10-K: AEI Income & Growth Fund XXII Reports Stable Performance in 2023 Despite Property Vacancy

AEI Income & Growth Fund XXII Limited Partnership reports a slight increase in cash balance and rental income for 2023, despite a property vacancy and no new acquisitions.

Summary

• AEI Income & Growth Fund XXII Limited Partnership reported a net income of $51,795 for 2023, a decrease from $598,495 in 2022.
• Rental income increased to $547,015 in 2023 from $466,091 in 2022, due to a full year of income from a property acquired in 2022 and rent increases on two properties.
• This increase was partially offset by the sale of two properties in 2022 and a vacancy on one property beginning in November 2023.
• The Partnership's cash balance increased by $17,439 in 2023, primarily due to operating activities exceeding distributions.
• The Partnership did not acquire or sell any properties in 2023.
• The Partnership owns interests in four commercial properties with a total cost of $8,686,532 as of December 31, 2023.
• Distributions of $421,555 were declared in 2023, with $409,097 allocated to Limited Partners and $12,458 to General Partners.
• The estimated value of the Partnership's Units was $650 per Unit as of December 31, 2023.
• The Partnership did not repurchase any units in 2023, but repurchased 313.86 units for $232,475 in 2022.

Sentiment

Score: 5

Explanation: The document presents a mixed picture with some positive aspects like increased rental income and a slight increase in cash balance, but these are offset by a significant decrease in net income, a property vacancy, and no new acquisitions. The overall sentiment is neutral to slightly negative.

Positives

• Rental income increased due to a full year of income from a 2022 acquisition and rent increases.
• The Partnership's cash balance saw a slight increase in 2023.
• The Partnership continues to generate positive cash flow from operations.
• The Partnership's properties are leased under net leases, which reduces operating expenses.
• The Partnership has a cybersecurity plan in place to mitigate risks.

Negatives

• Net income decreased significantly from $598,495 in 2022 to $51,795 in 2023.
• The Partnership experienced a property vacancy beginning in November 2023.
• The Partnership did not acquire any new properties in 2023.
• The Partnership incurred a $35,000 real estate impairment charge in 2023.
• The Partnership is a minor factor in the commercial real estate business and faces competition from larger entities.

Risks

• The Partnership's net income and cash distributions could be materially affected by the failure of major tenants.
• The Partnership faces competition when selling properties and attracting new tenants.
• The Partnership's tenants operate in competitive industries that can be affected by economic changes.
• Cybersecurity threats could materially affect the Management Company's business strategy, results of operations, or financial condition.
• Inflation and changing prices may have an adverse impact on the operating margins of the properties' tenants, which could impair their ability to pay rent.

Future Outlook

Based on the scheduled rent for the properties owned as of February 28, 2024, the Partnership expects to recognize rental income of approximately $471,000 in 2024. The Managing General Partner expects to submit the question to liquidate to a vote by the Limited Partners again in approximately five years.

Management Comments

• The Management Company believes the people who work for the Management Company are its most important resources and are critical to its continued success.
• The Management Company focuses significant attention toward attracting and retaining talented and experienced individuals to manage and support its operations.
• The Management Company believes its compensation package and benefits are competitive with others in its industry.
• Management believes inflation has not significantly affected income from operations.

Industry Context

The Partnership operates in the competitive commercial real estate market, facing competition from larger entities. The Partnership's performance is influenced by broader economic conditions, interest rates, and inflation, which can affect both property values and tenant performance.

Comparison to Industry Standards

• The Partnership's strategy of acquiring single-tenant commercial properties with net leases is a common approach in the real estate investment sector, similar to companies like Realty Income (O) and National Retail Properties (NNN).
• However, unlike these larger REITs, AEI Income & Growth Fund XXII is a limited partnership with a smaller portfolio and limited access to capital markets.
• The Partnership's focus on all-cash transactions and avoidance of debt for property acquisitions is a more conservative approach than many of its peers, which often use leverage to enhance returns.
• The Partnership's unit valuation method, based on a capitalization rate applied to rental income, is a standard practice in the industry, but the lack of a public market for its units makes it difficult to compare its valuation to publicly traded REITs.
• The Partnership's distribution yield, while not explicitly stated, is likely to be lower than that of larger, more diversified REITs due to its smaller scale and higher operating costs.

Related Party Transactions

• The Partnership has related party transactions with AEI Fund Management, Inc. for management services and expense reimbursements.
• The Partnership owns properties as tenants-in-common with affiliated entities.

Stakeholder Impact

• Shareholders will see a decrease in net income and may be concerned about the property vacancy.
• Employees of the Management Company are considered critical to the company's success.
• Tenants are responsible for most property expenses under net leases.
• The Partnership's performance is dependent on the financial health of its tenants.

Next Steps

• The Partnership will continue to operate until the Limited Partners vote to authorize the sale of all properties or until December 31, 2046.
• The Managing General Partner expects to submit the question to liquidate to a vote by the Limited Partners again in approximately five years.

Key Dates

Keywords

commercial real estate, limited partnership, net lease, property investment, rental income, real estate, distributions, property management, asset valuation, cybersecurity