BRT Realty Trust — FY2016 Form 10-K
Reporting period: Fiscal year ended September 30, 2016; fourth-quarter figures are July–September 2016. The filing is for BRT Realty Trust, the company identified in the supplied filing (rather than “BRT Apartments Corp.” in the request metadata).
Business context
BRT is an internally managed REIT focused primarily on owning, operating and developing multifamily properties, typically through joint ventures. At year-end it owned 33 properties with 9,420 units across 10 states; the multifamily portfolio’s net book value, including properties held for sale, was approximately $783.1 million. It sold its interest in the Newark Joint Venture in February 2016 and no longer conducts real estate lending as a business.
Key financial results
| Metric | FY2016 | FY2015 |
|---|---|---|
| Total revenue | $94.3 million | $77.1 million |
| Revenue less expenses | $(9.8) million | $(10.3) million |
| Income from continuing operations | $32.5 million | $4.7 million |
| Net income (loss) attributable to common shareholders | $31.3 million | $(2.4) million |
| Diluted earnings (loss) per share | $2.23 | $(0.17) |
| FFO / AFFO | $6.6 million / $10.9 million | $3.6 million / $5.6 million |
| Cash provided by operating activities | $10.1 million | $8.4 million |
- Revenue rose 22.3%, driven mainly by 2016 and 2015 acquisitions and higher same-store rents; average same-store rent per occupied unit increased to $892 from $841. Acquisitions and same-store growth were partly offset by revenue lost from sold properties.
- Net income included $46.5 million of gains on real estate sales and a $15.5 million gain on the Newark Joint Venture sale, as well as $4.5 million of mortgage prepayment charges. FFO excludes property-sale gains; AFFO includes adjustments such as debt-extinguishment costs.
- Fourth-quarter revenue was $24.8 million and net income attributable to common shareholders was $2.9 million, versus $19.7 million and $3.4 million, respectively, in fourth-quarter 2015. The quarter included an $11.4 million property-sale gain and $1.9 million of debt-extinguishment loss.
Debt, liquidity and cash flow
- Year-end cash and cash equivalents were $27.4 million, up from $15.6 million; restricted cash was $7.4 million and deposits and escrows were $19.0 million. Operating cash flow was $10.1 million. Investing activities used $135.8 million and financing activities provided $137.5 million.
- Multifamily and other mortgage principal outstanding was $621.4 million, at a weighted-average rate of 3.98% and weighted-average remaining maturity of about seven years. Junior subordinated notes had $37.4 million principal outstanding and a 2.76% floating rate at year-end. Most property mortgage debt is non-recourse, subject to customary carve-outs.
- Scheduled mortgage principal payments total $127.1 million in 2019; the filing also identifies $107.5 million of mortgage principal due at maturity that year, excluding amortization. Management expected property operations and available cash to cover operating needs and debt service through 2018.
Material changes and outlook
- BRT acquired 11 multifamily properties with 3,336 units for $318.7 million and sold six multifamily properties and two cooperative units for approximately $202.0 million. Multifamily real estate revenue increased 18.1% year over year.
- The Newark Joint Venture sale generated $16.9 million of proceeds and a $15.5 million gain. BRT retained a $19.5 million secured loan receivable bearing 11% interest, maturing in June 2017. Deferred interest was $2.4 million at year-end; payment had been extended, and repayment depended in part on a possible borrower transaction for which BRT gave no assurance.
- After year-end, BRT acquired three properties or development interests with 933 units for $102.7 million and sold four properties with 1,016 units for $130.2 million. Estimated gains on those sales were $35.6 million before allocation to non-controlling partners.
- Management estimated 2017 multifamily revenue of $88.8 million based on the year-end portfolio, excluding post-year-end acquisitions and dispositions. It expected 2017 revenue and operating costs, interest and depreciation from the three subsequent acquisitions of approximately $7.9 million and $7.7 million, respectively. The filing does not provide formal earnings or FFO guidance.
- The company had not paid cash dividends since 2010. It estimated tax loss carryforwards of $15–$20 million at November 30, 2016, which it said meant it was not then required to pay dividends to maintain REIT status. On December 8, 2016, the board approved a proposed conversion from a Massachusetts business trust to a Maryland corporation, subject to shareholder approval.
Risks, contingencies and unusual items
- Key risks include refinancing and interest-rate exposure, limited acquisition liquidity, regional concentration (notably Texas, Florida, Georgia and Mississippi), property operating costs, development and lease-up execution, and reliance on joint-venture partners and third-party managers.
- Failure to collect principal or deferred interest on the Newark loan could constrain liquidity or require a loss provision. The filing reports a limited indemnity of up to $2.8 million related to obligations of the sold Newark venture.
- Related-party arrangements include shared services and property/acquisition management fees. The former advisory agreement ended December 31, 2015, and related parties were retained for services previously provided under it.
- No real estate impairment charges were recorded in FY2014–FY2016. Management nevertheless warned that future impairment charges could occur. The auditors issued unqualified opinions on the financial statements and internal control over financial reporting.
Investor facts to verify
- Progress and terms of repayment of the $19.5 million Newark loan and accrued deferred interest, including any extensions or collateral releases.
- Actual refinancing outcomes for the large 2019 mortgage maturities and the company’s access to acquisition financing.
- Realized gains, debt-prepayment costs and partner allocations on post-year-end property sales, and operating performance after portfolio turnover.
- Occupancy, rent growth, capital-improvement spending and development/lease-up progress, particularly at newer or under-construction properties.
- Shareholder approval and completion terms of the proposed corporate conversion, and future dividend policy as tax-loss carryforwards are used.