Item 2. Management’s Discussion and Analysis
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward Looking Statements
Certain information contained herein includes forward looking statements, which are made pursuant to the safe harbor provisions of the Private Securities Liquidation Reform Act of 1995 (the “Act”). Forward looking statements in this report, or which management may make orally or in written form from time to time, reflect management’s good faith belief when those statements are made, and are based on information currently available to management. Caution should be exercised in interpreting and relying on such forward looking statements, the realization of which may be impacted by known and unknown risks and uncertainties, events that may occur subsequent to the forward looking statements, and other factors which may be beyond the Partnership’s control and which can materially affect the Partnership’s actual
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results, performance or achievements for 2021 and beyond. Should one or more of the risks or uncertainties mentioned below materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. We expressly disclaim any responsibility to update our forward looking statements, whether as a result of new information, future events or otherwise. Accordingly, investors should use caution in relying on past forward looking statements, which are based on results and trends at the time they are made, to anticipate future results or trends.
Since the Partnership’s long-term goals include the acquisition of additional properties, a portion of the proceeds from the refinancing and sale of properties is reserved for this purpose. If available acquisitions do not meet the Partnership’s investment criteria, the Partnership may purchase additional depositary receipts. The Partnership will consider refinancing existing properties if the Partnership’s cash reserves are insufficient to repay existing mortgages or if the Partnership needs additional funds for future acquisitions.
More than one year has passed since we became aware of the current outbreak of COVID-19, a novel strain of coronavirus. The World Health Organization declared a global pandemic on March 11, 2020. On March 10, 2020 the governor of Massachusetts, Charlie Baker, declared a state of emergency and ordered all non-essential businesses closed and prohibited the gathering of 10 or more people. Additionally, March of 2020 saw the closure of local colleges and universities for the balance of the academic year. Colleges in the City of Boston and the surrounding communities conducted classes in the 2020/2021 academic year remotely, or using a hybrid model of remote and limited in class learning. These educational models caused a large decrease in the student population and resulted in significant vacancies in the Partnership’s apartment portfolio.
With the introduction and roll out of Covid-19 vaccines in the spring of 2021, the economy is opening back up. The Governor of Massachusetts rescinded the State’s Covid-19 restrictions on May 29 th and terminated the State of Emergency on June 15 th . The local colleges and universities announced a return to campus in the fall of 2021 and the rental market improved significantly as students prepare to return to the area.
Vacancy rates for the Partnership’s residential properties as of August 1, 2021 were 3.3% as compared with a vacancy rate of 6.3% as of August 1, 2020. The vacancy rate for the Joint Venture properties as of August 1, 2021 is 2.8%, as compared to 3.9% for the same period last year.
Residential tenants generally have lease terms of 12 months. The majority of these leases will mature during the second and third quarters of the year. Rental activity has been strong as we moved from spring to summer and all indications are that we will have low vacancy rates for the balance of the year. However, with the uncertainty that exists with the new variants of the Covid-19 virus, we are unable to project the financial performance of the portfolio.
During the second quarter of 2021, rents increased on average of 1.2% for renewals and decreased on average of 4.0% for new leases .
For the second quarter of 2021, consolidated revenue decreased by 2.0%, operating expenses decreased by 0.5% and Income before Other Income (Expense) decreased by 5.8%. For the same reporting period, vacancy was 3.3% in 2021 vs 6.3% in 2020.
During the covid crisis, The Hamilton Company, the Partnership’s property manager, has taken steps to maintain the safety of its employees and tenants. Hamilton is providing essential services to ensure all properties are kept open, fully functioning and safe. Hamilton has implemented a work from home policy with a skeleton staff present at all site offices to provide for property management, maintenance, leasing and construction services. Leasing is limited to unoccupied units unless permission is granted by the current tenant and a web based video technology is being used to remotely show apartments. Hamilton and the Partnership will continue to adjust their s business practices to comply with Federal and State mandates for workplace and rental property operations.
On July 31, 2014, the Partnership entered into an agreement for a $25,000,000 revolving line of credit. The term of the line was for three years with a floating interest rate equal to a base rate of the greater of (a) the Prime Rate (b) the Federal Funds Rate plus one-half of one percent per annum, or (c) the LIBOR Rate for a period of one month plus 1% per annum, plus the applicable margin of 2.5%. The agreement originally expired on July 31, 2017, and was extended until October 31, 2020. The costs associated with the line of credit extension in 2017 were approximately $128,000. Prior to the line’s expiration in 2020, the Partnership exercised its option for a one-year extension until
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October 31, 2021. The Partnership paid an extension fee of approximately $37,500 in association with the extension. Management has a signed term sheet with the lender and is working to close on a three year extension and modification of the line of credit in August 2021. See Note 17. Subsequent Events for details.
