Business Context and Reporting Period
Company: BRT Realty Trust (BRT Apartments Corp.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: December 31, 2010
Business Overview: BRT is a Real Estate Investment Trust (REIT) primarily engaged in originating and holding senior mortgage loans secured by commercial and multi-family real estate in the U.S. The company also operates real estate properties and invests in securities. Following a period of focus on loan workouts and foreclosures due to the credit crisis, the company began shifting emphasis back to its primary lending business in the second half of fiscal 2010.
Key Financial Metrics
| Metric | Q4 2010 (3 Months) | Q4 2009 (3 Months) |
|---|---|---|
| Total Revenues | $2,452,000 | $1,881,000 |
| Total Expenses | $3,603,000 | $6,532,000 |
| Net Loss | $(681,000) | $(2,888,000) |
| Net Loss Attributable to Common Shareholders | $(508,000) | $(2,521,000) |
| Loss Per Share (Basic & Diluted) | $(0.04) | $(0.19) |
| Cash and Cash Equivalents | $37,051,000 | $58,497,000 (Sep 30, 2010) |
| Total Debt Obligations | $53,512,000 | $53,372,000 (Sep 30, 2010) |
| Real Estate Loans (Net) | $68,332,000 | $48,996,000 (Sep 30, 2010) |
Liquidity: Total available liquidity was approximately $47.1 million as of December 31, 2010, comprising cash and cash equivalents ($37.1 million) and available-for-sale securities ($10.1 million).
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased by 30.4% ($571,000) compared to the prior year quarter. This was driven by a 138.7% increase in interest on real estate loans due to a $20.9 million increase in the average balance of earning loans.
- Expense Reduction: Total expenses decreased by 44.5% ($2.9 million). The primary driver was the elimination of a $3.165 million provision for loan losses recorded in the prior year quarter. No loan loss provision was recorded in Q4 2010.
- Loan Portfolio Expansion: The company originated $28.3 million in mortgage loans during the quarter, a significant increase from $1.3 million in the same period of the prior year.
- Non-Performing Assets: As of December 31, 2010, three non-earning loans totaling $35.1 million (45.4% of total real estate loans) remained outstanding. An allowance for possible losses of $3.165 million covers these assets.
- Investment Gains: The company recognized a gain of $421,000 on the sale of available-for-sale securities, compared to $1.59 million in the prior year.
Outlook, Risks, and Management Commentary
- Dividend Policy: The Trust did not declare a dividend for the quarter. Management stated it is highly unlikely that dividends will be paid in 2011 or for several years thereafter, as the Trust expects to report a tax loss and has net operating loss carryforwards.
- Strategic Focus: Management is focusing on monitoring liquidity, repositioning non-performing assets, and acquiring/stabilizing properties from foreclosures to increase liquidity. They are also seeking a new credit facility.
- Risks: The company faces risks related to borrower defaults, additional loan loss provisions, and foreclosure expenses if the economic environment does not improve. A significant portion of the loan portfolio (69%) is located in New York, exposing the company to regional economic risks.
- Market Risk: Approximately 38% of the loan portfolio is variable rate. A 1% increase in interest rates would have a positive annual effect of approximately $182,000 on pre-tax income.
- Contingencies: One non-earning loan involves a borrower in Chapter 11 bankruptcy; the company is contesting the reorganization plan and seeking to enforce judgments against guarantors. Another non-earning loan is subject to a foreclosure judgment with an anticipated auction in Q1 2011.
Key Facts for Investor Verification
- Cash Burn vs. Origination: Verify the sustainability of the $28.3 million in new loan originations against the $21.4 million net decrease in cash and cash equivalents during the quarter.
- Non-Performing Loan Resolution: Monitor the status of the $35.1 million in non-earning loans, specifically the bankruptcy proceedings and the anticipated foreclosure auction scheduled for Q1 2011.
- Dividend Status: Confirm the continued suspension of dividends and the impact on REIT status compliance given the expected tax losses.
- Debt Fair Value: Note that the estimated fair value of junior subordinated notes is approximately $10.7 million less than their carrying value due to credit and interest rate risks.
- Concentration Risk: Verify the impact of the high geographic concentration (69% in New York) and the fact that two borrowers account for loans exceeding 5% of total assets each.