New England Realty Associates Limited Partnership — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; 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. Results are not necessarily indicative of the full year.
Financial performance and position
| Metric | Q1 2022 | Q1 2021 / prior date |
|---|---|---|
| Total revenue | $16.58 million | $15.09 million; up 9.9% |
| Operating expenses | $12.80 million | $11.69 million; up 9.5% |
| Income before other income (expense) | $3.78 million | $3.40 million; up 11.2% |
| Net income (loss) | $342,418 | $(294,180) |
| Net income (loss) per unit | $2.82 | $(2.42) |
| Cash from operating activities | $4.58 million | $4.34 million |
| Cash and cash equivalents | $92.27 million at March 31 | $96.08 million at December 31, 2021 |
| Mortgage notes payable | $369.97 million at March 31 | $370.48 million at December 31, 2021 |
| Total assets / total liabilities | $350.20 million / $406.31 million | Partners’ capital was negative $56.11 million |
Rental income rose 9.9%, while expenses increased 9.5%. Management attributed much of the expense increase to snow removal, operating costs and repairs and maintenance. Interest expense increased 2.7% to $3.45 million. The joint ventures contributed $20,069 of income, compared with a $325,170 loss a year earlier. The filing does not provide a clear standalone cash-flow margin measure.
Liquidity, debt and capital allocation
- Q1 cash decreased $3.82 million: operating cash flow of $4.58 million was outweighed by $640,311 of investing outflows and $7.76 million of financing outflows. Financing included $5.82 million of partner distributions, $1.34 million of unit repurchases and $600,190 of mortgage principal payments.
- The Partnership reported $92.27 million of cash, but substantially all cash and certain security deposits exceeded federal deposit-insurance limits. Security deposits and some escrows are restricted.
- Mortgage rates ranged from 2.97% to 4.95%; the weighted-average rate was 3.61%. Approximately $8.72 million of mortgage principal was scheduled to mature in 2023 and $31.31 million in 2024. Most mortgages have prepayment penalties.
- The $25 million revolving credit facility was restricted to $17 million during a modification period and was unavailable for draws at March 31 because the Partnership failed its debt-yield covenant: 8.04% versus the 8.5% minimum then applicable. The facility had been paid off in December 2021. Modified covenants were scheduled to phase out by December 31, 2022; returning to the $25 million commitment depends on meeting original covenant tests.
- Separately, the Partnership reported approximately $70.89 million as its proportionate share of non-recourse joint-venture debt. Its properties, subsidiaries and joint ventures collectively had approximately $539.37 million of long-term debt. These figures include different scopes of debt and should not be added together.
Changes, outlook and notable items
- Residential occupancy recovered: vacancy was 2.0% on May 1, 2022 versus 6.2% a year earlier. Joint-venture vacancy was 0.6% versus 9.2%. Management said occupancy had returned to pre-pandemic levels.
- Q1 rent increases averaged 4.9% for renewals and 11.2% for new leases. Management expected a strong rental market, continued rent growth and low vacancy for the balance of 2022; this is an expectation, not formal numerical guidance.
- Management said cash from operations should be sufficient for current operations, distributions, required debt payments and current property improvements. Results and cash flow may fluctuate with property sales or refinancing, capital spending, rental income and expenses, and significant tenant losses.
- On April 25, 2022, the Partnership and affiliates entered a rate-lock agreement for an approximately $79.96 million loan at a fixed 4.33% rate and paid a $1.60 million deposit. The stated intended uses were to repay approximately $37.15 million of debt secured by four properties, pay approximately $1.90 million in prepayment penalties, and use approximately $40.91 million for general Partnership purposes. This was a subsequent event, not a completed Q1 transaction.
- Q1 included a regular distribution of $9.60 per unit and a special distribution of $38.40 per Class A unit, both paid March 31. In May, the Partnership approved another regular quarterly distribution of $9.60 per unit, payable June 30, 2022. It also repurchased 14,132 depositary receipts during Q1 for approximately $1.07 million, plus related Class B and general-partner unit repurchases.
- Risks include local real-estate conditions, tenant collections and leasing, operating-cost and utility inflation, interest rates and refinancing access. Management noted uncertainty from Russia’s invasion of Ukraine and related sanctions, including possible inflation and economic effects. It reported no material environmental liabilities known to management and no material pending legal proceedings.
Important facts for investors to verify
- Whether the Partnership cures the debt-yield covenant breach and restores access to its revolving credit facility; confirm the timing and terms of any subsequent refinancing.
- Whether the expected rent growth and low vacancy persist through the main summer lease-renewal period, and how operating-cost inflation affects margins.
- The scale and timing of mortgage maturities, potential prepayment penalties, and the Partnership’s ability to fund debt service, improvements and distributions.
- The sustainability of distributions and unit repurchases relative to operating cash flow, particularly given negative partners’ capital and liabilities exceeding assets.
- The terms, completion and actual use of proceeds of the post-quarter $79.96 million rate-locked financing, and the extent of related-party management and service fees.