On March 31, 2020, Nera Brookside Associates, LLC (“Brookside Apartments”), entered into a Mortgage Note with KeyBank National Associates ( KeyBank) in the principal amount of $6,175,000. Interest only payments on the Note are payable on a monthly basis at a fixed interest rate of 3.53% per annum, and the principal amount of the Note is due and payable on March 31, 2035. The Note is secured by a mortgage on the Brookside apartment complex located at 5-12 Totman Drive, Woburn, Massachusetts pursuant to a Mortgage, Assignment of Leases and Rents and Security Agreement dated March 31, 2020. The Note is guaranteed by the Partnership pursuant to a Guaranty Agreement dated March 31, 2020. Brookside Apartments used the proceeds of the loan to pay off an outstanding loan of approximately $2,390,000, with the remaining portion of the proceeds were added to cash reserves. In connection with this refinancing, there were closing costs of approximately $132,000.
From the start of the Stock Repurchase Program in 2007 through March 31, 2021, the Partnership has purchased 1,428,437 Depositary Receipts. During the three months ended June 30, 2021, the Partnership did not purchase any Depositary Receipts. In March of 2020, the Board of Advisors and Board of Directors unanimously approved an extension of the Repurchase Program until March 31, 2025. Given the economic uncertainty caused by the coronavirus issue, as of April 15, 2020, the Partnership has elected to temporarily suspend the repurchase program.
At August 1, 2021, the Harold Brown related entities and Ronald Brown collectively own approximately 30.9% of the Depositary Receipts representing the Partnership Class A Units (including Depositary Receipts held by trusts for the benefit of such persons’ family members). The Estate of Harold Brown also controls 75% of the Partnership’s Class B Units, and 75% of the capital stock of NewReal, Inc. (“NewReal”), the Partnership’s sole general partner. Ronald Brown also owns 25% of the Partnership’s Class B Units and 25% of NewReal’s capital stock. In addition, Ronald Brown is the President and director of NewReal and Jameson Brown is NewReal’s Treasurer and a director. The 75% of the issued and outstanding Class B units of the Partnership, controlled by the Estate of Harold Brown, are owned by HBC Holdings LLC, an entity of which Jameson Brown is the manager. The outstanding stock of The Hamilton Company, Inc. is controlled by Jameson Brown and Harley Brown.
In addition to the Management Fee, the Partnership Agreement further provides for the employment of outside professionals to provide services to the Partnership and allows NewReal to charge the Partnership for the cost of employing professionals to assist with the administration of the Partnership’s properties. Additionally, from time to time, the Partnership pays Hamilton for repairs and maintenance services, legal services, construction services and accounting services. The costs charged by Hamilton for these services are at the same hourly rate charged to all entities managed by Hamilton, and management believes such rates are competitive in the marketplace.
Residential tenants sign a one year lease. During the six months ended June 30, 2021, tenant renewals were approximately 67% with an average rental increase of approximately 1.0%, new leases accounted for approximately 33% with rental rate decreases of approximately 4.4%. During the six months ended June 30, 2021, leasing commissions were approximately $308,000 compared to approximately $159,000 for the six months ended June 30, 2020, an increase of approximately $149,000 (94.2%). Tenant concessions were approximately $15,000 for the six months ended June 30, 2021, compared to approximately $18,000 for the six months ended June 30, 2020, a decrease of approximately $3,000 (15.7%). Tenant improvements were approximately $746,000 for the six months ended June 30, 2021, compared to approximately $897,000 for the six months ended June 30, 2020, a decrease of approximately $151,000 (16.8%).
Hamilton accounted for approximately 2.5% of the repair and maintenance expenses paid for by the Partnership during the six months ended June 30, 2021 and 2.5 % during the six months ended June 30, 2020. Of the funds paid to Hamilton for this purpose, the great majority was to cover the cost of services provided by the Hamilton maintenance department, including plumbing, electrical, carpentry services, and snow removal for those properties close to Hamilton’s headquarters. Several of the larger Partnership properties have their own maintenance staff. Those properties that do not have their own maintenance staff and are located more than a reasonable distance from Hamilton’s headquarters in Allston, Massachusetts are generally serviced by local, independent companies.
Hamilton’s legal department handles most of the Partnership’s eviction and collection matters. Additionally, it prepares most long-term commercial lease agreements and represents the Partnership in selected purchase and sale
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transactions. Overall, Hamilton provided approximately $59,000 (67.5%) and approximately $64,000 (65.9%) of the legal services paid for by the Partnership during the six months ended June 30, 2021 and 2020 respectively.
Additionally, as described in Note 3 to the consolidated financial statements, The Hamilton Company receives similar fees from the Investment Properties.
The Partnership requires that three bids be obtained for construction contracts in excess of $15,000. Hamilton may be one of the three bidders on a particular project and may be awarded the contract if its bid and its ability to successfully complete the project are deemed appropriate. For contracts that are not awarded to Hamilton, Hamilton charges the Partnership a construction supervision fee equal to 5% of the contract amount. Hamilton’s architectural department also provides services to the Partnership on an as-needed basis. During the six months ended June 30, 2021, Hamilton provided the Partnership approximately $302,000 in construction and architectural services, compared to approximately $305,000 for the six months ended June 30, 2020.
