately $59.05 million.
Cash used in investing activities was $1.19 million, including $2.77 million of property improvements. Cash used in financing activities was $8.03 million, including the $25 million credit-line repayment, partly offset by $20.07 million of mortgage proceeds, as well as partner distributions and unit repurchases. Distributions paid were $1.87 million; the first-half distribution was $0.50 per depositary receipt, unchanged from 2015.
Changes versus the prior comparable period
- Revenue growth reflected the 2015 acquisition of the 94-unit Residences at Captain Parker, which added approximately $1.20 million of first-half rental income, and rent increases at existing properties. Management reported approximately 5% same-store revenue growth.
- First-half expenses rose 10.1%, but excluding Captain Parker increased approximately 1.4%. Lower snow-removal costs offset increases in repairs and maintenance, depreciation and amortization, and taxes and insurance. Q2 expenses rose 16.1%, partly reflecting Captain Parker and higher repairs and maintenance.
- First-half income from unconsolidated joint ventures increased to $658,000 from $347,000, including approximately $235,000 of gains on unit sales. Q2 joint-venture income also included a gain on a unit sale.
- Cash declined as the partnership repaid its revolving-credit borrowing, made capital improvements, paid distributions and repurchased units.
Outlook, risks and unusual items
- Management said Q2 performance was consistent with expectations and anticipated approximately 5% revenue growth for the balance of 2016 excluding Captain Parker. It cited high occupancy and retention, renewal rent increases averaging 5.1%, and new-lease increases averaging 5.9% in the first half. It expected continued revenue gains and no overall operating-expense pressure, while noting possible urban leasing-cost pressure in the second half.
- Management expected operating cash and cash reserves to fund operations, distributions, debt service and planned improvements. It planned approximately $583,000 of additional 2016 capital improvements.
- After quarter-end, Hamilton 1025 LLC repaid its approximately $4.69 million mortgage; the partnership contributed $2.36 million toward the payoff. Management also reported a planned $1 million sale of a house and land, with proceeds intended for mortgage repayment, and a Hamilton Minuteman refinancing expected to provide $6 million of 15-year interest-only debt at 3.64%, versus the existing 5.67% rate. The Minuteman refinancing was expected to close in Q3; it was not reported as completed.
- Management intends to fund its share of future operating deficits at certain joint ventures if needed, although it says it has no legal obligation to do so. The partnership is a limited guarantor of certain Captain Parker loan obligations.
- Interest-rate exposure includes approximately $30.07 million of variable-rate debt across the partnership and joint ventures. The filing estimates a 100-basis-point rate change would change annual interest costs by approximately $251,000, assuming interest-rate caps are not in effect. Management also identifies regional economic, tenant, operating-cost, financing, competition, insurance and environmental risks.
- A 2015 fire damaged approximately 10 apartments at Westgate; repairs and rental losses are insured, and an estimated $155,000 insurance receivable remained at June 30. The filing reported no material pending legal proceedings, no material change to previously disclosed risk factors, and effective disclosure controls.
Most important facts for investors to verify
- Whether same-store rent growth and occupancy remain strong, and whether expense increases—especially repairs, maintenance and depreciation—affect operating performance.
- How much first-half earnings growth depended on joint-venture income and property-sale gains, rather than recurring rental operations.
- Debt maturities, variable-rate exposure, covenant headroom and completion and terms of the announced Hamilton Minuteman refinancing.
- The effect of negative partners’ capital, lower cash balances, and potential future joint-venture funding needs on liquidity and distributions.
- Related-party management and service fees, given the management company’s ownership ties and the principals’ substantial interests in the partnership and joint ventures.