New England Realty Associates Limited Partnership — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. The partnership owns and operates primarily residential and mixed-use real estate in Eastern Massachusetts and Southern New Hampshire, including 2,892 apartment units, 19 leased condominium units, commercial space, and interests in seven unconsolidated joint ventures.
Financial performance and position
| Metric | 2021 | 2020 |
|---|---|---|
| Revenue | $62.64 million | $62.10 million |
| Operating expenses | $48.40 million | $47.13 million |
| Income before other income (expense) | $14.24 million | $14.97 million |
| Interest expense | $13.63 million | $13.71 million |
| Net income (loss) | $(2.70) million | $1.42 million |
| Net income (loss) per unit | $(22.19) | $11.70 |
| Cash from operating activities | $15.78 million | $17.45 million |
- Revenue increased 0.9% year over year, while operating expenses rose 2.7%. Income before other income and expense fell 4.9%; the corresponding margin declined to about 22.7% from 24.1%.
- Net results included approximately $2.75 million of other expense, chiefly prepayment penalties from the November refinancing. Joint-venture results also shifted from $161,000 income to a $567,000 loss. The filing reports no income taxes at the partnership level.
- Cash and cash equivalents were $96.08 million at year-end, up from $18.65 million. The increase largely reflects refinancing proceeds; it should not be read as recurring operating cash generation.
- Mortgage notes payable were $370.48 million, net of deferred financing costs, versus $283.44 million a year earlier. The $17 million line-of-credit balance outstanding at 2020 year-end was repaid in December 2021. Partnership capital was negative $49.29 million.
- The partnership reported $373.19 million of contractual mortgage obligations, including amounts due of $37.28 million in 2023, $24.97 million in 2026, and $293.84 million thereafter. Its proportionate share of unconsolidated joint-venture debt was approximately $70.92 million.
- Management reported 2021 capital improvements of $3.32 million and expects approximately $5.5 million in 2022. Operating cash flow was below the prior year; distributions paid were $4.67 million in 2021, similar to 2020.
Material changes and operating trends
- Residential vacancy improved to 1.7% as of February 1, 2022, from 6.2% a year earlier; joint-venture vacancy fell to 1.4% from 15.5%. Commercial vacancy was reported at 0% versus 8.7%.
- Management attributed the recovery in leasing to students returning to Greater Boston colleges and universities in fall 2021. In the fourth quarter, renewal rents rose an average 4.5% and new-lease rents 9.3%; for full-year 2021, increases were 2.5% and 0.7%, respectively.
- Operating cost pressures included increases in repairs and maintenance (14.7%), operating expenses (12.2%), and renting expenses (43.6%). Depreciation and amortization declined 9.4%.
- In November 2021, the partnership borrowed $156 million under a KeyBank facility at a fixed 2.97% rate, interest-only through December 31, 2031. Proceeds repaid approximately $65.3 million of existing debt and incurred about $2.7 million of prepayment penalties; approximately $89 million remained for general partnership purposes.
- The revolving credit facility was extended to October 2024, with its commitment limited to $17 million during a modification period. Although the outstanding balance was paid off, the partnership was unable to draw on the facility at year-end because debt yield of 8.04% was below the applicable 8.5% covenant minimum.
Outlook, risks, and unusual matters
- Management said rental activity remained strong entering 2022 and expected the local market to remain strong into the spring leasing season. This is management’s expectation, not a quantified earnings or revenue forecast.
- The filing identifies continuing COVID-19 uncertainty, including tenant ability to pay, demand for student housing, and possible operating or construction disruption. Russia’s invasion of Ukraine and related sanctions were also cited as potential sources of economic and energy-cost uncertainty.
- Other key exposures include concentrated geography, competition, insurance and property-cost increases, mortgage refinancing and covenant risk, LIBOR transition, and risks from non-controlling joint ventures. The partnership has guaranteed certain joint-venture debt; its proportionate share of joint-venture debt was about $70.92 million.
- Related-party transactions are significant: Hamilton, an affiliate of the general partner, manages the properties and received approximately $2.52 million in management fees and $1.09 million in administrative and professional-service charges in 2021. The auditor identified related-party identification and investment-property impairment assessment as critical audit matters. No impairment was recorded in 2021.
- The partnership paid $38.40 per unit ($1.28 per depositary receipt) in 2021. After year-end, it approved a quarterly distribution of $9.60 per unit plus a special distribution of $38.40 per Class A unit, payable March 31, 2022.
- The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective. No material litigation was reported.
Important facts for investors to verify
- Reconcile the results narrative: one MD&A passage says 2021 income before interest and other items was approximately $14.97 million, but the financial statements and comparative table report $14.24 million for 2021 and $14.97 million for 2020.
- Confirm the status and covenant headroom of the revolving credit facility, including when draw availability and the full $25 million commitment may be restored.
- Review the use and remaining availability of the approximately $89 million refinancing proceeds, alongside the planned $5.5 million of 2022 improvements and declared distributions.
- Assess near-term maturities, particularly the $37.28 million scheduled for 2023, and refinancing options, prepayment costs, and exposure to variable rates and the LIBOR transition.
- Verify leasing and rent trends after the student return, including whether low vacancies and rent increases persist through the main second- and third-quarter lease renewal season.
- Evaluate joint-venture losses, guarantees, and related-party fees and governance, including the partnership’s exposure where investment carrying values are below zero.