BRT Apartments Corp. — Q2 2022 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and six months ended June 30, 2022. BRT is a multifamily-focused REIT. At quarter-end, it wholly owned 16 properties with 3,848 units, held interests in 14 unconsolidated joint-venture properties with 4,557 units, and owned a 17.45% interest in a 240-unit development. Its properties are concentrated in the Southeast and Texas.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $14.7 million | $7.0 million | $26.1 million | $14.1 million |
| Net income attributable to common stockholders | $35.6 million | $6.0 million | $47.1 million | $2.3 million |
| Diluted GAAP earnings per share | $1.91 | $0.34 | $2.53 | $0.13 |
| NAREIT FFO per diluted share | $0.20 | $0.29 | $0.55 | $0.63 |
| AFFO per diluted share | $0.37 | $0.31 | $0.76 | $0.61 |
Net income was substantially boosted by BRT’s share of gains on joint-venture property sales: $40.1 million in Q2 and $53.1 million for the first half. Excluding the sale gains, the operating comparison is materially different; Q2 revenues less expenses were a loss of $3.1 million, versus a $2.9 million loss a year earlier.
Consolidated NOI was $8.3 million in Q2 and $15.0 million for the first half, compared with $3.8 million and $7.8 million, respectively, a year earlier. Same-store NOI increased to $3.9 million in Q2 from $3.5 million and to $7.7 million for the first half from $6.9 million. Management attributed the gains mainly to higher rents, partly offset by higher operating costs. NOI, FFO and AFFO are non-GAAP measures and are not substitutes for GAAP earnings or cash flow.
Net cash from operating activities was $2.8 million for the first half, versus cash used of $3.1 million in 2021. Investing activities provided $31.4 million and financing activities used $11.3 million. Cash and cash equivalents were $57.0 million at June 30; cash plus restricted cash was $61.8 million.
At June 30, consolidated mortgages were $299.8 million gross ($297.0 million net of deferred costs); junior subordinated notes were $37.4 million gross. Total consolidated debt, net of deferred costs, was $334.1 million. Including approximately $390.0 million of joint-venture mortgage debt, total mortgage debt was $689.9 million. Consolidated mortgages had a 3.91% weighted-average rate and 9.2-year weighted-average remaining term; joint-venture mortgages averaged 4.00% and 6.3 years. The $35 million credit facility had no balance at June 30, but $22 million was outstanding on August 5, leaving $13 million available. Cash and cash equivalents were $13.9 million on that later date.
Material changes and unusual items
- Revenue growth reflected primarily the acquisition of remaining joint-venture partner interests, which brought properties and their revenues, expenses and debt onto BRT’s consolidated statements. Management estimated the 11 properties acquired during 2022 would have contributed $17.5 million of rental income and $16.4 million of expenses in the first half had they been consolidated from January 1.
- BRT completed six partner buyouts in the first half for a combined purchase price of approximately $42.9 million. Five further buyouts closed in July and August for approximately $63.0 million, with $128.0 million of related mortgage debt.
- Unconsolidated ventures sold three properties during the first half, generating BRT equity in sale gains of $53.1 million. The sales also involved mortgage repayments and debt-extinguishment charges.
- First-half interest expense rose to $4.9 million from $3.3 million, and depreciation and amortization rose to $8.6 million from $3.0 million, principally reflecting the partner buyouts. No impairment charge was recorded in 2022; 2021 included a $0.5 million impairment charge.
- The company increased its quarterly dividend 8.7% to $0.25 per share, payable July 8, 2022. It also sold 273,756 shares through its ATM program during the first half, generating $6.2 million before fees.
Outlook, risks and contingencies
BRT provided no specific earnings or operating guidance. Management expected operating expenses, debt service and amortization, near-term balloon payments, and dividends to be funded from operating cash flow, joint-venture distributions, property sales and, if available, the credit facility. It estimated $14.9 million of mortgage balloon payments due from 2022 through 2024 and said operating cash flow and available cash would not fully fund them; refinancing, equity issuance or property sales may be needed, potentially on unfavorable terms. Management also anticipated higher interest expense from partner buyouts, rising rates on floating-rate notes and credit-facility borrowings.
Joint-venture distributions are an important source of liquidity: BRT received $54.9 million from these ventures in Q2, including $51.7 million from property sales. BRT is not the borrower on their mortgage debt, but foreclosure or similar loss of joint-venture properties could materially harm its results and financial condition. Management said COVID-19 had not materially adversely affected results to date, while noting that a more cautious approach to rent increases, acquisitions and value-add work may have reduced potential income.
A joint venture had agreed to sell Waters Edge at Harbison, with closing anticipated in August or September 2022; BRT estimated its share of the gain at approximately $11.5 million and a mortgage prepayment charge of approximately $263,000, subject to closing conditions. Other disclosed risks include interest-rate and refinancing exposure, property-market and operating risks, geographic concentration, REIT qualification, natural disasters, environmental matters, and joint-venture partner and tenant risks. The filing reported no material change in previously disclosed litigation; it noted that insurance may not cover punitive damages in personal-injury claims.
Important facts for investors to verify
- How much recurring earnings and cash generation are represented by FFO/AFFO and same-store performance, versus large, nonrecurring property-sale gains.
- The funding plan for the $14.9 million of mortgage balloon payments due through 2024, including refinancing availability, expected property-sale proceeds and the post-quarter credit-facility draw.
- The financial and operating effects of the 11 partner buyouts completed in 2022, including purchase prices, assumed debt, financing costs and integration performance.
- The reported June 30 interest rate on the floating-rate junior subordinated notes is inconsistent: the debt note and MD&A state 3.29%, while the market-risk section states 2.30%. Verify the correct rate and related sensitivity.
- Whether the anticipated Waters Edge sale closed on the stated terms and whether the estimated gain and prepayment charge were realized.