NEN

Business Context and Reporting Period

Company: New England Realty Associates Limited Partnership (NERA)

Filing Type: Form 10-Q (Unaudited)

Reporting Period: Quarter and six months ended June 30, 2024

Overview: NERA owns and operates 31 properties in Eastern Massachusetts and Southern New Hampshire, comprising 2,943 residential units, 19 condominium units, and approximately 130,000 square feet of commercial space. The Partnership also holds 40-50% interests in seven unconsolidated joint ventures. As of August 8, 2024, there were 93,586 Class A units (2,807,590 Depositary Receipts) and 22,227 Class B units outstanding.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased by 11.6% ($4.15 million) compared to the prior year period. Rental income rose 11.3% to $39.55 million, driven by a new mixed-use acquisition (Shawmut Apartments) and organic rent growth (6.4% for renewals, 7.6% for new leases in Q2).
• Profitability Surge: Net income increased 89.4% to $7.54 million. This was primarily due to higher rental revenues and a 119.5% increase in income from unconsolidated joint ventures ($762,560 vs. $347,368).
• Expense Management: Total operating expenses increased 4.0% to $27.65 million. Excluding the new Shawmut property, operating expenses decreased slightly. Administrative expenses dropped 11.9%, while management fees increased 15.3% due to higher gross receipts.
• Capital Deployment: The Partnership invested $4.19 million in the Mill Street Development project and $4.94 million in rental property improvements. Cash reserves were utilized for these capital expenditures and distributions.

Guidance, Outlook, Risks, and Unusual Items

• Outlook: Management expects continued rent growth for the balance of 2024. The Mill Street Development project is anticipated to require approximately $30 million in total spending, with $10 million expected in 2024 and completion in Q4 2025.
• Liquidity and Debt Covenants: The Partnership holds approximately $83.6 million in short-term U.S. Treasury bills. However, the $25 million revolving line of credit is currently restricted; the Partnership cannot draw down funds because the portfolio's debt yield (9.3%) fell below the required minimum covenant of 9.5%. Discussions for a replacement line of credit are ongoing.
• Distributions: A quarterly distribution of $12.00 per Unit ($0.40 per Receipt) was approved for payment on September 30, 2024. A special distribution of $48.00 per Class A unit was paid in March 2024.
• Stock Repurchases: The Partnership continues its repurchase program. During the six months ended June 30, 2024, it purchased 10,110 Depositary Receipts at an average price of $71.16 per receipt.
• Risks: Key risks include dependence on the New England real estate market, interest rate fluctuations affecting refinancing costs, and potential environmental liabilities. The Partnership has no material litigation pending.

Investor Verification Checklist

• Debt Covenant Compliance: Verify the status of the debt yield covenant (currently 9.3% vs. 9.5% required) and the timeline for securing a replacement line of credit.
• Development Costs: Monitor the Mill Street Development project budget ($30 million total) against actual spending to ensure cash reserves remain sufficient.
• Joint Venture Performance: Review the significant increase in income from unconsolidated joint ventures to ensure sustainability, noting that several ventures have negative carrying values.
• Occupancy Rates: Track the residential vacancy rate (1.5% as of August 1, 2024) and commercial vacancy rate (1.0%) against market trends.
• Related Party Transactions: Review fees paid to The Hamilton Company (management) and NewReal, Inc. (general partner), which totaled approximately $1.57 million in management fees and $568,000 in other professional services for the six-month period.