BRT Apartments Corp. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019, compared with the three months ended March 31, 2018. The company changed its fiscal year-end from September 30 to December 31; 2019 is its first calendar-year fiscal year. Results are unaudited and in thousands of dollars unless stated otherwise.
Business context and financial performance
BRT is a multifamily REIT. At quarter-end it owned 36 properties with 10,008 units and had interests in three unconsolidated joint ventures with 1,026 units. Its owned portfolio included 402 units at Bells Bluff, Nashville, where leasing began during the quarter; 339 units in an unconsolidated venture were in lease-up.
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Total revenue | $30.946 million | $29.651 million |
| Rental revenue | $30.702 million | $29.476 million |
| Total expenses | $35.744 million | $34.548 million |
| Revenue less expenses | $(4.798) million | $(4.897) million |
| Net income (loss) attributable to common stockholders | $(4.247) million | $25.222 million |
| Basic/diluted earnings (loss) per share | $(0.27) | $1.77 / $1.75 |
| Net cash provided by operating activities | $8.492 million | $11.609 million |
| NAREIT FFO attributable to common stockholders | $3.062 million | $5.334 million |
| AFFO attributable to common stockholders | $3.718 million | $3.794 million |
Revenue increased 4.4%; rental revenue rose 4.2%, reflecting acquisitions, properties owned for a fuller period, and same-store growth, partly offset by properties sold. Total expenses increased 3.5%. Real estate operating expenses rose 4.3%, interest expense 1.3%, general and administrative expense 3.7%, and depreciation 4.1%. The revenue-less-expenses deficit was about 15.5% of revenue in Q1 2019.
The year-over-year decline in GAAP earnings chiefly reflects the absence of Q1 2018’s $52.0 million property-sale gain and $3.2 million insurance-recovery gain. Q1 2018 also included a $593,000 debt-extinguishment loss. Q1 2019 had no property-sale or insurance-recovery gain.
Balance sheet, debt and liquidity
- At March 31, 2019, total assets were $1.154 billion, including net real estate of $1.077 billion. Total liabilities were $868.4 million and total equity was $285.5 million.
- Mortgages payable, net of deferred costs, were $808.7 million; junior subordinated notes, net of costs, were $37.0 million. Total debt obligations, net of deferred costs, were $845.8 million, up from $808.9 million at December 31, 2018.
- Cash and cash equivalents were $21.1 million and restricted cash was $7.8 million at quarter-end. Management reported available liquidity of $23.5 million as of May 6, 2019, including $14.7 million cash, $7.8 million restricted cash, and $1.0 million available under the credit facility at that date.
- Investing activities used $18.2 million, including $6.9 million of property additions, $2.2 million of improvements and $11.2 million invested in a joint venture. Financing activities used $2.0 million. Cash, cash equivalents and restricted cash decreased by $11.7 million during the quarter.
- The company declared a $0.20-per-share quarterly dividend, paid April 5, 2019. It also paid a $0.20-per-share dividend on January 4, 2019.
Material changes, outlook and risks
- On March 12, BRT acquired a 312-unit property in Kannapolis, North Carolina, for $48.1 million, including $33.3 million of mortgage debt. Management estimated quarterly revenue of $1.1 million, operating expenses of $477,000, interest expense of $293,000 and depreciation of $558,000 for the property.
- After quarter-end, BRT acquired a 328-unit Trussville, Alabama property for $43.0 million through an 80%-owned joint venture. The purchase included $32.3 million of fixed-rate mortgage debt. BRT contributed $11.6 million. It also borrowed $9.0 million under a new credit facility on May 2.
- Management expects operating expenses, dividends and $80.0 million of interest and mortgage amortization payments over the next two years to be funded from property operations and, if needed, mortgage refinancing or property sales. A $29.0 million mortgage balloon payment is due in July 2019. Management expects to refinance it; operating cash flow and available cash alone are insufficient to fund it. Failure to refinance could require equity issuance or property sales on potentially less favorable terms.
- The new credit facility permits borrowing up to $10.0 million, subject to borrowing-base and other conditions. It matures in April 2021, has a rate of 50 basis points over prime subject to a 5% floor, and includes financial and other covenants. The stated rate on May 2 was 6%.
- Management said Bells Bluff construction costs are expected to be funded from up to $12.3 million of remaining construction financing; leasing of the first 120 completed units began in Q1, with the rest expected to be completed in stages during 2019.
- Most mortgage debt is fixed-rate, but five mortgages are adjustable-rate; three are effectively fixed through swaps. The $37.4 million junior subordinated notes bear interest at three-month LIBOR plus 2.00% and mature in 2036. Management estimates a 100-basis-point increase would raise annual interest expense on the notes by about $374,000. The filing also identifies geographic concentration, refinancing, interest-rate and REIT-qualification risks.
- Management intends to continue quarterly dividends but gives no assurance. It estimates a $10–14 million net operating loss at December 31, 2018 and says it is not currently required to pay cash dividends to maintain REIT status.
Most important facts to verify
- Whether the $29.0 million July 2019 mortgage balloon was refinanced, and on what terms.
- Post-quarter borrowing, acquisition funding and remaining availability under the $10.0 million credit facility, including compliance with its borrowing-base requirements and covenants.
- Leasing pace and completion costs at Bells Bluff, and operating performance of the Kannapolis and Trussville acquisitions.
- Property-level operating trends, especially same-store rent and occupancy gains versus higher real estate taxes and other expenses.
- Debt maturities, variable-rate exposure, dividend sustainability and the assumptions underlying FFO and AFFO, which are non-GAAP measures.