BRT Realty Trust — Form 10-Q Summary
Reporting period: First quarter of fiscal 2016, the three months ended December 31, 2015. The filing identifies the registrant as BRT Realty Trust. Unaudited results are compared with the quarter ended December 31, 2014; balance-sheet figures are compared with September 30, 2015. Dollars are in thousands unless stated otherwise.
Business context
BRT is a REIT that owns, operates and develops multifamily properties and other real estate, including the Newark Teachers Village project. At quarter-end, it owned 30 multifamily properties with 8,807 units across 11 states; occupancy excluding development units was 93.9%. Effective January 1, 2016, BRT became internally managed.
Key financial results
| Metric | Quarter ended Dec. 31, 2015 | Prior-year quarter |
|---|---|---|
| Total revenue | $23.212 million | $19.777 million |
| Total expenses | $26.594 million | $23.304 million |
| Net loss | $2.773 million | $3.527 million |
| Net loss attributable to common shareholders | $2.034 million; $0.14 per share | $2.498 million; $0.18 per share |
| Operating cash flow | $1.917 million | $7.656 million |
| FFO attributable to common shareholders | $1.652 million | $0.572 million |
| AFFO attributable to common shareholders | $2.266 million | $1.163 million |
Revenue increased 17.4%, while expenses rose 14.1%. The narrower common-shareholder loss primarily reflected a $609,000 gain on sale of a Manhattan cooperative apartment. The filing provides no single overall margin measure.
At December 31, cash and cash equivalents were $21.379 million, versus $15.556 million at September 30. Restricted cash was $21.148 million ($15.229 million for Newark and $5.919 million for multifamily improvements) and is not generally available for corporate purposes. Total debt obligations were $647.605 million, excluding $19.248 million of mortgages on property held for sale; this included $596.204 million of mortgages, $37.4 million of junior subordinated notes and $14.001 million of other borrowings. Total liabilities were $721.608 million and total equity was $158.874 million.
Cash from operations was more than offset by $26.515 million of investing outflows; financing provided $30.421 million, including mortgage proceeds, other borrowings and noncontrolling-interest contributions. Cash and cash equivalents rose by $5.823 million during the quarter.
Material changes and developments
- Rental and other property revenue rose $3.454 million, driven mainly by acquired properties, same-store rent increases, Southridge lease-up and newly occupied Newark residential units. The comparison also included $2.3 million of 2014 rent from three properties sold in fiscal 2015.
- Operating expenses increased $1.097 million, interest expense $727,000 and depreciation $1.503 million, largely reflecting acquisitions, development activity and supplemental borrowing. Acquisition costs declined $238,000.
- BRT acquired two multifamily properties during the quarter for $26.425 million, including a 271-unit development land acquisition and a 236-unit operating property. After quarter-end, it acquired properties in Katy, Texas, and Macon, Georgia, for a combined $54.775 million, financed in part with $41.950 million of mortgage debt.
- Mortgage debt increased from $566.438 million at September 30 to $596.204 million at December 31. BRT also borrowed $8 million unsecured from related party Gould Investors at 5.24%, maturing no later than May 10, 2016 subject to specified proceeds-related terms. The Newark venture borrowed approximately $6 million through the EB-5 program at 4%.
- The advisory agreement ended December 31, 2015. BRT expects to retain personnel, including related parties, for those services; management estimated fiscal 2016 savings of approximately $1 million. The 2016 service cost is capped at $1.15 million.
Outlook, risks and unusual items
- Management said available cash and multifamily distributions were expected to cover operating expenses in 2016 and 2017 and general operating contributions to the Newark venture. Future acquisitions depend on cash availability, mortgage financing and potential proceeds from proposed Newark transactions.
- BRT continued negotiating a sale of all or substantially all of its Newark venture equity interest and discussions concerning repayment over time of $19.5 million of debt owed to BRT by the venture. Neither transaction was assured; $8 million of proceeds would be used to repay the Gould Investors loan.
- The Newark Teachers Village project was estimated to require $25 million to $28 million to complete, including Phase II cost overruns and retail build-out and Phase III construction. After identified restricted funds, tax-credit proceeds and committed but unfunded loans, management estimated a further $6.5 million to $9.5 million would be needed over approximately nine months. No commitments for that additional funding had been obtained; failure to fund or complete the project could materially harm the venture and BRT.
- The Newark venture projected an approximately $2 million shortfall for debt service and operating costs through December 2017 after identified reserves and operating revenues. Outcomes depended partly on timely leasing and additional funding, with no assurance that adequate funds would be available.
- The Grove at Trinity Point in Tennessee was held for sale with a $23.869 million book value. BRT estimated an approximately $6.8 million gain on sale, of which approximately $2.7 million would go to the minority partner.
- The $37.4 million junior subordinated notes carried 4.9% interest through April 29, 2016, then reset to three-month LIBOR plus 2.0%. BRT disclosed sensitivity to floating-rate debt; a 100-basis-point increase in the two unhedged variable-rate mortgages would reduce annual net income by an estimated $553,000.
- Newark New Markets Tax Credit proceeds are recorded as deferred income and are subject to program compliance and potential tax-credit recapture. BRT reported no cash dividends for the quarter and said it had not paid cash dividends since 2010.
Important facts for investors to verify
- Whether the Newark equity sale or debt repayment transaction closes, on what terms, and how the proceeds affect liquidity and the related-party loan.
- How the Newark venture funds its estimated completion costs and operating shortfall, and whether construction, retail build-out and leasing meet projected timelines.
- Whether operating cash flow and property-level distributions can support debt service, capital needs and planned acquisitions as debt rises.
- The actual sale price, timing and gain on The Grove at Trinity Point, including the minority partner allocation.
- The terms and rate impact when the junior subordinated notes begin floating-rate interest in April 2016, and the status of post-quarter acquisitions and their financing.
- The sustainability of FFO and AFFO improvements, which are non-GAAP supplemental measures and do not represent cash available for all obligations.