Business context and reporting period
New England Realty Associates Limited Partnership (NERA) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2012. NERA owns or operates residential, mixed-use and commercial properties in Eastern Massachusetts and Southern New Hampshire; it also holds 40%–50% interests in nine unconsolidated joint ventures. Interim results include normal recurring adjustments and are not necessarily indicative of full-year results.
Financial performance and position
| Metric | Three months ended Sept. 30, 2012 | Nine months ended Sept. 30, 2012 |
|---|---|---|
| Total revenue | $8.88 million | $26.53 million |
| Income before other income and discontinued operations | $3.15 million | $9.52 million |
| Income from continuing operations | $0.77 million | $2.45 million |
| Net income | $0.77 million | $2.45 million |
| Net income per unit | $5.90 | $18.63 |
- Revenue and operations: Nine-month rental income rose 5.2% to $26.25 million; total revenue increased 5.0%. Income before other income and discontinued operations was approximately 35.9% of revenue for the nine-month period. Residential occupancy was 97.0% at November 1, 2012; commercial vacancy was 4.9%.
- Cash flow: Nine-month operating cash flow was $8.44 million, compared with $5.92 million a year earlier. Investing activities used $0.87 million; financing activities used $6.30 million, including debt repayment, unit repurchases and partner distributions. Cash increased $1.27 million to $5.32 million.
- Balance sheet and liquidity: Total assets were $121.66 million and partners’ capital was negative $22.42 million at September 30. Cash was $5.32 million. The filing reports $138.34 million of mortgage debt at NERA and its consolidated subsidiaries, versus $139.16 million at year-end 2011; the $1.67 million related-party note payable outstanding at year-end was repaid in 2012.
- Debt and exposure: Consolidated mortgage rates ranged from 4.25% to 7.07%, with a 5.53% weighted-average rate. Approximately $41.36 million of NERA mortgage debt is listed as maturing in 2013. NERA’s proportionate share of non-recourse joint-venture debt was approximately $60.48 million; the filing reports approximately $277.07 million of long-term debt across NERA, subsidiaries and joint ventures. Estimated fair value of NERA mortgage debt was $158.06 million, above its carrying amount.
- Distributions: 2012 quarterly distributions were increased to $7.50 per unit, or $0.25 per depositary receipt after the 3-for-1 receipt split. Nine-month distributions were $0.75 per receipt versus $0.70 in 2011.
Changes versus the prior comparable period
- For the third quarter, total revenue increased 2.6%, income from continuing operations rose 68.4%, and net income rose 69.5% from the 2011 quarter.
- For the first nine months, rental income increased $1.29 million, while operating expenses increased only 0.3%. Operating expense and renting expense declined, partly reflecting a warm winter and lower leasing costs; depreciation, taxes and insurance, and administrative costs increased.
- Nine-month continuing-operations income rose 166.0% to $2.45 million. Reported net income declined 71.9% from $8.72 million in 2011 because the prior-year period included a $7.72 million gain on the sale of Avon Street Apartments and related discontinued-operations income. There was no comparable property sale gain in 2012.
- Revenue gains reflected rent increases, lower vacancies at many properties, and the 2011 acquisition of Battle Green Apartments. Cypress Street vacancies and a lease restructuring at Linewt partly offset growth.
Outlook, risks and unusual items
- Management expected 2012 results to exceed 2011, citing rental demand, tenant retention and rent growth; it anticipated positive revenue growth over the following 18–24 months. This is management’s outlook, not formal numerical guidance.
- Management expected to refinance at least $28 million of debt on Boylston Street and Westgate Apartments in the first quarter of 2013, potentially at lower rates and with additional borrowing. Separately, the filing describes approximately $47 million of mortgages under refinancing consideration, with no lender commitment and no expected closing in 2012; potential prepayment penalties were approximately $1 million.
- Management said operating cash and interest-bearing accounts should cover current operations, distributions, required debt payments and planned improvements. It also planned approximately $174,000 of additional 2012 capital improvements after approximately $1.64 million spent in the first nine months.
- Key risks include the 2013 mortgage maturities and refinancing availability, local real-estate and rental-market conditions, tenant retention and collections, operating costs, interest rates, insurance availability, environmental exposure, and acquisition and leverage risks. Management reported no known material environmental liabilities; no material litigation was pending, and risk factors were unchanged from the 2011 Form 10-K.
- Related-party relationships are significant: the management company is owned by the General Partner’s majority shareholder, which also controls substantial partnership interests. NERA pays management and professional-service fees to the manager and has joint ventures with the manager’s principals and employees.
- The 2011 Avon Street sale generated $7.72 million in reported gain and was structured as a Section 1031 exchange into Battle Green. The partnership is pass-through for income-tax purposes; changes to accelerated depreciation rules were expected to increase taxable income in 2012 and 2013.
Important facts for investors to verify
- Confirm the timing, terms and availability of refinancing for the 2013 maturities, including any prepayment costs and whether additional debt will be raised.
- Track actual rent growth, occupancy, tenant retention and commercial vacancies, particularly at Cypress Street.
- Assess distributions and repurchases against operating cash flow, capital spending and upcoming debt service.
- Review joint-venture property performance and debt, including NERA’s proportionate exposure and the impact of mortgage amortization.
- Evaluate related-party fees, service arrangements and governance, alongside the concentration of ownership and management relationships.
- Note that 2011 net income included a large nonrecurring property-sale gain; continuing operations provide the more comparable view of earnings.