Hamilton’s accounting staff perform bookkeeping and accounting functions for the Partnership. During the six months ended June 30, 2021 and 2020, Hamilton charged the Partnership $62,500 for bookkeeping and accounting services. For more information on related party transactions, see Note 3 to the Consolidated Financial Statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of the consolidated financial statements, in accordance with accounting principles generally accepted in the United States of America, requires the Partnership to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. The Partnership regularly and continually evaluates its estimates, including those related to acquiring, developing and assessing the carrying values of its real estate properties and its investments in and advances to joint ventures. The Partnership bases its estimates on historical experience, current market conditions, and on various other assumptions that are believed to be reasonable under the circumstances. However, because future events and their effects cannot be determined with certainty, the determination of estimates requires the exercise of judgment. The Partnership’s critical accounting policies are those which require assumptions to be made about such matters that are highly uncertain. Different estimates could have a material effect on the Partnership’s financial results. Judgments and uncertainties affecting the application of these policies and estimates may result in materially different amounts being reported under different conditions and circumstances. See Note 1 to the Consolidated Financial Statements, Principles of Consolidation.
Revenue Recognition: Rental income from residential and commercial properties is recognized over the term of the related lease. For residential tenants, amounts 60 days in arrears are charged against income. The commercial tenants are evaluated on a case by case basis. Certain leases of the commercial properties provide for increasing stepped minimum rents, which are accounted for on a straight-line basis over the term of the lease. Revenue from commercial leases also include reimbursements and recoveries received from tenants for certain costs as provided in the lease agreement. The costs generally include real estate taxes, utilities, insurance, common area maintenance and recoverable costs. Rental concessions are also accounted for on the straight-line basis.
Above-market and below-market lease values for acquired properties are initially recorded based on the present value (using a discount rate which reflects the risks associated with the leases acquired) of the differences between (i) the contractual amounts to be paid pursuant to each in-place lease and (ii) management’s estimate of fair market lease rates for each corresponding in-place lease, measured over a period equal to the remaining term of the lease for above-market leases and the initial term plus the term of any below-market fixed-rate renewal options for below-market leases . The capitalized above-market lease amounts are accounted for as a reduction of base rental revenue over the remaining term of the respective leases, and the capitalized below-market lease values are amortized as an increase to base rental revenue over the remaining initial terms plus the terms of any below-market fixed-rate renewal options of the respective leases.
The Partnership evaluates the non-lease components (lease arrangements that include common area maintenance services) with related lease components (lease revenues). If both the timing and pattern of transfer are the same for the non-lease component and related lease component, the lease component is the predominant component. The Partnership elected an allowed practical expedient. For (i) operating lease arrangements involving real estate that include common area maintenance services and (ii) all real estate arrangements that include real estate taxes and insurance costs,
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we present these amounts within lease revenues in our consolidated statements of income. We record amounts reimbursed by the lessee in the period in which the applicable expenses are incurred.
Rental Property Held f or Sale: When assets are identified by management as held for sale, the Partnership discontinues depreciating the assets and estimates the sales price, net of selling costs, of such assets. The Partnership generally considers assets to be held for sale when the transaction has received appropriate corporate authority, and there are no significant contingencies relating to the sale. If, in management’s opinion, the estimated net sales price, net of selling costs, of the assets which have been identified as held for sale is less than the carrying value of the assets, a valuation allowance is established.
If circumstances arise that previously were considered unlikely and, as a result, the Partnership decides not to sell a property previously classified as held for sale, the property is reclassified as held and used. A property that is reclassified is measured and recorded individually at the lower of (a) its carrying value before the property was classified as held for sale, adjusted for any depreciation (amortization) expense that would have been recognized had the property been continuously classified as held and used, or (b) the fair value at the date of the subsequent decision not to sell.
Rental Properties: Rental properties are stated at cost less accumulated depreciation. Maintenance and repairs are charged to expense as incurred; improvements and additions are capitalized. When assets are retired or otherwise disposed of, the cost of the asset and related accumulated depreciation is eliminated from the accounts, and any gain or loss on such disposition is included in income. Fully depreciated assets are removed from the accounts. Rental properties are depreciated by both straight-line and accelerated methods over their estimated useful lives. Upon acquisition of rental property, the Partnership estimates the fair value of acquired tangible assets, consisting of land, building and improvements, and identified intangible assets and liabilities assumed, generally consisting of the fair value of (i) above and below market leases, (ii) in-place leases and (iii) tenant relationships. The Partnership allocated the purchase price to the assets acquired and liabilities assumed based on their fair values. The Partnership records goodwill or a gain on bargain purchase (if any) if the net assets acquired/liabilities assumed exceed the purchase consideration of a transaction. In estimating the fair value of the tangible and intangible assets acquired, the Partnership considers information obtained about each property as a result of its due diligence and marketing and leasing activities, and utilizes various valuation methods, such as estimated cash flow projections utilizing appropriate discount and capitalization rates, estimates of replacement costs net of depreciation, and available market information. The fair value of the tangible assets of an acquired property considers the value of the property as if it were vacant.
