New England Realty Associates Limited Partnership — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021; filed November 8, 2021. Unaudited interim results. NERA owns or operates residential, mixed-use, and commercial properties in Eastern Massachusetts and Southern New Hampshire, plus 40%–50% interests in seven joint ventures.
Financial results and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $15.95 million | $15.14 million | $46.48 million | $47.28 million |
| Income before other income and expense | $3.55 million | $3.23 million | $11.13 million | $12.02 million |
| Interest expense | $3.39 million | $3.42 million | $10.14 million | $10.29 million |
| Net income (loss) | $(75,000) | $(439,000) | $200,000 | $2.39 million |
| Net income (loss) per unit | $(0.62) | $(3.61) | $1.65 | $19.66 |
- Revenue and operating performance: Q3 revenue rose 5.3% year over year, while nine-month revenue fell 1.7%. Q3 income before other income and expense improved 10.0%; the nine-month measure declined 7.3%. Nine-month rental income decreased $801,000.
- Costs and joint ventures: Nine-month operating expenses increased 0.3%, with higher repairs and maintenance, operating, and renting costs partly offset by lower depreciation. The equity-method result swung to a $797,000 loss from $669,000 of income in the prior-year period, contributing to the 91.6% decline in nine-month net income.
- Cash flow: Nine-month cash from operating activities was $12.85 million, versus $13.30 million. Capital improvements used $2.23 million; distributions to partners were $3.51 million. Cash increased $5.97 million to $24.62 million.
- Balance sheet and debt: At September 30, cash was $24.62 million, total assets $288.89 million, mortgage notes payable $281.92 million, and notes payable $17.00 million. Total liabilities were $333.67 million and partners’ capital was negative $44.78 million. Mortgage rates ranged from 3.53% to 5.66%, with a 4.43% weighted average rate. The mortgage maturity schedule shows approximately $102.67 million due in 2023.
- Liquidity and distributions: The Partnership paid $0.96 per depositary receipt during the first nine months, matching the prior-year amount. Management expects operating cash flow to cover current operations, distributions, required debt payments, and current property improvements.
Material changes, outlook, and risks
- Rental recovery: Management reported that colleges returned to campus in September and the local rental market improved. At November 1, residential vacancy was 2.5%, versus 8.3% a year earlier; joint-venture vacancy was 2.8%, versus 22.8%. Commercial vacancy was 2.0%, versus 6.3%. Management said vacancies had returned to pre-pandemic levels, while expecting some seasonal market softening in winter.
- Rent trends: In Q3, average rents rose 2.7% on renewals and 1.3% on new leases. For the nine-month period, renewals averaged a 1.9% increase, while new leases averaged a 1.2% decrease.
- Credit line and covenant status: At September 30, the Partnership was not in compliance with covenants on its $25 million revolving credit line, which prevented additional advances. On October 29, it amended and extended the facility to October 29, 2024. The commitment is restricted to $17 million during a modification period that phases out by December 31, 2022; management reported compliance under the amended covenants. The interest margin was reduced to LIBOR plus 300 basis points, the unused fee was eliminated, and a $125,000 modification fee was paid.
- Potential financing: After quarter-end, NERA was negotiating a proposed $149 million KeyBank master credit facility secured by 11 properties. Proceeds were expected to repay about $65 million of existing debt, pay about $5 million of prepayment penalties, and leave about $79 million for general partnership purposes. The filing describes negotiations, not a completed transaction.
- Pandemic and other risks: Management cautioned that COVID-19 variants and economic uncertainty could affect tenant ability to pay, rental demand, and results. Other disclosed risks include regional economic and real estate conditions, operating-cost increases, refinancing availability, interest rates, competition, and environmental or insurance exposures. No material pending legal proceedings were reported.
- Joint ventures and unusual exposure: NERA reported a $22.73 million distribution and loss balance in excess of its investment in unconsolidated ventures and stated it intends to fund its share of future operating deficits if needed, despite having no legal obligation to do so. Its proportionate share of joint-venture non-recourse debt was approximately $70.95 million.
- Other items: Management expected to resume depositary-receipt repurchases in Q4 2021; none were made in the first nine months. Related-party entities provide property management and other services. Disclosure controls were reported effective, with no material third-quarter changes in internal control over financial reporting.
Most important facts for investors to verify
- Whether the amended credit line remains compliant and when its borrowing commitment can return from $17 million to $25 million.
- Whether the proposed $149 million master credit facility closed, and its final terms, collateral, and use of proceeds.
- How the approximately $102.67 million of mortgage maturities scheduled for 2023 will be refinanced or repaid.
- Whether occupancy, rent collections, and leasing trends sustain the reported recovery, including any continuing effects of concessions and doubtful accounts.
- The performance, debt, and potential support needs of joint ventures, particularly given the accumulated losses in excess of NERA’s investments.
- The impact of distributions, capital spending, and any resumed repurchases on cash and liquidity.