Business context and reporting period
New England Realty Associates Limited Partnership (NERA) reported unaudited results for the three months ended March 31, 2019, compared with the same period in 2018. NERA owns 27 properties with 2,711 apartments, 19 condominium units and about 108,043 square feet of commercial space, primarily in Eastern Massachusetts and Southern New Hampshire. It also holds 40%–50% interests in eight joint ventures.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Total revenue | $14.88 million | $14.06 million; up 5.9% |
| Income before other income and expense | $3.95 million | $3.76 million; up 5.1% |
| Net income | $1.50 million | $1.88 million; down 20.1% |
| Net income per unit | $12.21 | $15.10 |
| Operating cash flow | $5.03 million | $5.62 million |
| Cash and cash equivalents | $7.65 million at March 31 | $9.06 million at December 31, 2018 |
Rental income was $14.77 million, up 5.9%; laundry and sundry income was $114,000. Total expenses increased 6.1% to $10.93 million. Income before other income and expense was 26.6% of revenue, versus 26.8% a year earlier; net margin was 10.1%, versus 13.4%. Interest expense was $3.00 million, up 0.5%. Income from unconsolidated joint ventures fell 50.1% to $549,000, principally because prior-year results included larger gains on condominium sales.
Net cash decreased $1.41 million. Investing activities provided $138,000, while financing activities used $6.58 million, including $2.93 million for unit repurchases, $1.18 million for partner distributions, $2.00 million to repay the line-of-credit balance and $473,000 of mortgage principal payments.
At March 31, total assets were $243.17 million, mortgage notes payable were $251.95 million, total liabilities were $281.41 million and partners’ capital was negative $38.23 million. NERA reported no outstanding balance on its $25 million revolving credit line, extended through October 2020, and stated that it complied with its covenants. The current ratio is not stated, and the filing does not provide a clear consolidated current-liabilities subtotal. Mortgage rates ranged from 3.76% to 5.81%, with a 4.63% weighted average; stated mortgage maturities are concentrated in 2023 and 2024. NERA’s proportionate share of joint-venture non-recourse debt was about $71.2 million. NERA also guarantees the $125 million Dexter Park joint-venture mortgage.
Material changes versus prior period
- Revenue growth reflected approximately $493,000 from the Hamilton Highlands acquisition, completed in March 2018, as well as higher rents at several properties.
- Management reported same-store revenue growth of 2.4% and a 1.9% decline in operating expenses, excluding Hamilton Highlands; same-store income before other income and expense increased 13.9%. Vacancy was 2.8% at May 1, 2019, versus 2.4% a year earlier.
- Reported net income declined despite higher property-level income, mainly because joint-venture income was lower following reduced condominium-sale gains. The 2018 comparison included gains on six Hamilton Bay and eight Hamilton 1025 unit sales; Q1 2019 included a gain on two Hamilton Bay unit sales.
- NERA repurchased 43,095 depositary receipts during Q1 for $2.34 million and made required related repurchases of Class B and general partner units totaling about $586,000. The quarterly distribution was $0.32 per receipt, compared with $0.30 in Q1 2018.
Outlook, risks and unusual items
- Management reported average rent increases of 4.1% on renewals and 2.8% on new leases in Q1; it expected renewal increases of 3%–4% during 2019 and believed similar same-store operating results were achievable for the year. These are expectations, not guarantees.
- NERA anticipated about $2.18 million of capital improvements in 2019 and said operating cash and interest-bearing accounts should cover operations, distributions, debt payments and planned improvements.
- Management was negotiating a refinancing of the Residences at Captain Parker: a proposed $20.75 million, 10-year, interest-only fixed-rate loan at 4.05%. The existing loan was about $20.07 million; a possible 1% prepayment penalty of approximately $200,000 could materially affect Q2 2019 income. The filing described the refinancing as expected, not completed.
- Management projected that the remaining Hamilton 1025 condominium units would be sold in Q2 2019. NERA estimated its cumulative profit from the relevant 1025 Hancock and Hamilton Bay unit sales from 2014 through 2019 at approximately $6.8 million.
- Interest-rate sensitivity: a 100-basis-point move in variable-rate debt could change annual interest costs by approximately $459,000, assuming interest-rate caps are not in effect. The filing reports approximately $50.9 million of variable-rate debt across NERA, subsidiaries and joint ventures.
- A February water-pipe break at Hamilton Oak temporarily displaced residents from 40 apartments. NERA reported insurance coverage, $75,000 received and an estimated $212,000 insurance recovery receivable at quarter-end.
- NERA stated that it had no material pending legal proceedings and no material changes to its previously disclosed risk factors. It identified regional economic and rental-market conditions, operating-cost inflation, refinancing availability, competition, environmental and insurance exposures, and joint-venture and leverage risks. Management said disclosure controls were effective and there were no material Q1 changes to internal control over financial reporting.
- Related-party management and service arrangements are significant: the property manager is affiliated with the General Partner’s majority shareholder. NERA reported management fees of about $591,000 and other professional, payroll and service charges; review the terms and amounts in the filing.
Important facts for investors to verify
- Confirm the drivers and sustainability of same-store rent growth, occupancy and expense trends, particularly the reported 2.8% vacancy rate.
- Review debt maturities, refinancing terms and covenants, and the $125 million Dexter Park guaranteed mortgage alongside NERA’s own mortgage debt and proportionate joint-venture debt.
- Verify the status and final costs of the Captain Parker refinancing and any prepayment penalty after the expected Q2 closing.
- Assess joint-venture distributions, condominium-sale proceeds and the effect of gains on reported earnings; confirm the timing and proceeds of remaining unit sales.
- Evaluate cash available after distributions, repurchases and planned capital spending, and the implications of negative partners’ capital.
- Review related-party fees, unit repurchases and distributions, and the extent of NERA’s stated intentions to support certain joint ventures despite no legal obligation to fund their deficits.