Intangible assets acquired include amounts for in-place lease values above and below market leases and tenant relationship values, which are based on management’s evaluation of the specific characteristics of each tenant’s lease and the Partnership’s overall relationship with the respective tenant. Factors to be considered by management in its analysis of in-place lease values include an estimate of carrying costs during hypothetical expected lease-up periods considering current market conditions, and costs to execute similar leases at market rates during the expected lease-up periods, depending on local market conditions. In estimating costs to execute similar leases, management considers leasing commissions, legal and other related expenses. Characteristics considered by management in valuing tenant relationships include the nature and extent of the Partnership’s existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant’s credit quality and expectations of lease renewals. The value of in-place leases are amortized to expense over the remaining initial terms of the respective leases. The value of tenant relationship intangibles are amortized to expense over the anticipated life of the relationships.
In the event that facts and circumstances indicate that the carrying value of a rental property may be impaired, an analysis of the value is prepared. The estimated future undiscounted cash flows are compared to the asset’s carrying value to determine if a write-down to fair value is required.
Impairment: On an annual basis management assesses whether there are any indicators that the value of the Partnership’s rental properties may be impaired. A property’s value is impaired only if management’s estimate of the aggregate future cash flows (undiscounted and without interest charges) to be generated by the property is less than the carrying value of the property. To the extent impairment has occurred, the loss shall be measured as the excess of the carrying amount of the property over the fair value of the property. The Partnership’s estimates of aggregate future cash flows expected to be generated by each property are based on a number of assumptions that are subject to economic and market uncertainties including, among others, demand for space, competition for tenants, changes in market rental rates, and costs to operate each property. As these factors are difficult to predict and are subject to future events that may alter
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management’s assumptions, the future cash flows estimated by management in its impairment analyses may not be achieved.
Investments in Joint Ventures: The Partnership accounts for its 40%-50% ownership in the Investment Properties under the equity method of accounting, as it exercises significant influence over, but does not control these entities. These investments are recorded initially at cost, as Investments in Joint Ventures, and subsequently adjusted for the Partnership’s share in earnings, cash contributions and distributions. Under the equity method of accounting, our net equity is reflected on the consolidated balance sheets, and our share of net income or loss from the Partnership is included on the consolidated statements of income. Generally, the Partnership would discontinue applying the equity method when the investment (and any advances) is reduced to zero and would not provide for additional losses unless the Partnership has guaranteed obligations of the venture or is otherwise committed to providing further financial support for the investee. If the venture subsequently generates income, the Partnership only recognizes its share of such income to the extent it exceeds its share of previously unrecognized losses. We intend to fund our share of the investments’ future operating deficits should the need arise. However, we have no legal obligation to pay for any of the liabilities of such investments nor do we have any legal obligation to fund operating deficits.
The authoritative guidance on consolidation provides guidance on the identification of entities for which control is achieved through means other than voting rights (“variable interest entities” or “VIEs”) and the determination of which business enterprise, if any, should consolidate the VIE (the “primary beneficiary”). Generally, the consideration of whether an entity is a VIE applies when either (1) the equity investors (if any) lack one or more of the essential characteristics of a controlling financial interest, (2) the equity investment at risk is insufficient to finance that equity’s activities without additional subordinated financial support or (3) the equity investors have voting rights that are not proportionate to their economic interests and the activities of the entity involve or are conducted on behalf of an investor with a disproportionately small voting interest. The primary beneficiary is defined by the entity having both of the following characteristics: (1) the power to direct the activities that, when taken together, most significantly impact the variable interest entity’s performance; and (2) the obligation to absorb losses and rights to receive the returns from VIE that would be significant to the VIE.
With respect to investments in and advances to the Investment Properties, the Partnership looks to the underlying properties to assess performance and the recoverability of carrying amounts for those investments in a manner similar to direct investments in real estate properties. An impairment charge is recorded if management’s estimate of the aggregate future cash flows (undiscounted and without interest charges) to be generated by the property is less than the carrying value of the property.
Legal Proceedings: The Partnership is subject to various legal proceedings and claims that arise, from time to time, in the ordinary course of business. These matters are frequently covered by insurance. If it is determined that a loss is likely to occur, the estimated amount of the loss is recorded in the financial statements. Both the amount of the loss and the point at which its occurrence is considered likely can be difficult to determine.
