New England Realty Associates Limited Partnership — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Financial statements are unaudited. The partnership owns residential, mixed-use and commercial properties primarily in Eastern Massachusetts and Southern New Hampshire, and holds 40%–50% interests in seven joint ventures.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $17.08 million | $15.95 million | $50.59 million | $46.48 million |
| Income before other income/expense | $4.56 million | $3.55 million | $12.95 million | $11.13 million |
| Net income | $995,224 | $(75,385) | $1.58 million | $200,326 |
| Net income per unit | $8.32 | $(0.62) | $13.12 | $1.65 |
Nine-month operating margin before other income/expense was approximately 25.6%, versus 24.0% a year earlier. Net margin was approximately 3.1%, versus 0.4%. The filing does not present a standard EBITDA or funds-from-operations measure.
- Cash flow: Nine-month operating cash flow was $13.03 million (prior year $12.85 million). Investing used $76.57 million, principally reflecting net Treasury-bill purchases; financing provided $26.93 million. Cash declined $36.61 million to $59.47 million.
- Liquidity: The balance sheet also included $74.00 million of Treasury bills, for cash and Treasury bills totaling $133.47 million. The partnership could not draw on its revolving credit line at September 30 because it failed the debt-yield covenant.
- Debt and capital: Mortgage notes payable were $411.48 million, up from $370.48 million at year-end 2021. The weighted-average mortgage rate was 3.69%. Total liabilities were $448.79 million, exceeding total assets of $387.78 million; partners’ capital was negative $61.00 million. The partnership’s proportionate share of joint-venture non-recourse debt was approximately $70.84 million, separate from its consolidated mortgage balance.
- Distributions and repurchases: Nine-month distributions were $8.12 million; distributions per depositary receipt were $2.24, including a special distribution. The partnership spent $5.17 million on unit and receipt repurchases.
Changes versus prior year
Nine-month revenue rose 8.8%, led by rental income growth of 8.9%. Operating expenses increased 6.5%, particularly repairs and maintenance (up 12.8%) and operating costs (up 17.0%). Interest expense increased 9.1% to $11.06 million as refinancing increased debt. Joint-venture results improved to $203,867 of income from a $796,725 loss. Q3 revenue increased 7.1%, while expenses rose 1.0%; Q3 net income turned positive.
Outlook, risks and unusual items
- Management reported residential vacancy of 1.8% at November 1, 2022, down from 2.5% a year earlier; joint-venture vacancy was 0.9%, versus 2.8%. Commercial vacancy was 18.8%, sharply higher than 2.0% a year earlier.
- Management said Q3 renewals averaged rent increases of 6.7% and new leases 18.2%, and expected continued rent growth for the rest of 2022. No quantified earnings or revenue guidance was provided.
- Management said refinancings of 15 properties raised approximately $130 million to build reserves and support potential acquisitions. The June 2022 KeyBank facility advance was $80.28 million at a fixed 4.33%; proceeds paid down about $37.07 million of existing debt and related prepayment penalties, with remaining proceeds for general partnership purposes.
- The revolving line’s debt-yield covenant was missed: reported debt yield was 8.05% against a minimum 8.5%. No draws were available until compliance is restored. Management anticipated operating cash would cover current operations, distributions, debt service and planned improvements.
- Risks cited include local real-estate conditions, inflation and operating costs, interest rates, refinancing availability, tenant demand and property competition. The filing also describes possible future joint-venture support, while stating the partnership has no legal obligation to fund operating deficits.
- Cybersecurity and controls: A ransomware attack on the management company on October 3, 2022 encrypted on-premise systems. The filing says backups were not compromised and data was restored, with no monetary damage or financial-data loss reported. The incident delayed this filing; management concluded IT controls supporting financial reporting were ineffective and disclosed material weaknesses and remediation measures.
- Other subsequent events: The partnership closed on January 18, 2023 on a roughly $10.15 million Framingham retail-property purchase, funded from cash reserves. A December 2022 antitrust class action named the partnership among property managers; the company disputes the allegations, and no class had been certified. The management-company CFO resigned in December and a successor was appointed.
Key facts for investors to verify
- Progress toward restoring compliance with the revolving-credit debt-yield covenant and availability of that facility.
- Debt maturities, refinancing terms and the effect of higher borrowing costs on interest expense and distributions.
- Cash and Treasury-bill balances, planned acquisitions and the funding needs associated with negative partners’ capital.
- Whether elevated commercial vacancy persists and how residential rent growth and expenses develop.
- Completion and testing of cybersecurity and financial-reporting control remediation, and developments in the antitrust litigation.