Business Context and Reporting Period
Company: BRT Realty Trust (BRT Apartments Corp.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2008
Business Overview: BRT is a Real Estate Investment Trust (REIT) organized in 1972. Its primary business is originating and holding senior and junior real estate mortgage loans secured by real property. The Trust also participates as an equity investor and lender in joint ventures. As of June 30, 2008, the Trust held 11,769,956 shares of beneficial interest outstanding.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2008 |
Nine Months Ended June 30, 2008 |
Nine Months Ended June 30, 2007 |
|---|---|---|---|
| Total Revenues | $5,309,000 | $18,120,000 | $34,283,000 |
| Net (Loss) Income | $(5,682,000) | $(2,466,000) | $38,559,000 |
| Diluted EPS | $(0.48) | $(0.21) | $3.75 |
| Cash Distributions per Share | $0.62 | $1.86 | $1.82 |
| Net Cash from Operating Activities | N/A | $2,786,000 | $16,636,000 |
| Cash and Cash Equivalents | $15,344,000 | $15,344,000 | $11,517,000 |
| Total Assets | $291,291,000 | $291,291,000 | $328,109,000 |
| Total Liabilities | $83,989,000 | $83,989,000 | $92,934,000 |
| Shareholders' Equity | $207,302,000 | $207,302,000 | $235,175,000 |
Debt and Liquidity:
- Borrowed Funds: $12,000,000 outstanding at June 30, 2008 (paid down to $0 by the filing date).
- Junior Subordinated Notes: $56,702,000.
- Credit Facility: $185 million revolving facility; $63 million available at quarter-end.
- Non-Earning Loans: $70,829,000 (39% of total real estate loans).
Material Changes vs. Prior Period
- Revenue Decline: Total revenues dropped 50% year-over-year for the three months ended June 30, 2008 ($5.3M vs. $10.5M). Interest income on real estate loans fell 54% to $3.8M due to a $77.2 million decrease in average loan balances and an increase in non-earning loans.
- Net Loss: The Trust reported a net loss of $5.7M for the quarter and $2.5M for the nine-month period, compared to net income of $9.4M and $38.6M in the prior year periods. This reversal is primarily driven by significant provisions for loan losses and impairment charges.
- Loan Loss Provisions: The provision for loan losses increased to $6.4M for the quarter (vs. $1.0M prior year) and $11.7M for the nine months (vs. $1.0M prior year). The total allowance for possible losses rose to $14.27M.
- Impairment Charges: The Trust recorded $6.8M in total impairment charges for the nine months ended June 30, 2008, including $4.0M for real estate properties and joint ventures, and $2.8M for properties held for sale. No such charges were recorded in the prior year.
- Asset Composition: Real estate properties held for sale increased to $38.3M from $9.4M at the prior year-end, reflecting increased foreclosures and deed-in-lieu transactions.
Outlook, Risks, and Management Commentary
Management Commentary:
Management attributes the deterioration in results to the credit crisis and reduced liquidity in credit markets, which have negatively impacted commercial real estate sales and financing. Borrowers engaged in condominium conversions were unable to close sales or refinance, leading to defaults. There were no loan originations in the quarter ended June 30, 2008.
Risks and Contingencies:
- Non-Earning Loans: 11 loans totaling $70.8M are non-earning. Foreclosure actions were pending on nine loans totaling $66.2M at quarter-end. Subsequent to quarter-end, the Trust acquired title to seven properties via foreclosure with a principal balance of $50.1M.
- Market Conditions: Management cannot predict when adverse trends in real estate and credit markets will stabilize. Continued defaults and foreclosures are expected to reduce revenues and increase expenses.
- Liquidity: While the Trust has $15.3M in cash and significant availability under its credit facility, a decline in the value of earning assets could reduce borrowing capacity. The Trust also relies on the sale of available-for-sale securities (Entertainment Properties Trust) for liquidity.
Dividend Policy:
To maintain REIT status, the Trust intends to distribute at least 90% of taxable income. Management recommended a regular quarterly dividend of $0.62 per share and a special dividend of approximately $0.70 per share (totaling ~$8.2M) to be paid in October 2008 to distribute capital gains from security sales.
Investor Verification Checklist
- Non-Earning Loan Exposure: Verify the status and collateral value of the $70.8M in non-earning loans, particularly the recent foreclosures in Tennessee and Indiana.
- Loan Loss Adequacy: Assess whether the $14.27M allowance for loan losses is sufficient given the continued deterioration in the credit market and the concentration of non-earning assets.
- Impairment Realization: Monitor the actual sale prices of the $38.3M in real estate properties held for sale to determine if further impairments are necessary.
- Liquidity Constraints: Confirm the availability under the $185M credit facility, noting that borrowing capacity is tied to the value of earning assets, which has declined.
- Dividend Sustainability: Evaluate the ability to maintain the $0.62 quarterly distribution and the proposed special dividend given the current net loss and reliance on asset sales for cash flow.