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RESULTS OF OPERATIONS
Three Months Ended June 30, 2021 and June 30, 2020
The Partnership and its Subsidiary Partnerships earned income before interest expense, income from investments in unconsolidated joint ventures, other expense of approximately $4,187,000 during the three months ended June 30, 2021, compared to approximately $4,444,000 for the three months ended June 30, 2020, a decrease of approximately $257,000 (5.8%).
The rental activity is summarized as follows:
Occupancy Date
August 1, 2021
August 1, 2020
Residential
Units
2,911
2,911
Vacancies
97
182
Vacancy rate
3.3
%
6.3
%
Commercial
Total square feet
108,043
108,043
Vacancy
12,890
4,232
Vacancy rate
11.9
%
3.9
%
Rental Income (in thousands)
Three Months Ended June 30,
2021
2020
Total
Continuing
Total
Continuing
Operations
Operations
Operations
Operations
Total rents
$
15,333
$
15,333
$
15,647
$
15,647
Residential percentage
94
%
94
%
95
%
95
%
Commercial percentage
6
%
6
%
5
%
5
%
Contingent rentals
$
290
$
290
$
251
$
251
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Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020:
Three Months Ended June 30,
Dollar
Percent
2021
2020
Change
Change
Revenues
Rental income
$
15,333,216
$
15,646,814
$
(313,598)
(2.0)%
Laundry and sundry income
114,128
112,292
1,836
1.6%
15,447,344
15,759,106
(311,762)
(2.0)%
Expenses
Administrative
559,818
512,195
47,623
9.3%
Depreciation and amortization
3,943,664
4,601,617
(657,953)
(14.3)%
Management fee
616,348
615,541
807
0.1%
Operating
1,407,646
1,291,781
115,865
9.0%
Renting
221,275
128,608
92,667
72.1%
Repairs and maintenance
2,334,403
2,049,174
285,229
13.9%
Taxes and insurance
2,176,958
2,115,721
61,237
2.9%
11,260,112
11,314,637
(54,525)
(0.5)%
Income Before Other Income (Expense)
4,187,232
4,444,469
(257,237)
(5.8)%
Other Income (Expense)
Interest income
25
52
(27)
(51.9)%
Interest expense
(3,378,942)
(3,423,583)
44,641
(1.3)%
Income from investments in unconsolidated joint ventures
(238,424)
444,113
(682,537)
(153.7)%
(3,617,341)
(2,979,418)
(637,923)
21.4%
Net Income
$
569,891
$
1,465,051
$
(895,160)
(61.1)%
Rental income for the three months ended June 30, 2021 was approximately $15,333,000, compared to approximately $15,647,000 for the three months ended June 30, 2020, a decrease of approximately $314,000 (2.0%). Although rental income has increased at a number of properties, due to the effect of the Pandemic, a number of properties incurred a decrease in their rental income. The Partnership properties with the largest increases in rental income include Hamilton Oaks, Hamilton Green and Hamilton Cypress with increases of $33,000, $32,000, and $24,000 respectively. These are offset by certain properties with the largest decreases in rental income, which include 62 Boylston, 1144 Commonwealth, and Lincoln Street, with decreases of approximately $610,000, 168,000, and $60,000, respectively. Included in rental income is contingent rentals collected on commercial properties. Contingent rentals include such charges as bill backs of common area maintenance charges, real estate taxes, and utility charges.
Operating expenses for the three months ended June 30, 2021 were approximately $11,260,000 compared to approximately $11,315,000 for the three months ended June 30, 2020, a decrease of approximately $55,000 (0.5%). The factors contributing to the decrease are a decrease in depreciation and amortization of approximately $658,000 (14.3%), partially offset by an increase in repairs and maintenance of approximately $285,000 (13.9%), an increase in operating costs of approximately $116,000 ( 9.0%) and an increase in renting expense of approximately $93,000 (72.1%).
Interest expense for the three months ended June 30, 2021 was approximately $3,379,000 compared to approximately $3,424,000 for the three months ended June 30, 2020, a decrease of approximately $45,000 (1.3%).
At June 30, 2021, the Partnership has between a 40% and 50% ownership interests in seven different Investment Properties. See a description of these properties included in the section titled Investment Properties as well as Note 14 to the Consolidated Financial Statements for a detail of the financial information of each Investment Property.
As described in Note 14 to the Consolidated Financial Statements, the Partnership’s share of the net loss from the Investment Properties was approximately $238,000 for the three months ended June 30, 2021, compared to the net income of approximately $444,000 for the three months ended June 30, 2020, a decrease in income of approximately $682,000 (153.7%). This decrease is primarily due to the reduction in rental revenue from approximately $ 2,617,000 to $2,142,000, a decrease of approximately $475,000 (18.2 %) for the three months ended June 30, 2021 compared to the three months ended June 30, 2020. Included in the income for the three months ended June 30, 2021 is depreciation and amortization expense of approximately $656,000.
