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, 2023. NERA owns residential, mixed-use and commercial properties primarily in Eastern Massachusetts and Southern New Hampshire, and holds 40%–50% interests in seven unconsolidated joint ventures.
Financial Performance and Liquidity
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $19.0 million | $17.1 million | $54.8 million | $50.6 million |
| Income before other income (expense) | $4.9 million | $4.6 million | $14.1 million | $12.9 million |
| Net income | $2.2 million | $1.0 million | $6.2 million | $1.6 million |
| Net income per unit | $18.38 | $8.32 | $51.83 | $13.12 |
Nine-month operating cash flow was $16.3 million, versus $13.0 million a year earlier. Cash and cash equivalents were $16.1 million at September 30, down from $49.6 million at year-end 2022; U.S. Treasury bills were $83.3 million, compared with $88.3 million. Investing used $36.5 million, including two property acquisitions and property improvements. Financing used $13.2 million, including mortgage principal payments, partner distributions and unit repurchases.
Mortgage notes payable were $409.3 million, net of financing costs, versus $411.0 million at year-end. The weighted average interest rate on NERA mortgage debt was 3.68% (3.78% effective). NERA’s proportionate share of joint-venture non-recourse debt was approximately $70.7 million. Partners’ capital was negative $64.7 million; total liabilities were $450.8 million against total assets of $386.2 million.
Calculated net margin rose to approximately 11.5% in Q3 from 5.8%, and to 11.2% for the nine-month period from 3.1%. Income before other income as a share of revenue was approximately 25.8% in Q3 and 25.7% for nine months.
Material Changes Versus Prior Period
- Nine-month revenue increased 8.2%; expenses increased 8.0%. Rental income rose 8.1%, while repairs and maintenance rose 17.6% and renting expense rose 64.8%.
- Nine-month net income increased $4.6 million. Higher interest income on Treasury bills contributed $3.0 million, and income from unconsolidated joint ventures increased $0.3 million. Interest expense rose $0.7 million, attributed to earlier property refinancings and higher debt.
- NERA acquired a Framingham commercial property for approximately $10.2 million in January and a Boston South End mixed-use property for approximately $27.5 million in July, using cash reserves.
- Residential vacancy was 0.9% on November 1, 2023, compared with 1.8% a year earlier. Commercial vacancy was 1.0%, versus 18.8%; the filing’s commercial property base also increased.
Outlook, Risks and Unusual Items
Management reported average Q3 rent increases of 6.4% for renewals and 9.9% for new leases, and expected a strong rental market with continued rent growth through the rest of 2023. It expects operating cash to cover current operations, distributions, required debt payments and current property improvements. No specific earnings or revenue forecast was provided.
A material liquidity constraint is the $25 million revolving credit facility, which matures October 2024: NERA reported that its portfolio debt yield was below the required 9.5% covenant threshold and it could not draw on the facility until it meets the required covenants. The facility had no outstanding balance at September 30.
A 50%-owned joint venture received notice that a transfer of ownership interests following Harold Brown’s death constituted an event of default under its $16.9 million loan. The borrower disputes that a default occurred and is seeking lender consent. NERA also disclosed related-party management and service arrangements. Management reported no material litigation or known material environmental liabilities; ordinary real-estate-related proceedings may arise.
Key risks include local market and tenant conditions, operating-cost inflation, availability and cost of refinancing, interest-rate exposure, competition, environmental and insurance risks, and acquisition execution. Management stated disclosure controls were effective and there were no material changes in internal control over financial reporting during the quarter.
Most Important Facts to Verify
- Whether NERA can cure the debt-yield covenant breach and restore access to its revolving credit facility before its October 2024 maturity.
- Resolution and potential financial consequences of the joint-venture lender’s alleged loan default.
- Property-level performance and cash flows supporting the two 2023 acquisitions, continued rent growth and low vacancy.
- Upcoming mortgage maturities, refinancing requirements and the effect of interest rates on debt service and distributions.
- Use and availability of cash reserves, including Treasury bill balances, alongside distributions, acquisitions and capital spending.
- Terms, oversight and costs of related-party management and professional-services arrangements.