Business context and reporting period
New England Realty Associates Limited Partnership (NYSE American: NEN) filed this Form 10-K for the fiscal year ended December 31, 2023. The partnership owns and operates primarily residential and mixed-use real estate in Eastern Massachusetts and Southern New Hampshire. At year-end, it owned 2,943 apartments, 19 leased condominium units and commercial properties; it also held 40%–50% interests in seven joint ventures with 688 residential units.
Financial performance and liquidity
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Revenue | $74.48 million | $68.29 million | +9.1% |
| Income before other income and expense | $18.81 million | $18.09 million | +4.0% |
| Net income | $8.45 million | $3.72 million | +127.1% |
| Net income per unit | $71.34 | $30.99 | — |
| Net cash from operating activities | $24.18 million | $21.54 million | +12.3% |
- Rental income rose 9.4%. Excluding the two 2023 acquisitions, management reported revenue growth of 6.8%.
- Expenses increased 10.9% to $55.67 million; excluding the acquisitions, they rose 6.1%. Repairs and maintenance increased 18.6%, while renting costs rose 57.2%.
- Income before other income and expense was 25.3% of revenue, versus 26.5% in 2022. Net income was 11.3% of revenue, versus 5.5%.
- Interest income increased to $4.49 million from $1.06 million, primarily reflecting Treasury bill investments. Interest expense rose 4.5% to $15.72 million.
- Cash and cash equivalents were $18.23 million at year-end, down from $49.56 million. Treasury bills were $84.70 million, for combined cash and Treasury bills of about $102.93 million.
- Cash flow was $24.18 million from operations, $(38.94) million from investing and $(16.57) million from financing; cash declined by $31.33 million. Investing included $38.03 million for acquisitions and $9.29 million for property improvements.
- Mortgage notes payable were $408.66 million net of deferred financing costs ($411.44 million gross). Weighted-average rate on partnership mortgages was 3.68%; substantially all were fixed-rate. The partnership reported $70.69 million as its proportionate share of unconsolidated joint venture debt. Total assets were $385.73 million, and partners’ capital was negative $65.35 million.
Material changes versus the prior comparable period
- Net income more than doubled, aided by higher Treasury bill interest income, higher joint venture income and the absence of the $874,517 “other loss” recorded in 2022. Operating income before other income and expense rose only 4.0% as expenses grew faster than revenue.
- Residential vacancy was 0.9% at February 1, 2024, down from 1.9% a year earlier. Joint venture vacancy increased to 2.2% from 1.7%.
- The partnership acquired a Framingham commercial property for about $10.15 million and a 52-unit Boston mixed-use property for about $27.5 million, both funded from cash reserves.
- Annual distributions increased to $84 per unit ($2.80 per depositary receipt) from $76.80 per unit ($2.56 per receipt). The partnership repurchased 43,774 depositary receipts in 2023 for approximately $3.14 million, alongside required repurchases of other partnership units.
Outlook, commentary, risks and unusual items
- Management said residential leasing remained strong: 2023 renewal rents increased about 6.1% and new-lease rents about 8.9%. It expected low vacancy to continue, but provided no formal earnings or revenue guidance.
- Management plans approximately $22.28 million of 2024 capital improvements, including about $10.07 million for the Mill Street development. The 72-unit project, including 17 affordable units, is expected to begin construction in 2024. A construction contract is approximately $29.7 million; management anticipates a $15 million permanent loan upon completion, currently expected in late 2025.
- A $971,109 impairment charge was recorded for the Mill Street building after approval of the redevelopment left it vacant. The charge reflects the building’s net book value.
- The existing revolving credit facility is due to mature October 29, 2024, but the partnership was unable to draw on it at December 31, 2023 because debt yield was 8.6%, below the 9.0% covenant minimum. Management reported discussions with lenders for a replacement facility.
- March 2024 distributions included a quarterly $12 per unit ($0.40 per receipt) and a special $48 per Class A unit ($1.60 per receipt). These were payable March 28, 2024.
- Key risks include refinancing and covenant compliance, interest-rate exposure, property operating-cost inflation, concentration in the Boston-area market, insurance and climate-related exposure, possible Boston rent restrictions and emissions rules, and risks involving joint ventures. The partnership also has significant related-party arrangements with Hamilton, its Brown-family-controlled property manager; management fees were about $2.95 million in 2023, in addition to administrative and service fees.
- A joint venture received a 2023 default notice concerning transfers of ownership interests after Harold Brown’s death. It disputed the default; in March 2024, the lender gave retroactive consent subject to conditions. The partnership estimated its share of related costs at about $107,000.
- The auditor gave unqualified opinions on the financial statements and internal controls. Management also reported effective disclosure controls and internal control over financial reporting. No material litigation or cybersecurity incident affecting operations was reported.
Most important facts for investors to verify
- Whether the partnership obtains a replacement credit facility before the existing line’s October 2024 maturity, and the terms and covenant requirements.
- Debt maturities and refinancing exposure, especially the $25.1 million due in 2026, $23.3 million in 2027 and $31.9 million in 2028, plus joint venture debt and guarantees.
- Mill Street construction costs, schedule, funding availability and the proposed permanent financing.
- Whether rent growth and low residential vacancies persist, and whether higher repairs, insurance, taxes and leasing costs pressure property margins.
- The sustainability of distributions and repurchases given the cash decline, negative partners’ capital and planned capital spending.
- Related-party fees, joint venture economics and the conditions attached to the lender’s post-event consent for Hamilton on Main.