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As a result of the changes discussed above, the net income for the three months ended June 30, 2021 was approximately $570,000 compared to net income of approximately $1,465,000 for the three months ended June 30, 2020, a decrease in income of approximately $895,000 (61.1 %).
Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020:
The Partnership and its Subsidiary Partnerships earned income before interest expense, income from investments in unconsolidated joint ventures, and other expense of approximately $7,582,000 during the six months ended June 30, 2021, compared to approximately $8,789,000 for the six months ended June 30, 2020, a decrease of approximately $1,207,000 (13.7%).
Six Months Ended June 30,
Dollar
Percent
2021
2020
Change
Change
Revenues
Rental income
$
30,313,332
$
31,900,244
$
(1,586,912)
(5.0)%
Laundry and sundry income
222,801
234,446
(11,645)
(5.0)%
30,536,133
32,134,690
(1,598,557)
(5.0)%
Expenses
Administrative
1,212,004
1,096,853
115,151
10.5%
Depreciation and amortization
7,849,582
9,167,084
(1,317,502)
(14.4)%
Management fee
1,221,739
1,264,534
(42,795)
(3.4)%
Operating
3,453,614
2,960,183
493,431
16.7%
Renting
483,241
325,479
157,762
48.5%
Repairs and maintenance
4,304,490
4,135,392
169,098
4.1%
Taxes and insurance
4,429,092
4,396,262
32,830
0.7%
22,953,762
23,345,787
(392,025)
(1.7)%
Income Before Other Income (Expense)
7,582,371
8,788,903
(1,206,532)
(13.7)%
Other Income (Expense)
Interest income
46
159
(113)
(71.1)%
Interest (expense)
(6,743,111)
(6,873,908)
130,797
(1.9)%
(Loss) from investments in unconsolidated joint ventures
(563,595)
918,680
(1,482,275)
(161.3)%
(7,306,660)
(5,955,069)
(1,351,591)
22.7%
Net Income
$
275,711
$
2,833,834
$
(2,558,123)
(90.3)%
Rental income for the six months ended June 30, 2021 was approximately $30,313,000, compared to approximately $31,900,000 for the six months ended June 30, 2020, a decrease of approximately $1,587,000 (5.0%). Although rental income has increased at a number of properties, due to the effect of the Pandemic, a number of properties incurred a decrease in their rental income.The Partnership properties with the largest increases in rental income include Hamilton Oaks, Hamilton Green and Dean Street Associates with increases of $92,000, $59,000, and $44,000 respectively. These are offset by certain properties with the largest decreases in rental income, which include 62 Boylston, 1144 Commonwealth, and Lincoln Street, with decreases of approximately $1,369,000, 306,000, and $116,000, respectively. Included in rental income is contingent rentals collected on commercial properties. Contingent rentals include such charges as bill backs of common area maintenance charges, real estate taxes, and utility charges.
Operating expenses for the six months ended June 30, 2021 were approximately $22,953,000 compared to approximately $23,345,000 for the six months ended June 30, 2020, a decrease of approximately $392,000 (1.7%). The factors contributing to this net decrease are a decrease in depreciation and amortization of approximately $ 1,318,000 (14.4%) due to fully depreciated assets, partially offset by an increase in operating costs of approximately $493,000 (16.7%), an increase in repairs and maintenance expenses of approximately $169,000 (4.1%), and an increase in renting expense of approximately $158,000 (48.5%).
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Interest expense for the six months ended June 30, 2021 was approximately $6,743,000 compared to approximately $6,874,000 for the six months ended June 30, 2020, a decrease of approximately $131,000 (1.9%). The decrease is primarily due to a decrease in interest expense on the line of credit of approximately $82,000.
At June 30, 2021, the Partnership has between a 40% and 50% ownership interests in seven different Investment Properties. See a description of these properties included in the section titled Investment Properties as well as Note 14 to the Consolidated Financial Statements for a detail of the financial information of each Investment Property.
As described in Note 14 to the Consolidated Financial Statements, the Partnership’s share of the net loss from the Investment Properties was approximately $564,000 for the six months ended June 30, 2021, compared to net income of approximately $919,000 for the six months ended June 30, 2020, a decrease in income of approximately $1,482,000 (161.4%). This decrease is primarily due to the reduction in rental revenue from approximately $ 5,372,000 for the six months ended June 30, 2020 to approximately $4,215,000 for the six months ended June 30, 2021, a decrease of approximately $1,157,000 (21.5 %). Included in the income for the six months ended June 30, 2021 is depreciation and amortization expense of approximately $1,308,000. The proportional loss for the six months ended June 30, 2021 from the investment in Dexter Park is approximately $459,000.
As a result of the changes discussed above, net income for the six months ended June 30, 2021 was approximately $276,000 compared to income of approximately $2,834,000 for the six months ended June 30, 2020, a decrease in net income of approximately $2,558,000 (90.3%).
