BRT Realty Trust — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2016. The filing identifies the registrant as BRT Realty Trust; the request metadata names BRT Apartments Corp.
Business context
BRT is a REIT focused on owning, operating and developing multifamily properties, generally with joint-venture partners, plus other real estate assets and a real estate loan. At June 30, 2016, it owned 31 multifamily properties with 8,973 units in 11 states; stabilized properties were 93.5% occupied. Two properties were under construction or in lease-up. BRT became internally managed effective January 1, 2016.
Financial performance
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Total revenue | $23.2 million, up 17.5% year over year | $69.5 million, up 21.0% |
| Revenue less expenses | $(3.4) million, versus $(1.8) million | $(6.1) million, versus $(5.3) million |
| Net income (loss) attributable to common shareholders | $5.5 million; diluted EPS $0.39 | $28.4 million; diluted EPS $2.02 |
| FFO / AFFO attributable to common shareholders | $1.4 million / $1.8 million; $0.10 / $0.14 per share | $5.2 million / $6.7 million; $0.37 / $0.48 per share |
| Operating cash flow | Not separately reported for the quarter | $6.9 million, versus $12.0 million |
Quarterly earnings included a $10.3 million gain on real estate sales and a $0.4 million gain on a partnership-interest sale. Nine-month earnings also included $35.1 million of real estate-sale gains and a $15.5 million gain on the Newark venture sale, partly offset by a $2.7 million debt-extinguishment loss. Thus, reported net income substantially reflects dispositions rather than revenue exceeding expenses.
Balance sheet, liquidity and capital
- At June 30, total assets were $788.1 million, total liabilities $597.1 million and equity $191.1 million. Cash and cash equivalents were $37.7 million; another $6.4 million was restricted for property capital improvements.
- Debt obligations were $554.0 million, comprising $516.6 million of mortgages and $37.4 million of junior subordinated notes; an additional $27.1 million mortgage was classified as held for sale. The subordinated notes bear three-month LIBOR plus 2.00% and mature in 2036.
- Nine-month cash flows were $6.9 million provided by operations, $41.9 million used in investing and $57.2 million provided by financing. Cash increased $22.2 million from September 30, 2015.
- BRT reported no cash dividends during the nine-month period and stated it had not paid cash dividends since 2010. It estimated net operating loss carryforwards of approximately $30–$40 million.
Material changes and outlook
- During the nine months, BRT acquired seven multifamily properties for aggregate contract prices of $205.4 million and sold properties for $168.6 million. During the quarter, it acquired three properties with 986 units for $89.2 million and sold two properties with 624 units for $72.8 million.
- Revenue growth primarily reflected acquisitions, higher same-store rents and Southridge lease-up; expenses also rose with acquisitions, debt, depreciation and operating costs. The prior advisory agreement ended December 31, 2015; services shifted to executives and the former board chair, with 2016 fees capped at $1.15 million.
- Management expected the Sandtown Vista sale to close in the fiscal first quarter of 2017, subject to lender consent and customary conditions, with an estimated gain of about $8.8 million. A July 27, 2016 contract to sell Wichita for $30.0 million was expected to close by September 30, subject to customary conditions; estimated gain was $7.7 million after a $1.9 million prepayment charge. These were estimates, not completed sales at the filing date.
- BRT said operating expenses and debt service through 2017 were expected to be funded from property operations and NJV loan interest, with supplemental financings if needed. It also said acquisition capacity depends on available cash and mortgage financing. No specific broader earnings guidance was provided.
Risks, contingencies and unusual items
- The $19.5 million Newark Joint Venture loan matures in June 2017 and bears 11% annual interest, including 5% deferred. BRT recognized $2.2 million of deferred interest in the nine-month period and agreed to defer payment through September 30, 2016. Collection and repayment timing are important uncertainties.
- BRT may receive up to an additional $0.9 million related to the Newark sale, but will recognize it only when received. A subsidiary also provided an indemnity for up to $2.8 million of venture obligations.
- Management reported that a 100-basis-point increase in rates would raise annual interest expense by $374,000 on the LIBOR-linked subordinated notes and reduce annual net income by $443,000 on two variable-rate mortgages. The filing also discusses interest-rate-swap valuation sensitivity.
- Property concentration creates regional economic exposure: 27% of units were in Texas, with additional concentrations in Florida, South Carolina, Georgia and Alabama. Management cautioned that forward-looking estimates are subject to risks and uncertainties.
Important facts for investors to verify
- Whether the pending Sandtown Vista and Wichita sales closed on expected terms, and whether estimated gains were realized.
- Collection of current and deferred interest and principal on the Newark loan, including its June 2017 maturity and collateral position.
- Recurring operating performance apart from property-sale and venture-sale gains; review FFO/AFFO alongside GAAP earnings and cash flows.
- Debt maturities, variable-rate exposure, refinancing access and liquidity needs, including development funding and capital improvements.
- Occupancy and lease-up progress at developing properties, and the effect of property transactions on same-store results.