BRT Apartments Corp. annual report, FY2012

BRT Realty Trust — FY2012 Form 10-K

Reporting period: Fiscal year ended September 30, 2012. The filing is an annual report, not a standalone fourth-quarter report; quarterly figures below are identified where relevant. BRT is a REIT engaged in commercial and multifamily mortgage lending, multifamily property ownership through joint ventures, and other real estate operations, including Newark development.

Financial performance and position

Metric	FY2012	FY2011
Total revenue	$19.6 million	$17.9 million
Total expenses	$23.4 million	$13.8 million
Net income attributable to common shareholders	$4.4 million	$6.4 million
Diluted earnings per share	$0.32	$0.45
Funds from operations (FFO)	$6.0 million	$5.8 million
Adjusted FFO (AFFO)	$5.9 million	$5.9 million

Revenue rose 9.5%, but expenses increased 69.5%, and common-shareholder earnings declined about 31%. Rental and other property revenue increased to $8.7 million, including $5.5 million from five multifamily properties acquired during the year. Loan interest revenue fell 14.6% to $7.3 million; loan fee income rose to $2.3 million. FY2012 included a $3.2 million gain on a loan sale and $0.6 million of gains on securities sales. Acquisition costs for multifamily properties were $2.4 million.

By segment, loan and investment activities generated $9.5 million of income attributable to common shareholders; multifamily activities recorded a $4.2 million loss, and other real estate activities recorded a $0.8 million loss. Multifamily losses included acquisition costs and noncash depreciation and amortization.

Cash flow: Operating activities used $7.5 million, investing activities used $136.6 million, and financing activities provided $178.3 million. Cash and cash equivalents ended the year at $78.2 million, alongside $55.3 million of restricted construction cash. Management reported approximately $76.1 million of available liquidity at September 30, excluding deposits payable, securities, and unsecured credit availability; it reported approximately $44 million at December 5, 2012.
Debt and equity: Total debt was $206.7 million at year-end, comprising $169.3 million of mortgages and $37.4 million of junior subordinated notes. Mortgages increased from $14.4 million in 2011, primarily from property acquisitions and Newark financing. Total assets were $386.0 million and BRT shareholders’ equity was $133.4 million. Contractual debt obligations, including scheduled interest, totaled $305.0 million.
Loan portfolio: Eight earning loans had $37.1 million of principal outstanding, down from $67.3 million; weighted-average contractual interest was 11.3%, with a weighted-average term to maturity of 5.72 months. About 95% of principal was floating-rate. All portfolio loans matured in fiscal 2013. No non-earning loans or loan-loss allowance were reported at year-end.
Property portfolio: Net real estate properties totaled $190.3 million, including $117.5 million of multifamily properties and $61.8 million of Newark assets. By November 30, BRT had acquired eight multifamily properties totaling 2,335 units, with approximately $42.6 million of BRT equity invested.

Material changes versus prior year

BRT expanded into multifamily ownership in 2012. Five properties were acquired during the fiscal year; three additional properties were acquired after year-end.
Total assets roughly doubled from $191.0 million to $386.0 million, largely reflecting multifamily acquisitions, related mortgage financing, and Newark project financing proceeds.
Loan originations declined: management reported $98.6 million in 2012 versus $131.3 million in 2011. The lending-activity table separately reports $101.8 million of loans originated; the filing does not clearly reconcile the difference. Repayments increased to $124.8 million from $66.1 million.
Net income attributable to common shareholders fell from $6.4 million to $4.4 million, mainly because of losses in the new multifamily segment and other real estate activities, partly offset by stronger loan-segment results. Interest expense more than doubled to $4.7 million.
Newark-related financing and New Markets Tax Credit proceeds supported construction of Teachers Village. The balance sheet included $25.8 million of deferred income from the tax-credit transaction, not recognized as income while compliance obligations remain.

Outlook, risks, and unusual items

Management estimated that rental revenue from its eight multifamily properties could reach approximately $21.6 million in fiscal 2013, assuming rental and occupancy rates remain stable. It also estimated approximately $4.6 million of multifamily depreciation and $8.1 million to $10.8 million of multifamily property operating expenses in 2013.
Management expected higher 2013 interest expense, estimating approximately $5.3 million for the eight multifamily properties, $1.8 million for Newark’s 2012 financings, and $3.9 million for the junior subordinated notes. These are estimates, not guidance on total company earnings.
Teachers Village remained under construction, with occupancy expected in stages during 2013 and 2014. Newark Joint Venture profitability depends on completing construction, leasing residential and retail space, meeting debt service, and securing up to $30 million for a further development phase. Management anticipated Newark losses in fiscal 2013 and for several years thereafter.
Newark risks include refinancing approximately $2.7 million of 2013 debt service, leasing-up shortfalls, possible additional capital calls, construction and completion risks, and restrictions attached to tax credits and public financing. The venture’s estimated New Markets Tax Credit indemnity exposure was up to $40 million, excluding interest and penalties, subject to reduction if credits are not disallowed.
BRT had approximately $44 million of cash and cash equivalents, net of deposits payable, at December 5, 2012. The Capital One revolver had no balance outstanding, but only $10 million was available unsecured for up to 90 days; secured borrowing depends on eligible collateral and lender requirements.
BRT had not paid dividends since fiscal 2010 and said it did not expect a dividend in calendar 2013, citing a $60.5 million tax-loss carryforward and anticipated REIT taxable-income offsets.
Key risks include concentrated lending exposure to New York and Georgia, all multifamily properties being in the Southeast, short loan maturities, market and refinancing risk, possible impairments, joint-venture and development execution risks, and conflicts arising from related-party advisory and shared-services arrangements.
Interest-rate sensitivity: management estimated a 1% rate increase would raise pretax income by $328,000; a 1% decrease was not expected to reduce pretax income on variable-rate loans because of stated rate floors. The company reported effective disclosure controls, no identified material weaknesses, and unqualified audit opinions on its financial statements and internal control.

Important facts for investors to verify

Reconcile reported 2012 loan originations of $98.6 million in management’s discussion with $101.8 million in the lending table.
Track Teachers Village construction milestones, lease execution and occupancy, the proposed third-phase financing, debt refinancing, and any required joint-venture capital contributions.
Assess whether multifamily properties achieve projected rents and occupancy, and compare realized property expenses and interest costs with management’s estimates.
Review debt maturities and debt-service funding, including the distinction between reported balance-sheet debt and $305.0 million of contractual payments that include interest.
Monitor compliance with New Markets Tax Credit and other public-financing requirements, including the potential indemnity and guarantee exposures.
Consider the sustainability of earnings and cash generation: FY2012 operating cash flow was negative despite positive common-shareholder net income, and FFO/AFFO are supplemental measures, not substitutes for GAAP earnings or cash flow.