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LIQUIDITY AND CAPITAL RESOURCES
The Partnership’s principal source of cash during the first six months of 2021 was the collection of rents. The Partnership’s principal source of cash during the first six months of 2020 was the collection of rents and the proceeds from the refinancing of Brookside Apartments. The majority of cash and cash equivalents of $23,367,387 at June 30, 2021 and $18,646,972 at December 31, 2020 were held in interest bearing accounts at creditworthy financial institutions.
The increase in cash of $4,720,415 for the six months ended June 30, 2021 is summarized as follows:
Six Months Ended June 30,
2021
2020
Cash provided by operating activities
$
9,168,975
$
9,524,873
Cash (used in) investing activities
(985,258)
(454,059)
Cash (used in) provided by financing activities
(1,125,589)
1,510,950
Repurchase of Depositary Receipts, Class B and General Partner Units
—
(394,031)
Distributions paid
(2,337,721)
(2,338,034)
Net increase in cash and cash equivalents
$
4,720,407
$
7,849,699
The change in cash provided by operating activities is due to various factors, including a change in depreciation expense due to recent acquisitions, a change in income and distribution from joint ventures, and other factors. The increase in cash used in investing activities is primarily due to improvements to rental properties. The change in cash used in financing activities is due to the pay down of mortgages,
During 2021, the Partnership and its Subsidiary Partnerships have completed improvements to certain of the Properties at a total cost of approximately $1,385,000. These improvements were funded from cash reserves. Cash reserves have been adequate to fully fund improvements. The most significant improvements were made at 62 Boylston Street, Hamilton Oaks, Redwood Hills, Dean Street Associates, Hamilton Green and 1144 Commonwealth, at a cost of approximately $355,000, 145,000, $123,000, $95,000, $95,000 and $84,000 respectively.
On March 31, 2020, Nera Brookside Associates, LLC (“Brookside Apartments”), entered into a Mortgage Note with KeyBank National Associates ( KeyBank) in the principal amount of $6,175,000. Interest only payments on the Note are payable on a monthly basis at a fixed interest rate of 3.53% per annum, and the principal amount of the Note is due and payable on March 31, 2035. The Note is secured by a mortgage on the Brookside apartment complex located at 5-12 Totman Drive, Woburn, Massachusetts pursuant to a Mortgage, Assignment of Leases and Rents and Security Agreement dated March 31, 2020. The Note is guaranteed by the Partnership pursuant to a Guaranty Agreement dated March 31, 2020. Brookside Apartments used the proceeds of the loan to pay off an outstanding loan of approximately $2,390,000, with the remaining portion of the proceeds added to cash reserves. In connection with this refinancing, there were closing costs of approximately $136,000.
During the six months ended June 30, 2021, the Partnership received distributions of approximately $419,000 from the investment properties. For the six months ended June 30, 2020, the Partnership received $1,066,000 in distributions from the investment properties. Included in these net distributions is the amount from Dexter Park of approximately $80,000 and $700,000 for the six months ended June 30, 2021 and 2020, respectively.
In January 2021, the Partnership approved a quarterly distribution of $9.60 per Unit ($0.32 per Receipt), which was paid on March 31, 2021. In April 2021, the Partnership approved a quarterly distribution of $9.60 per Unit ($0.32 per Receipt), which was paid on June 30, 2021.
On July 31, 2014, the Partnership entered into an agreement for a $25,000,000 revolving line of credit. The term of the line was for three years with a floating interest rate equal to a base rate of the greater of (a) the Prime Rate (b) the Federal Funds Rate plus one-half of one percent per annum, or (c) the LIBOR Rate for a period of one month plus 1% per annum, plus the applicable margin of 2.5%. The agreement originally expired on July 31, 2017, and was extended until October 31, 2020. The costs associated with the line of credit extension in 2017 were approximately $128,000. Prior to the line’s expiration in 2020, the Partnership exercised its option for a one-year extension until October 31, 2021. The Partnership paid an extension fee of approximately $37,500 in association with the extension.
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Management has a signed term sheet with the lender and is working to close on a three year extension and modification of the line of credit in August 2021. See Note 17. Subsequent Events for details.
On December 19, 2019, the Partnership drew down on the line of credit in the amount of $20,000,000, used in conjunction with the purchase of Mill Street Apartments. On December 20, 2019, the Partnership paid down $2,000,000. On January 22, 2020, the Partnership paid down the line by $1,000,000. As of June 30, 2021, the line of credit had an outstanding balance of $17,000,000.
The Partnership anticipates that cash from operations will be sufficient to fund its current operations, pay distributions, make required debt payments and finance current improvements to its properties. The Partnership may also sell or refinance properties. The Partnership’s net income and cash flow may fluctuate dramatically from year to year as a result of the sale or refinancing of properties, property improvements, increases or decreases in rental income or expenses, or the loss of significant tenants.
