NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP annual report, FY2022

Business context and reporting period

New England Realty Associates Limited Partnership (NERA) filed this Form 10-K for the fiscal year ended December 31, 2022. It owns and operates residential and commercial real estate, primarily in Eastern Massachusetts and Southern New Hampshire. At year-end, it owned 2,892 apartment units, 19 leased condominium units, and commercial space; it also held 40%–50% interests in seven joint ventures. Residential rents generated about 95% of rental income.

Financial performance and position

Metric	2022	2021
Total revenue	$68.29 million	$62.64 million
Income before other income and expense	$18.09 million	$14.24 million
Net income (loss)	$3.72 million	$(2.70) million
Operating cash flow	$21.54 million	$15.78 million
Cash and cash equivalents at year-end	$49.56 million	$96.08 million

• Revenue rose 9.0%; rental income increased 8.7%. Income before other income and expense rose 27.0%, and its margin on revenue was approximately 26.5%, versus 22.7% in 2021.
• Expenses increased 3.7% to $50.21 million. Repairs and maintenance rose 11.9% and operating expenses rose 13.2%; renting expense fell 48.5%.
• Interest expense increased 10.4% to $15.05 million, principally reflecting higher debt following refinancing. Interest income rose to $1.06 million, mainly from Treasury bills. Joint-venture income improved to $0.50 million from a $0.57 million loss.
• 2021 results included $2.75 million of refinancing prepayment penalties; 2022 other expense was $0.87 million. This was a major factor in the year-over-year move from a net loss to net income.
• Net income per unit was $30.99; per depositary receipt, $1.03. Distributions were $2.56 per receipt in 2022, double 2021’s $1.28.
• Investing cash outflow was $93.07 million, largely reflecting Treasury bill purchases; financing cash inflow was $25.01 million after debt payments, unit repurchases, and distributions. The cash decline also reflects the shift into Treasury bills: year-end Treasury bill investments were $88.33 million, bringing cash plus Treasury bills to about $137.89 million.

Debt, liquidity, and capital

• Mortgage notes payable on consolidated Partnership properties were $411.0 million, net of deferred financing costs, at year-end, up from $370.5 million. Gross scheduled maturities were $414.1 million: $25.1 million in 2026 and $23.3 million in 2027, with most of the balance thereafter.
• Joint ventures had $166.1 million of mortgage debt; NERA’s proportionate share of their non-recourse debt was approximately $70.8 million. Most debt carries fixed interest rates. Partnership-property mortgages had a 3.69% weighted-average stated rate.
• The $25 million revolving credit facility had no balance drawn, but NERA could not draw on it at December 31, 2022 because its debt yield was 8.3%, below the 9.0% covenant minimum. Access remains restricted until covenant compliance is restored.
• Partners’ capital was negative $59.9 million, compared with negative $49.3 million in 2021. The balance sheet reported total assets of $391.8 million and total liabilities of $451.7 million.
• NERA repurchased 54,271 depositary receipts in 2022 for $4.26 million, plus proportional Class B and General Partner unit repurchases. Total repurchases and related costs were $5.33 million.

Changes, outlook, and risks

• Management reported 2022 rent increases of 6.3% for renewals and 15.4% for new leases. Residential vacancy was 1.9% at February 1, 2023, versus 1.7% a year earlier; commercial space was fully occupied. Management described leasing activity as strong and expected the local market to remain strong into the 2023 spring rental season.
• NERA completed approximately $5.98 million of property improvements in 2022 and planned approximately $12.5 million for 2023. It closed in January 2023 on a roughly $10.15 million commercial retail property acquisition in Framingham, funded from cash reserves.
• Management said it increased borrowing and reserves amid rising rates and possible economic slowdown. About $88 million of reserves were invested in short-term Treasury bills. The filing provides no quantified earnings or revenue guidance.
• In March 2023, NERA approved a quarterly distribution of $0.32 per receipt and a special distribution of $1.28 per receipt, both payable March 31, 2023.
• Key risks include regional concentration, rental demand and tenant collections, rising operating and insurance costs, refinancing and covenant risk, joint-venture exposure, and potential uninsured property losses. The filing also cites proposed Boston rent restrictions and building-emissions rules that could increase costs or constrain rent growth.
• A ransomware attack on the management company in October 2022 encrypted on-premise systems. NERA reported no monetary damage or loss of financial data, but recovery delays contributed to a late quarterly filing. Management and the auditor identified material weaknesses in IT general controls; the auditor gave an adverse opinion on internal control over financial reporting. The financial-statement audit opinion was unqualified, and no related financial-statement misstatements were identified.
• A class action alleging rent price-fixing named NERA, which denied using the software at issue; NERA was dismissed from the case on March 8, 2023. The filing reports no other material litigation known to management.
• Management is engaged with Hamilton, a Brown-family-affiliated management company, for property management and other services. Related-party fees and shared joint-venture ownership are material governance matters for investors to consider.

Important facts to verify

1. Whether the debt-yield covenant breach has been cured and when access to the revolving credit facility can resume.
2. The current debt maturity, refinancing, interest-rate, and liquidity position, including the availability and intended use of cash and Treasury bill reserves.
3. Whether planned 2023 capital spending and the Framingham acquisition affect distributions or reserve levels.
4. Progress in remediating the IT control weaknesses identified after the ransomware incident, and whether controls are operating effectively.
5. Any developments in proposed Boston rent restrictions or emissions requirements, and their potential effect on NERA’s properties and cash flows.
6. Related-party management arrangements, fees, and joint-venture exposures; confirm the terms and oversight protections in the partnership agreement.