Business Context and Reporting Period
Company: BRT Realty Trust (BRT Apartments Corp.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: December 31, 2006
Business Overview: BRT is a Real Estate Investment Trust (REIT) organized under Massachusetts law. Its primary business is originating and holding senior and junior commercial mortgage loans secured by real property, primarily in the United States. It also participates as an equity investor and lender in joint ventures.
Key Financial Metrics
| Metric | Q4 2006 | Q4 2005 |
|---|---|---|
| Total Revenues | $12,745,000 | $7,400,000 |
| Net Income | $8,289,000 | $4,715,000 |
| Diluted EPS | $0.95 | $0.60 |
| Cash from Operations | $8,911,000 | $3,349,000 |
| Cash & Equivalents (End of Period) | $7,587,000 | $6,137,000 |
| Total Assets | $380,171,000 | $371,042,000 (Sep 30, 2006) |
| Total Liabilities | $134,453,000 | $216,607,000 (Sep 30, 2006) |
| Shareholders' Equity | $245,718,000 | $154,435,000 (Sep 30, 2006) |
| Dividends per Share | $0.58 | $0.52 |
Loan Portfolio: Total real estate loans were $292.39 million, with $11.60 million classified as non-earning (3.98% of net loans).
Debt: Borrowed funds outstanding were $60.00 million. Junior subordinated notes totaled $56.70 million. The revolving credit facility is $185 million with $168 million available.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 72% year-over-year to $12.75 million, driven primarily by an 80% increase in interest and fees on real estate loans ($11.59 million vs. $6.42 million). This was due to a $128.3 million increase in the average loan balance and higher interest rates (13.35% vs. 13.09%).
- Profitability: Net income rose 76% to $8.29 million. This was significantly aided by a $1.82 million gain on the disposition of real estate related to an unconsolidated joint venture and a $358,000 income from discontinued operations (vs. a loss of $62,000 in the prior year).
- Expense Increases: Interest expense on borrowed funds surged 118% to $3.86 million due to higher average borrowings ($182.4 million vs. $91.7 million) and increased rates. Advisor fees increased 54% to $824,000 due to a larger asset base.
- Capital Structure: Shareholders' equity increased significantly from $154.4 million to $245.7 million following an underwritten public offering of 2.93 million shares, raising net proceeds of $77.2 million.
Guidance, Outlook, and Risks
Capital Deployment: Proceeds from the public offering were used to pay down the revolving credit facility by $58 million and clear a $19 million margin line balance. The company intends to use cash from operations and loan collections to fund new loan originations and pay dividends.
Liquidity: The company maintains a $185 million revolving credit facility maturing February 1, 2008. It also has margin lines of credit secured by available-for-sale securities (primarily Entertainment Properties Trust shares), with approximately $31.2 million available at period end.
Risks and Contingencies:
- Interest Rate Sensitivity: Approximately 95% of the loan portfolio is variable-rate. A 1% increase in rates is estimated to increase pre-tax income by $2.18 million, while a 1% decrease would reduce it by $819,000.
- Concentration Risk: Four unaffiliated borrowers hold loans exceeding 7% of the total portfolio. The portfolio is geographically concentrated in the New York metropolitan area, New Jersey, Florida, and Tennessee.
- Non-Earning Loans: Two loans totaling $11.6 million are non-earning. One is deemed impaired; the other is not.
- Subsequent Event: Between January 1 and February 5, 2007, BRT sold 165,300 shares of Entertainment Properties Trust, expecting to recognize a gain of approximately $8.37 million in the first quarter of 2007.
Investor Verification Checklist
- Loan Quality: Verify the status of the $11.6 million in non-earning loans and the specific collateral backing the four largest loans (each >7% of portfolio).
- Debt Maturity: Confirm the repayment schedule for the $289.8 million in loans due within 12 months and the renewal terms of the $185 million credit facility maturing in February 2008.
- Equity Valuation: Assess the impact of the subsequent sale of Entertainment Properties Trust shares on future earnings and the valuation of the remaining $59 million holding.
- Interest Rate Exposure: Monitor the spread between the average loan yield (13.35%) and the average borrowing cost (8.41%) given the variable-rate nature of both assets and liabilities.
- Related Party Transactions: Review the Advisor's fee structure and the terms of the joint venture with CIT Capital USA, Inc., which manages a portion of the loan origination pipeline.