Off-Balance Sheet Arrangements—Joint Venture Indebtedness
As of June 30, 2021 the Partnership had a 40%-50% ownership interest in seven Joint Ventures, five of which have mortgage indebtedness. We do not have control of these partnerships and therefore we account for them using the equity method of consolidation. At June 30, 2021, our proportionate share of the non-recourse debt related to these investments was approximately $70,972,000. See Note 14 to the Consolidated Financial Statements.
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Contractual Obligations
As of June 30, 2021, we are subject to contractual payment obligations as described in the table below.
Payments due by period
2022
2023
2024
2025
2026
Thereafter
Total
Contractual Obligations
Long -term debt
Mortgage debt
$
2,549,482
$
79,940,669
$
25,419,180
$
11,269,194
$
21,708,763
$
142,776,836
$
283,664,124
Other obligations
17,000,000
—
—
—
—
—
17,000,000
Total Contractual Obligations
$
19,549,482
$
79,940,669
$
25,419,180
$
11,269,194
$
21,708,763
$
142,776,836
$
300,664,124
* Excluding unamortized deferred financing costs
We have various standing or renewable service contracts with vendors related to our property management. In addition, we have certain other contracts we enter into in the ordinary course of business that may extend beyond one year. These contracts are not included as part of our contractual obligations because they include terms that provide for cancellation with insignificant or no cancellation penalties.
See Notes 5 and 14 to the Consolidated Financial Statements for a description of mortgage notes payable. The Partnerships has no other material contractual obligations to be disclosed.
Factors That May Affect Future Results
Along with risks detailed in Item 1A and from time to time in the Partnership’s filings with the Securities and Exchange Commission, some factors that could cause the Partnership’s actual results, performance or achievements to differ materially from those expressed or implied by forward looking statements include but are not limited to the following:
● The Partnership depends on the real estate markets where its properties are located, primarily in Eastern Massachusetts, and these markets may be adversely affected by local economic market conditions, which are beyond the Partnership’s control.
● The Partnership is subject to the general economic risks affecting the real estate industry, such as dependence on tenants’ financial condition, the need to enter into new leases or renew leases on terms favorable to tenants in order to generate rental revenues and our ability to collect rents from our tenants.
● The Partnership is also impacted by changing economic conditions making alternative housing arrangements more or less attractive to the Partnership’s tenants, such as the interest rates on single family home mortgages and the availability and purchase price of single family homes in the Greater Boston metropolitan area.
● The Partnership is subject to significant expenditures associated with each investment, such as debt service payments, real estate taxes, insurance and maintenance costs, which are generally not reduced when circumstances cause a reduction in revenues from a property.
● The Partnership is subject to increases in heating and utility costs that may arise as a result of economic and market conditions and fluctuations in seasonal weather conditions.
● Civil disturbances, earthquakes and other natural disasters may result in uninsured or underinsured losses.
● Actual or threatened terrorist attacks may adversely affect our ability to generate revenues and the value of our properties.
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● Financing or refinancing of Partnership properties may not be available to the extent necessary or desirable, or may not be available on favorable terms.
● The Partnership properties face competition from similar properties in the same market. This competition may affect the Partnership’s ability to attract and retain tenants and may reduce the rents that can be charged.
● Given the nature of the real estate business, the Partnership is subject to potential environmental liabilities. These include environmental contamination in the soil at the Partnership’s or neighboring real estate, whether caused by the Partnership, previous owners of the subject property or neighbors of the subject property, and the presence of hazardous materials in the Partnership’s buildings, such as asbestos, lead, mold and radon gas. Management is not aware of any material environmental liabilities at this time.
● Insurance coverage for and relating to commercial properties is increasingly costly and difficult to obtain. In addition, insurance carriers have excluded certain specific items from standard insurance policies, which have resulted in increased risk exposure for the Partnership. These include insurance coverage for acts of terrorism and war, and coverage for mold and other environmental conditions. Coverage for these items is either unavailable or prohibitively expensive.
● Market interest rates could adversely affect market prices for Class A Partnership Units and Depositary Receipts as well as performance and cash flow.
● Changes in income tax laws and regulations may affect the income taxable to owners of the Partnership. These changes may affect the after-tax value of future distributions.
● The Partnership may fail to identify, acquire, construct or develop additional properties; may develop or acquire properties that do not produce a desired or expected yield on invested capital; may be unable to sell poorly- performing or otherwise undesirable properties quickly; or may fail to effectively integrate acquisitions of properties or portfolios of properties.
● Risk associated with the use of debt to fund acquisitions and developments.
● Competition for acquisitions may result in increased prices for properties.
● Any weakness identified in the Partnership’s internal controls as part of the evaluation being undertaken could have an adverse effect on the Partnership’s business.
● Ongoing compliance with Sarbanes-Oxley Act of 2002 may require additional personnel or systems changes.
The foregoing factors should not be construed as exhaustive or as an admission regarding the adequacy of disclosures made by the Partnership prior to the date hereof or the effectiveness of said Act. The Partnership expressly disclaims any obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.