New England Realty Associates Limited Partnership — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Unaudited consolidated financial statements. The Partnership owns residential, mixed-use and commercial properties primarily in Eastern Massachusetts and Southern New Hampshire, plus 40%–50% interests in seven joint ventures.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $16.93M | $15.45M | $33.51M | $30.54M |
| Income before other income (expense) | $4.61M | $4.19M | $8.39M | $7.58M |
| Net income | $0.24M | $0.57M | $0.59M | $0.28M |
| Net income per unit | $2.02 | $4.68 | $4.84 | $2.26 |
| Operating cash flow | Not stated | Not stated | $7.45M | $9.17M |
For Q2, revenue increased 9.6% and expenses increased 9.4%; income before other income (expense) rose 10.1%, but net income declined 57.4%. For the first half, revenue grew 9.7%, expenses rose 9.5%, and net income increased 112.3%. The filing does not present a standard operating-margin measure; income before other income (expense) was about 27.2% of Q2 revenue and 25.0% of first-half revenue.
- Balance sheet at June 30: Assets $389.9M; cash and cash equivalents $132.6M; mortgage notes payable $411.9M; total liabilities $449.2M; partners’ capital deficit $59.4M. Cash rose from $96.1M at year-end 2021.
- Debt and liquidity: Mortgage rates ranged from 2.97% to 4.95%, with a 3.69% weighted-average rate on Partnership mortgages. Mortgage principal maturities include $8.5M in 2023, $2.7M in 2024, $3.1M in 2025 and $21.9M in 2026. The filing does not provide a conventional current ratio.
- Cash flows and uses: First-half investing cash use was $0.98M, including $2.11M of property improvements. Financing provided $30.07M net, including $41.94M of mortgage proceeds, offset by principal payments, $3.69M in unit repurchases and $6.98M in partner distributions. Cash increased $36.55M.
- Distributions: First-half distributions were $1.92 per depositary receipt, including a special distribution; total cash distributions were $6.98M.
Material changes and management commentary
- Residential rental demand improved as students returned to local campuses. At August 1, residential vacancy was 2.0%, down from 3.3% a year earlier; joint-venture vacancy was 0.9%, versus 2.8%. Q2 renewal rents rose on average 5.9%, and new-lease rents rose 15.0%. Management expected a strong rental market and continued rent growth through the remainder of 2022.
- Commercial vacancy moved in the opposite direction: 18.8% at August 1, 2022 versus 11.9% a year earlier. Staples and Trader Joe’s together accounted for about 30% of commercial rental income.
- Repairs and maintenance increased 27.4% in Q2 and 22.1% for the half, attributed principally to apartment renovation/refurbishment. First-half operating expense also rose 21.6%, with winter snow-removal costs cited.
- Interest expense increased 7.2% in Q2 and 5.0% for the half, as refinancing increased debt. Joint-venture results improved: the Partnership’s share shifted from a $0.56M first-half loss in 2021 to $0.11M income in 2022.
Debt, outlook, risks and contingencies
- In June, the Partnership amended its KeyBank facility for an additional $80.28M at a fixed 4.33%. Proceeds repaid about $37.07M of existing debt and about $0.85M of prepayment penalties; the remaining approximately $42.38M was for general partnership purposes. The penalty was recorded in other expense, which totaled $0.83M for the first half.
- The Partnership breached the revolving credit facility’s debt-yield covenant: reported debt yield was 7.7%, below the applicable 8.5% minimum. It could not draw on the line at June 30 until it meets the covenant. The line’s commitment was restricted to $17M during the modification period, with restoration to $25M conditional on meeting original covenant tests.
- Management said refinancing activity across 15 properties had raised approximately $130M and that it was building reserves for potential acquisitions amid rising rates and possible economic slowdown. Subsequent to quarter-end, approximately $90M was invested in short-term U.S. Treasury bills. The Partnership was also negotiating to refinance a commercial property in Framingham.
- Management expected operating cash flow to cover current operations, distributions, debt service and planned improvements. No numerical full-year earnings or revenue guidance was provided.
- Risks include regional economic weakness, inflation and energy costs, higher interest rates, refinancing availability, tenant collections, operating-cost increases and real-estate competition. Management noted uncertainty around the Russia–Ukraine conflict and possible economic effects. Most debt is fixed-rate; the filing estimates that a 100-basis-point move in variable rates would change annual interest cost by about $50,000. It also reports approximately $581.9M of combined long-term debt for the Partnership, subsidiaries and joint ventures.
- The Partnership’s share of joint-venture non-recourse debt was approximately $70.9M. Although it has no legal obligation to fund joint-venture operating deficits, management intends to contribute if needed. The Partnership guarantees certain Dexter Park joint-venture debt.
- No material pending legal proceedings or material changes to previously reported risk factors were disclosed. Management reported disclosure controls were effective and no material second-quarter change in internal control over financial reporting.
- Related-party management and service arrangements include fees paid to an entity owned by the General Partner’s majority shareholder; review the disclosed fees and governance relationships.
Important facts for investors to verify
- Whether and when the Partnership remedies the 7.7% debt-yield covenant breach and regains access to its revolving credit facility.
- How refinancing, higher leverage and the $0.85M prepayment charge affect future interest expense, covenant headroom and debt maturities.
- Whether residential rent growth and low vacancy persist, and whether the higher commercial vacancy rate or tenant concentration affects collections.
- The use and return on the approximately $90M subsequently invested in short-term Treasury bills, and the timing and terms of any acquisition or Framingham refinancing.
- Whether renovation, maintenance, insurance and other property costs continue to rise faster than rental revenue, and how distributions are supported by recurring cash flow.