BRT Apartments Corp. — 2019 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019; the company changed its fiscal year-end from September 30 to December 31 in 2019. The filing was signed May 15, 2020. Although this request refers to 2019 Q4, the filing covers the full year; selected fourth-quarter figures are included below.
Business context
BRT is an internally managed REIT focused on owning, operating and developing multifamily properties, primarily in the Southeast and Texas. At year-end it wholly owned eight properties with 1,880 units and held interests in 30 properties with 8,898 units through unconsolidated joint ventures. Its reported consolidated revenue excludes the joint ventures’ property revenue, which is accounted for using the equity method.
Financial and operating results
- Revenue: 2019 consolidated revenue was $27.8 million, up 18.5% from restated 2018 revenue of $23.4 million. Rental and other property revenue rose 19.4% to $27.0 million. Growth reflected $5.5 million from properties consolidated after buying out joint-venture partners and $845,000 of same-store growth; property sales partly offset the increases.
- Profit: Net income attributable to common stockholders was $856,000, or $0.05 per diluted share, versus restated 2018 net income of $25.5 million, or $1.68 per diluted share. 2019 results included $10.6 million in gains on consolidated property sales and $9.9 million of BRT’s share of unconsolidated-joint-venture sale gains, alongside $1.4 million of debt-extinguishment charges and increased JV losses.
- Fourth quarter: Revenue was $6.9 million; total expenses were $9.2 million; net income attributable to common stockholders was $6.1 million, or $0.38 per diluted share. Sale-related gains contributed materially to quarterly income.
- REIT operating measures: FFO was $12.0 million ($0.74 per diluted share), down from $16.4 million ($1.08) in 2018. AFFO increased to $16.6 million ($1.03 per diluted share) from $14.1 million ($0.94). NOI increased to $14.7 million from $11.9 million; same-store NOI rose to $9.0 million from $8.3 million. These are non-GAAP measures and are not substitutes for GAAP earnings or cash flow.
- Margins and expenses: Total expenses were $36.1 million, exceeding consolidated revenue by $8.4 million before equity-method results and property-sale gains. Real estate operating expenses were $12.3 million, interest expense $7.8 million, general and administrative expense $10.1 million, and depreciation $5.9 million.
- Cash flow: Net cash from operating activities was $8.6 million, down from restated $27.0 million. Investing activities provided $22.9 million and financing activities used $30.9 million. Cash, cash equivalents and restricted cash together rose $699,000 to $32.4 million.
- Liquidity: Unrestricted cash and cash equivalents were $22.7 million and restricted cash was $9.7 million at year-end. The restricted funds were designated for property improvements. The company reported $22.7 million of available cash at December 31, 2019, excluding JV cash.
- Debt: Consolidated mortgages were $134.0 million and junior subordinated notes were $37.4 million in principal. The notes bear floating interest at three-month LIBOR plus 2.00% and mature in 2036. The $10 million credit facility had no balance outstanding at year-end and matures in April 2021. Unconsolidated JVs had $809.1 million of mortgage debt; that debt is not on BRT’s consolidated balance sheet. Multifamily mortgage debt had a 4.17% weighted-average rate and approximately 7.8-year weighted-average remaining maturity.
- Dividends and equity: The company declared $0.84 per share in 2019, a 10% increase over 2018. It raised approximately $7.5 million from common-stock sales during 2019.
Material changes and unusual items
- Restatement and non-reliance: BRT restated its 2018 audited financial statements and prior quarterly statements through September 2019 after determining that 27 joint ventures had been consolidated contrary to ASC 810 and should instead have been accounted for under the equity method. This materially reduced reported revenues, expenses, assets and liabilities. The company stated that previously reported net income, FFO and AFFO, in absolute and per-share terms, were correct, and that stockholders’ equity had been stated correctly or understated. The 2018 comparison figures in this filing are restated.
- Control weakness: Management concluded internal control over financial reporting was ineffective at December 31, 2019 because of a material weakness in controls over accounting for real estate ventures. The auditor issued an adverse opinion on internal control, while giving an unqualified opinion on the financial statements. BRT estimated $700,000–$1.0 million in costs to address the presentation issues during the first half of 2020.
- Portfolio activity: Through JVs, BRT acquired interests in three properties totaling 840 units for $109.5 million, with $27.2 million of BRT equity. It sold two Houston properties totaling 384 units for $33.2 million, recognizing $9.9 million in gains before partner allocation, and its JV sold a 400-unit Indianapolis property for $36.5 million. BRT also bought its partner’s interest in a Texas property for $1.6 million.
- COVID-19 and subsequent events: Management reported collecting 98% of April 2020 multifamily rent due through May 6, while cautioning this might not predict later collections. It anticipated added operating costs, rent concessions, leasing and transaction delays, and approximately $300,000 of potentially uncollectible commercial rental and other income for the three months ending June 30, 2020. The pandemic’s ultimate impact was described as uncertain. The company also reported post-year-end stock issuance, a JV acquisition in Wilmington, North Carolina, and approximately $12.8 million of cash and equivalents at April 30, 2020.
Outlook, risks and contingencies
- Management said operating cash flow and available cash would not be enough to cover anticipated mortgage balloon payments through 2022; refinancing, property sales, equity issuance and credit-facility funding were among the expected sources. The liquidity discussion cites approximately $183.5 million of balloon payments, while a risk-factor discussion cites $182.6 million; investors should reconcile the difference. Failure to refinance could force asset sales on unfavorable terms.
- Other key risks include COVID-19 effects on rent collection and costs, concentration in regional markets, interest-rate and LIBOR-transition exposure, dependence on joint-venture partners and third-party managers, capital needs for value-add properties, and potential impairment charges. Management recorded no impairment charges in 2019 or 2018.
- A lawsuit alleges wrongful death at a Houston property and seeks more than $1 million in compensatory damages plus unspecified exemplary damages. The insurer is defending the claim; BRT believes primary and umbrella coverage is sufficient for compensatory damages, but insurance generally does not cover exemplary damages.
- Management’s acquisition strategy targets properties with cap rates of approximately 4.5%–5.75%, an initial annual cash return of approximately 6.5%–8%, and an estimated internal rate of return of approximately 10%–16%; these are underwriting objectives, not company guidance.
Important facts for investors to verify
- Review the restatement notes and subsequent SEC filings for any further accounting adjustments, and monitor whether the material weakness is remediated.
- Confirm the maturity schedule and refinancing plan for balloon debt through 2022, including the differing disclosed totals, and assess JV debt exposure and guarantees.
- Track rent collections, concessions, expenses, cash balances, and commercial tenant relief requests as COVID-19 effects develop.
- Assess recurring operating performance separately from gains on sales, using GAAP cash flows alongside FFO, AFFO and NOI.
- Verify the sustainability of the dividend against operating cash generation, capital requirements and financing needs.