Filing summary
Period and issuer: The supplied filing is BRT Realty Trust’s Form 10-Q for the quarter ended June 30, 2012, with results for the three and nine months ended that date. This differs from the request metadata, which identifies BRT Apartments Corp. Fiscal-year comparatives are for the corresponding 2011 periods.
Business context
BRT originated and held senior commercial and multifamily mortgage loans, and began expanding into multifamily property ownership with venture partners in the March 2012 quarter. It reported loan and investment and real estate segments. The statements are unaudited; management cautions that interim results are not necessarily indicative of full-year results.
Financial performance
Amounts below are in millions of dollars unless stated otherwise.
| Metric | Three months ended June 30, 2012 | Nine months ended June 30, 2012 | Comparable 2011 period |
|---|---|---|---|
| Total revenue | $5.56 | $12.40 | $5.34 / $13.49 |
| Total expenses | $6.76 | $16.13 | $3.51 / $10.72 |
| Revenue less expenses | $(1.21) | $(3.74) | $1.84 / $2.77 |
| Net income (loss), consolidated | $(0.79) | $0.57 | $2.72 / $3.36 |
| Net income (loss) attributable to common shareholders | $(0.14) | $2.70 | $3.17 / $4.51 |
| Basic and diluted earnings (loss) per share | $(0.01) | $0.19 | $0.23 / $0.32 |
The nine-month common-shareholder result exceeded consolidated net income because the filing adds back losses attributable to non-controlling interests. No conventional operating margin is presented; revenue less expenses was negative in both 2012 periods.
- Revenue mix and changes: Nine-month rental revenue rose to $4.46 million from $2.58 million, reflecting new multifamily properties. Interest income on loans was $5.63 million versus $5.73 million; loan fees were $1.39 million versus $1.21 million. Revenue fell 8% overall, mainly because prior-year recoveries of loan allowances were $3.57 million versus $0.02 million in 2012.
- Other gains and costs: Nine-month results included a $3.19 million gain on sale of a loan and $0.42 million of securities gains. Property acquisition costs were $2.26 million; interest expense rose to $2.76 million from $1.65 million. Three-month expenses increased 93%, including higher property operating costs, depreciation and borrowing costs.
- Cash flow: Operating activities used $6.52 million in the first nine months, compared with $0.20 million used in 2011. Investing activities used $122.05 million, primarily reflecting $101.51 million of property additions and a $30.28 million increase in restricted construction cash, partly offset by loan collections and asset-sale proceeds. Financing provided $127.50 million, including $114.70 million of mortgage proceeds, $8.93 million of non-controlling-investor contributions and $16.08 million from the New Markets Tax Credit transaction. Cash ended at $42.97 million, down $1.06 million.
- Balance sheet and liquidity: At June 30, assets were $329.75 million, liabilities $184.77 million and equity $144.98 million. Mortgages payable were $125.70 million, up from $14.42 million at September 30, 2011; junior subordinated notes remained $37.40 million. Cash plus available-for-sale securities was $44.82 million. Management reported $45.1 million of available liquidity excluding $30.3 million of restricted construction cash; the revolving facility had no balance outstanding.
- Portfolio: Net real estate loans were $64.85 million, versus $66.69 million at September 2011; all loans were reported performing, with no allowance for possible losses. About 97% of loan principal was variable-rate. Real estate properties, net, increased to $166.79 million, principally from three multifamily acquisitions totaling 1,074 units and $100.8 million in purchase price, excluding acquisition costs.
Outlook, risks and unusual items
- Management expected rental revenue, property operating costs, interest expense, depreciation and operating cash flows to increase as the multifamily portfolio grew. It anticipated near-term interest expense increases because the Tennessee acquisition’s mortgage was outstanding for only part of the quarter and the notes’ rate was scheduled to rise from 3.0% to 4.9% in August 2012. No specific earnings or revenue guidance was provided.
- The Newark Teachers Village project’s first financing phase included $31.8 million of mortgage debt and $16.1 million of New Markets Tax Credit proceeds. The tax-credit contribution is recorded as deferred income and may be subject to recapture for seven years if program requirements are not met. Management said approximately $30.3 million remained restricted for construction at quarter-end.
- After expected charter-school and daycare rents, the Newark venture estimated it needed at least another $420,000 of retail rent to cover debt service and operating expenses for the first-phase buildings. Retail leasing and sufficient rent were not assured; BRT may, but is not obligated to, fund any shortfall. The venture contemplated raising a further $85 million for later project phases, with no assurance of financing or profitability.
- Management said the Treasury subsidy covering about 90% of interest on approximately $22.7 million of Qualified School Construction Bonds was expected to continue at roughly $1.2 million annually until at least 2018. A $1.65 million portion of a Newark venture mortgage was guaranteed by BRT. Multifamily mortgage debt was generally non-recourse to BRT, subject to customary carve-outs.
- For a 1% increase in interest rates, management estimated a positive annual pretax impact of approximately $614,000; a 1% decline was estimated to have no impact because of loan rate floors. The loan portfolio was concentrated in New York metropolitan area (44%), Florida (19%), Georgia (19%) and Maryland (18%).
- BRT did not declare a dividend in the quarter. It stated that approximately $62 million of net operating loss carryforwards made dividends unlikely in 2012 and for several years thereafter. Management reported disclosure controls as effective and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the issuer identity: the filing names BRT Realty Trust, not BRT Apartments Corp.
- Assess multifamily property performance, debt-service coverage and the effect of acquisition and financing costs on earnings and cash generation.
- Track Teachers Village construction conditions, retail leasing, remaining project financing and compliance with New Markets Tax Credit requirements.
- Review mortgage maturities, the August 2012 junior-note rate increase, credit-facility covenants and BRT’s capacity to fund potential venture shortfalls.
- Reconcile consolidated earnings with earnings attributable to common shareholders and monitor the substantial increase in mortgage debt and use of restricted cash.