BRT Apartments Corp. — FY2018 Form 10-K
Reporting period: Fiscal year ended September 30, 2018. The filing is an annual report, not a standalone quarterly filing; it also reports fourth-quarter results for July–September 2018. BRT is an internally managed REIT focused on owning, operating and developing multifamily properties, principally in the Southeast and Texas.
Business context and portfolio
- At year-end, BRT owned 36 multifamily properties across 11 states, totaling 10,121 units, including 402 units in development. It also held interests in three unconsolidated multifamily properties totaling 1,026 units.
- During FY2018, BRT acquired six properties with 1,921 units for $230.3 million, financed with $164.3 million of acquisition mortgage debt and approximately $50.0 million of BRT equity. It sold three multifamily properties and two cooperative units for $171.4 million.
- Geographic concentration is material: Texas represented 31% of FY2018 multifamily revenue; Georgia 14%; Florida 14%; and Missouri 9%.
Financial performance and position
| Metric | FY2018 | FY2017 |
|---|---|---|
| Total revenue | $119.6 million | $105.8 million |
| Total expenses | $139.8 million | $119.3 million |
| Net income attributable to common stockholders | $23.8 million | $13.6 million |
| Diluted earnings per share | $1.61 | $0.97 |
| Funds from operations (FFO) | $15.2 million; $1.03 per diluted share | $9.3 million; $0.67 per diluted share |
| Adjusted FFO (AFFO) | $14.4 million; $0.97 per diluted share | $12.3 million; $0.88 per diluted share |
| Cash provided by operating activities | $38.6 million | $13.1 million |
- FY2018 reported profit included $64.9 million of property-sale gains and a $4.5 million insurance-recovery gain. Revenue less expenses was negative $20.1 million before other items, reflecting, among other costs, depreciation and interest; GAAP net income therefore does not represent recurring property operating performance.
- Fourth-quarter revenue was $31.5 million and expenses were $37.0 million. Net loss attributable to common stockholders was $3.1 million, or $0.20 per diluted share.
- Same-store properties had a 3.7% average rental-revenue increase; average rent per occupied unit rose to $912 from $889. Operating expenses at same-store properties rose an average 3.4%.
- At September 30, total assets were $1.153 billion, including net real estate properties of $1.021 billion. Cash and cash equivalents were $27.4 million, with a further $6.7 million of restricted cash designated for property improvements.
- Mortgage principal outstanding was $798.8 million, at a 4.18% weighted-average rate and 6.9-year weighted-average remaining maturity. The balance-sheet mortgage amount, net of deferred costs, was $792.4 million. Junior subordinated notes totaled $37.4 million, bear floating interest (4.34% at year-end), and mature in 2036.
- Cash dividends declared increased to $0.78 per share from $0.18. BRT raised $20.4 million net through an at-the-market stock offering, issuing approximately 1.59 million shares.
Changes, outlook and key risks
- Revenue increased 13.1% year over year, mainly from the 2018 acquisitions and a full year of contribution from 2017 acquisitions. The increase was partly offset by revenue lost from properties sold. Interest expense rose 22.1% and depreciation rose 26.3%, primarily reflecting portfolio growth and debt incurred for acquisitions.
- Management estimated FY2019 multifamily property revenue of $120.4 million, generally assuming FY2018 rental and occupancy rates. This is a property-revenue estimate, not earnings guidance.
- After year-end, BRT acquired a 266-unit South Carolina property for $37.8 million, including $26.4 million of mortgage debt. It sold Factory at Garco Park for $51.7 million and estimated a $12.0 million gain, about $6.3 million attributable to the non-controlling partner. A sale of Cedar Lakes for $41.3 million was contracted but had not closed at the report date; management estimated a potential $7.5 million gain if completed.
- BRT said operating cash and available cash were insufficient to fund mortgage balloon payments due in 2019–2020 without refinancing or other capital. It expected to refinance $84.7 million of mortgage maturities in that period; inability to refinance could require equity issuance or property sales on less favorable terms.
- Hurricane Harvey damage at Retreat at Cinco Ranch generated $9.2 million of insurance recoveries recognized through year-end, including the $4.5 million gain and $1.2 million of business-interruption rental income. The property was substantially repaired by September 30, 2018.
- Other important risks include rising interest rates and refinancing costs; concentration in Texas and Southeastern markets; joint-venture and property-manager dependence; property-value impairment; development and value-add execution; and insurance gaps or catastrophe losses. BRT provided carve-out guarantees on approximately $113.7 million of mortgage principal.
- The company reported no impairment charges in FY2016–FY2018 and no legal proceedings. The independent auditor issued an unqualified opinion on the financial statements and internal controls; management also concluded internal controls were effective.
Important facts for investors to verify
- Review the maturity schedule, refinancing plans, lender terms and post-year-end debt changes, including the effect of the Factory at Garco Park sale on reported maturities.
- Reconcile GAAP earnings with recurring performance: sale gains and insurance recoveries materially affected FY2018 profit; assess the company’s FFO and AFFO definitions and adjustments.
- Confirm whether the Cedar Lakes sale closed and whether the estimated gains on subsequent sales were realized as projected.
- Track occupancy, rents, operating costs and lease-up progress, particularly in concentrated markets and development properties.
- Assess the adequacy and availability of catastrophe coverage, including remaining repairs or recoveries related to Hurricane Harvey and the exposure from blanket insurance policies.
- Review joint-venture economics, related-party service arrangements and the company’s ability to sustain dividends while funding debt service, capital improvements and growth.