BRT Apartments Corp. quarterly report, Q2 FY2013

BRT Realty Trust — Form 10-Q summary

Reporting period: Quarter and six months ended March 31, 2013 (fiscal 2013 second quarter). The filing identifies the registrant as BRT Realty Trust, despite the request metadata naming BRT Apartments Corp. Financial amounts below are in U.S. dollars; dollar figures are stated in millions unless otherwise noted.

Business context and key financial metrics

BRT is a REIT with three segments: commercial real estate lending, multi-family property ownership and operations, and other real estate, principally the Newark Joint Venture’s Teachers Village development. It originates mainly short-term senior mortgage loans and began expanding into multi-family acquisitions in 2012.

Metric	Quarter ended March 31, 2013	Six months ended March 31, 2013
Total revenue	$10.146 million, versus $3.687 million	$18.397 million, versus $6.841 million
Net income (loss)	$0.676 million, versus $(2.097) million	$(1.506) million, versus $1.364 million
Net income (loss) attributable to common shareholders	$1.010 million, versus $(1.028) million; $0.07 per share versus $(0.07)	$(0.294) million, versus $2.846 million; $(0.02) per share versus $0.20
Revenue less expenses	$0.126 million, versus $(2.399) million	$(2.117) million, versus $(2.527) million
Operating cash flow	Not presented separately for the quarter	$1.241 million, versus cash used of $6.481 million

For the six months, rental and other property revenue was $12.506 million and loan interest and fees were $4.845 million. The filing does not provide a clear consolidated operating-margin or EBITDA measure. The quarter’s common-shareholder profit included a $0.482 million gain on securities sales; the prior-year six-month comparison included a $3.192 million loan-sale gain and a $0.490 million real estate-sale gain.

At March 31, 2013, total assets were $440.225 million, including $269.014 million of net real estate properties, $90.425 million of net loans, and $16.634 million of cash. Restricted construction cash was $40.587 million and is not freely available. Total debt obligations were $258.155 million: $220.755 million of mortgages and $37.400 million of junior subordinated notes. The revolving credit facility had no balance outstanding. Equity was $149.958 million.

Changes versus the prior comparable periods

• Revenue growth primarily reflects acquired multi-family properties: rental revenue rose 573% in the quarter and 600% for the six months. Four properties totaling 1,044 units were acquired in the first half for $64.6 million, financed with $50.6 million of acquisition mortgages.
• Loan interest and fee revenue increased 34.7% in the quarter, principally from a higher average loan balance; the six-month increase was 8.8%. Loans totaled $90.4 million at period-end, and management reported all were performing with no loan-loss allowance.
• Higher property-related interest expense, operating costs, and depreciation accompanied the portfolio expansion. Six-month interest expense rose to $5.607 million from $1.342 million; property operating expenses rose to $6.563 million from $1.745 million.
• Six-month net income attributable to common shareholders fell to a loss of $0.294 million from income of $2.846 million. The prior period benefited materially from the loan-sale gain; current-period results also included a securities-sale gain and a $0.422 million recovery of a previously charged-off loan.
• Compared with September 30, 2012, mortgages payable increased $51.471 million, real estate properties increased $78.697 million, and net loans increased $53.841 million. Cash declined $61.611 million during the six-month period.

Outlook, risks and unusual items

• Management said it believed funds were sufficient for 2013 operating expenses and expected general capital contributions for the Newark Joint Venture and multi-family properties. It gave no specific consolidated earnings guidance.
• Teachers Village was still under development and expected to remain unprofitable until construction and occupancy progress. Two of its five buildings were anticipated to be completed by July 2013, with the remainder by summer 2014. The venture estimated it needed at least $7 million in additional 2014–2015 rent from retail and residential tenants to cover debt service and operating expenses, with no assurance that leasing targets would be achieved.
• The Newark Joint Venture was seeking up to $30 million of public and private financing for a third development phase. Funding, construction completion, tenant leasing, and project profitability were uncertain. The venture also depended on restricted construction funds, tax-credit arrangements, government-related financing and other sources.
• Management estimated approximately $12.3 million of fiscal 2013 interest expense attributable to the nine multi-family properties, Newark Joint Venture financings, and junior subordinated notes. The junior subordinated notes’ rate increased from 3.0% to 4.9% in August 2012.
• Management reported approximately $26.6 million of liquidity excluding restricted construction cash, including cash and securities and available borrowing capacity. At March 31 and April 30, the credit facility was undrawn; the filing stated up to $10 million could then be borrowed unsecured for up to 90 days, subject to terms and covenants.
• About 89% of loan principal was variable-rate and tied to prime, with minimum rates; 64% of the loan portfolio was secured by property in the New York metropolitan area. Management estimated a 1% rate increase would raise annual pretax income by about $623,000 on variable-rate loans, while a 1% increase on variable-rate debt would reduce it by about $130,000.
• BRT had approximately $56 million of net operating loss carryforwards at December 31, 2012 and said dividends were highly unlikely in 2013 and for several years thereafter. No dividend was declared for the quarter ended March 31, 2013.
• The filing reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. It reported no off-balance-sheet arrangements.

Important facts for investors to verify

• Whether Teachers Village construction, leasing, financing and required future rent levels meet management’s assumptions, and whether the third phase obtains funding.
• How the increase in mortgages and other financing affects interest costs, liquidity, covenants and refinancing exposure, including the Teachers Village debt with a 2013 maturity and the credit facility maturing in June 2014.
• Whether acquired multi-family properties generate sufficient rental income to cover debt service and operating expenses as expected.
• The collectability and concentration of the loan portfolio: four borrowers each represented more than 10% of gross loans, although management said all loans were performing.
• The sustainability of reported earnings given securities-sale gains, loan-loss recovery, prior-period transaction gains, and the ongoing costs and losses associated with development activity.