BRT Realty Trust — FY2014 Form 10-K
Business context and reporting period. The filing is for the fiscal year ended September 30, 2014; the requested 2014 Q4 figures are included below where available. BRT Realty Trust is a REIT shifting its focus to multifamily property ownership and development. At year-end it owned 27 multifamily properties with 7,609 units across 10 states, primarily through joint ventures, and had $511.9 million of net multifamily real estate. Its other real estate activities are concentrated in Newark, New Jersey, including the Teachers Village development. BRT ceased real estate lending after selling its remaining $2 million loan in October 2014; lending results are presented as discontinued operations.
Financial performance and position
| Metric | FY2014 | FY2013 |
|---|---|---|
| Total revenue | $66.4 million | $31.8 million |
| Total expenses | $84.0 million | $45.0 million |
| Loss from continuing operations | $17.6 million | $6.9 million |
| Net income (loss) attributable to common shareholders | $(9.5) million | $5.0 million |
| Basic and diluted EPS | $(0.66) | $0.35 |
| FFO / AFFO | $2.2 million / $3.8 million | $4.4 million / $5.7 million |
| Cash from operating activities | $(4.8) million | $0.8 million |
| Cash and cash equivalents at year-end | $23.2 million | $56.9 million |
Revenue growth was driven mainly by property acquisitions and a full year of income from properties acquired in 2013. Expenses also rose substantially, including property operating costs, interest, and depreciation. FY2014 total expenses exceeded revenue by $17.6 million. The 2014 loss reflects lower discontinued lending income and the absence of the prior-year $5.5 million gain on a partnership-interest sale. No impairment charges were recorded in 2014.
At September 30, 2014, total assets were $734.6 million, total liabilities $566.0 million, and BRT shareholders’ equity $130.1 million. Mortgages payable were $482.4 million and junior subordinated notes were $37.4 million, for total reported debt of $519.8 million. Restricted cash was $32.4 million ($22.8 million for Newark and $9.6 million for multifamily improvements), and is not generally available for corporate purposes. The $25 million revolving credit facility expired in June 2014; management said its expiration would not materially affect the company.
Multifamily mortgage debt had a 4.15% weighted-average interest rate and approximately 7.1 years of remaining term. The junior subordinated notes mature in 2036, bear 4.90% interest through April 2016, and then reset to LIBOR plus 2.00%. Cash declined by $33.7 million during the year; operating and investing activities used $4.8 million and $219.3 million, respectively, while financing activities provided $190.4 million.
2014 fourth quarter: Revenue was $19.4 million, expenses were $24.3 million, and net loss attributable to common shareholders was $3.8 million, or $0.27 per share. In the fourth quarter of 2013, common-shareholder net income was $4.8 million.
Material changes versus the prior comparable period
- Multifamily rental and other property revenue increased 113% to $65.3 million, primarily from 13 properties acquired during 2014 and a full year of operations from 2013 acquisitions.
- Operating expenses rose 124% to $37.1 million; interest expense rose 73% to $20.7 million; depreciation and amortization rose 120% to $15.6 million.
- Multifamily holdings expanded from 14 properties and 3,786 units at September 30, 2013, to 27 properties and 7,609 units at September 30, 2014. The acquisitions cost $205.2 million and were associated with $144.7 million of mortgage debt.
- Mortgage debt increased $169.2 million year over year, while cash and cash equivalents fell $33.7 million.
- Discontinued-operations income fell to $1.4 million from $9.0 million, reflecting the contraction and exit of real estate lending.
Outlook, risks, contingencies, and unusual items
- Management estimated 2015 rental income of approximately $76.5 million from the 27 multifamily properties and Newark Joint Venture, assuming stable rents and occupancy and no additional acquisitions. It estimated 2015 multifamily operating expenses of $38.4 million, total interest expense of $23.1 million, and depreciation and amortization of approximately $19 million.
- Management expected the Newark Joint Venture to incur operating losses in 2015 and for several years thereafter. Teachers Village rent may not be sufficient to meet debt service and operating costs; additional leasing, completion, and tenant-financing conditions create uncertainty. Failure to meet financing or leasing requirements could require further member contributions or expose properties to foreclosure.
- The Newark Joint Venture’s New Markets Tax Credit indemnity exposure was estimated at up to approximately $33 million, excluding interest and penalties, if credits are disallowed. The venture also has construction, completion, environmental, and other guarantees, including guarantees of up to $27 million of principal in specified circumstances.
- Management said BRT believed it had sufficient funds for 2015 and 2016 operating needs and required Newark contributions, but acquisitions and improvements remain constrained by available cash and mortgage financing. Multifamily refinancing is a key risk: management stated cash flow would not cover all principal payments as they mature.
- Multifamily revenue is geographically concentrated: Texas, Georgia, Tennessee, and Florida together represented approximately 81% of estimated 2015 multifamily revenue. Other risks include interest-rate changes, competition, property-manager performance, joint-venture disagreements, casualty and environmental exposures, and potential impairment.
- BRT had not paid cash dividends since 2010 and did not expect to pay one in 2015 or the near future, citing approximately $53.4 million of tax-loss carryforwards at December 31, 2013.
- After year-end, the board increased the share-repurchase authorization to $4 million and extended it through September 2017. BRT agreed to repurchase 345,081 shares for approximately $2.4 million, with settlement scheduled for December 17, 2014.
The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management reported no material weaknesses. No legal proceedings were reported.
Important facts for investors to verify
- Whether multifamily rent growth and occupancy support management’s 2015 revenue estimate, while property taxes and operating costs rise after acquisitions.
- Debt maturity and refinancing plans, especially multifamily principal due in 2018 and 2019, and the Newark financing’s potential 2018 repurchase/refinancing requirement.
- Teachers Village construction completion, retail and residential lease-up, tenant conditions, and whether the project can cover debt service without additional capital.
- The extent of any guarantees or New Markets Tax Credit recapture exposure, and the availability of committed but unfunded Newark financing and tax-credit proceeds.
- Post-year-end cash, the share repurchase settlement, and the amount of liquidity remaining after restricted funds and planned obligations are considered.
- How discontinued lending results, related-party advisory fees, and joint-venture accounting affect comparisons and reported earnings.