New England Realty Associates Limited Partnership — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023; unaudited. The Partnership owns residential, mixed-use and commercial properties primarily in Eastern Massachusetts, and holds 40%–50% interests in seven joint ventures. Its consolidated portfolio included 2,892 apartments, 19 condominium units and 128,635 square feet of commercial space.
Financial results
- Q2 revenue: $18.10 million, up 6.9% from $16.93 million. Rental income rose 6.8% to $17.96 million.
- Q2 operating expenses: $13.36 million, up 8.5%; repairs and maintenance rose 17.0%, administrative expense 39.1%, and operating costs 13.1%. Income before other income and expense was $4.74 million, up 2.8%.
- Q2 net income: $2.22 million, versus $0.24 million; net income per unit was $18.73 versus $2.02. The increase was substantially aided by $1.20 million of interest income and a swing in other expense to $92,810 of income from $834,538 of expense.
- First-half revenue: $35.79 million, up 6.8%. Operating expenses increased 5.9% to $26.60 million; income before other income and expense rose 9.6% to $9.19 million.
- First-half net income: $3.98 million, versus $0.59 million; net income per unit was $33.45 versus $4.84. Interest income was $2.17 million versus $61, while interest expense increased 10.5% to $7.83 million. The prior period included $834,533 of other expense.
- Cash flow and liquidity: First-half operating cash flow was $8.17 million versus $7.45 million. Cash increased $6.14 million to $55.70 million. Treasury bills were $68.36 million at June 30, 2023; together, cash and Treasury bills totaled about $124.06 million. Investing cash flow was $7.71 million, reflecting Treasury bill activity and joint-venture distributions, partly offset by property purchases and improvements.
- Debt: Mortgage notes payable were $409.83 million, net of deferred financing costs, versus $410.97 million at year-end. The weighted-average mortgage rate was 3.68%; scheduled mortgage maturities total approximately $412.80 million before deferred financing costs, with $354.37 million thereafter. The revolving credit facility had no balance outstanding.
- Capital and distributions: Partners’ capital was negative $64.31 million. First-half distributions were $7.13 million, including the special distribution; reported distributions per depositary receipt were $2.00 for the six months.
Changes, outlook and risks
- Residential rents increased on renewals and new leases; management reported average Q2 increases of 6.8% for renewals and 7.8% for new leases. Residential vacancy was 1.8% on August 1, 2023, versus 2.0% a year earlier. Management expected a strong rental market and continued rent growth, but gave no numerical earnings or revenue guidance.
- On January 18, the Partnership acquired a Framingham commercial property for approximately $10.15 million, funded from cash reserves. After quarter-end, on July 14, it purchased a 52-unit Boston residential property for approximately $27.5 million, also using cash reserves.
- Management said cash from operations is expected to cover current operations, distributions, required debt payments and current property improvements. It may acquire properties, repurchase depositary receipts, or refinance properties depending on opportunities and funding needs.
- Credit availability risk: At June 30, the Partnership failed the line-of-credit debt-yield covenant; it cannot draw on the facility until it meets the required covenants. The line is scheduled to expire October 29, 2024.
- Management cited local economic and rental-market conditions, tenant collections and leasing, rising operating costs, interest rates, refinancing availability, competition, insurance and environmental exposures as risks. Most debt is fixed-rate; the filing estimates a 100-basis-point rate change would affect annual costs on variable-rate debt by about $50,000.
- The Partnership reported no material litigation and no material changes to the risk factors in its 2022 Form 10-K. It said previously identified IT-control weaknesses related to a ransomware incident had been remediated and controls were operating effectively as of June 30, 2023.
- Related-party arrangements include property management and other services provided by The Hamilton Company, an entity related to the general partner. Management fees and other charges should be considered when assessing expenses and governance.
Important facts for investors to verify
- Whether the Partnership regains compliance with the debt-yield covenant and restores access to its revolving credit line.
- Debt maturity and refinancing exposure, including the large amount scheduled “thereafter,” and debt associated with unconsolidated joint ventures.
- Whether rent growth and low residential vacancy persist, and whether operating-cost increases—especially repairs and maintenance—moderate.
- Cash and Treasury bill balances after the post-quarter $27.5 million acquisition, distributions and planned capital improvements.
- The sustainability of reported net-income growth, given the material contribution from Treasury bill interest and prior-period other expense.
- Related-party service charges, joint-venture support intentions despite negative investment balances, and continued effectiveness of remediated IT controls.