Business Context and Reporting Period
Company: BRT Realty Trust (BRT Apartments Corp.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: BRT is a Real Estate Investment Trust (REIT) historically focused on originating short-term commercial mortgage loans. Due to the credit crisis, the company has shifted focus from origination to servicing its loan portfolio, managing workout activities, pursuing foreclosures, and operating acquired real estate assets.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2009 | Nine Months Ended June 30, 2009 |
|---|---|---|
| Total Revenues | $2,694,000 | $11,954,000 |
| Net Loss | $(5,263,000) | $(51,222,000) |
| Loss Per Share (Basic & Diluted) | $(0.45) | $(4.39) |
| Cash and Cash Equivalents | $22,461,000 (Balance Sheet) | $22,461,000 (Balance Sheet) |
| Total Assets | $197,241,000 | $197,241,000 |
| Total Liabilities | $63,248,000 | $63,248,000 |
| Shareholders' Equity | $129,528,000 | $129,528,000 |
| Real Estate Loans (Net) | $81,582,000 | $81,582,000 |
| Non-Earning Loans | $30,423,000 (34% of portfolio) | $30,423,000 |
| Allowance for Loan Losses | $8,592,000 | $8,592,000 |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues dropped 47% for the three months and 33% for the nine months compared to the prior year periods. Interest income on real estate loans fell 66% (three months) and 43% (nine months) due to a shrinking earning loan portfolio and lower interest rates.
- Significant Losses: The company reported a net loss of $51.2 million for the nine months ended June 30, 2009, compared to a net loss of $2.5 million in the same period in 2008. This deterioration is primarily driven by impairment charges and loan loss provisions.
- Impairment Charges: The Trust recorded $9.3 million in impairment charges against real estate properties and $17.5 million against properties held for sale during the nine-month period. These charges relate to multi-family properties in Indiana and Tennessee, and condominium units in Florida.
- Loan Loss Provisions: A provision for loan losses of $17.5 million was recorded for the nine months ended June 30, 2009, compared to $11.7 million in the prior year. This includes a $2.3 million charge-off related to borrower fraud.
- Asset Reduction: Total assets decreased from $270.0 million (Sept 30, 2008) to $197.2 million (June 30, 2009), largely due to the reclassification of loans to real estate upon foreclosure and subsequent impairment charges.
- Debt Restructuring: The company terminated its $185 million credit facility and paid off the $6 million outstanding balance. Additionally, $55 million of trust preferred securities were exchanged for junior subordinated notes with a lower interest rate (3.5% fixed vs. 8.37% blended).
Guidance, Outlook, and Risks
- Dividend Suspension: The Board of Trustees suspended cash distributions on common shares in December 2008 to preserve capital. No dividends were declared or paid in the quarter ended June 30, 2009.
- Market Outlook: Management expects continued challenges due to the credit crisis, including potential borrower defaults, additional foreclosures, declining real estate values, and limited loan origination activity. The company anticipates these factors will result in continued declines in revenue and net income.
- Liquidity: Total available liquidity was approximately $26.9 million as of June 30, 2009, consisting of cash and cash equivalents ($22.5 million) and availability under margin lines of credit ($4.4 million). Management believes existing capital sources are adequate for current needs.
- Subsequent Event: On August 4, 2009, the Trust entered into an agreement to sell a non-performing loan for $16.5 million, receiving a $1 million non-refundable deposit. Closing is anticipated by December 31, 2009.
- Risks: Key risks include the inability of borrowers to refinance or repay loans, further declines in collateral values, and the high cost of servicing non-performing assets and foreclosed properties.
Investor Verification Checklist
- Non-Performing Loan Concentration: Verify the status and collateral value of the $30.4 million in non-earning loans, which represent 34% of the total loan portfolio.
- Impairment Adequacy: Assess whether the $26.8 million in total impairment charges (operating and discontinued) sufficiently reflects the current market value of the real estate portfolio.
- Fraud Investigation: Monitor the outcome of the investigation into the borrower fraud that resulted in a $2.3 million charge-off and potential legal action against third-party service providers.
- Liquidity Runway: Confirm the sufficiency of the $26.9 million liquidity position given the suspension of dividends and the ongoing costs of managing foreclosed properties.
- Debt Restructuring Terms: Review the long-term impact of the exchange of trust preferred securities for junior subordinated notes, specifically the interest rate reset provisions post-2012.