BRT Apartments Corp. — Form 10-Q Summary
Reporting period: Quarter ended December 31, 2017, the first quarter of BRT’s fiscal 2018 year. The filing is unaudited. BRT is a REIT focused on owning, operating, and developing multifamily properties, primarily through joint ventures. At quarter-end it owned 34 properties with 9,684 units and held interests in three unconsolidated multifamily ventures.
Key financial results
| Metric | Q1 FY2018 | Prior-year quarter |
|---|---|---|
| Total revenue | $28.3 million | $25.6 million |
| Rental and other property revenue | $28.2 million | $25.0 million |
| Total expenses | $32.3 million | $28.0 million |
| Income from continuing operations, net of taxes | $8.2 million | $32.3 million |
| Net income attributable to common stockholders | $6.4 million; $0.45 per diluted share | $15.8 million; $1.13 per diluted share |
| FFO attributable to common stockholders | $2.9 million; $0.20 per share | $1.9 million; $0.14 per share |
| AFFO attributable to common stockholders | $3.7 million; $0.26 per share | $2.9 million; $0.21 per share |
| Cash provided by operating activities | $8.4 million | $7.8 million |
Net income included a $12.5 million gain on the sale of Waverly Place Apartments, compared with $35.8 million of gains in the prior-year quarter. The filing does not provide a directly comparable operating margin measure; reported expenses exceeded revenue in both periods before property-sale gains and other items.
Balance sheet, debt, and liquidity
- At December 31, 2017, total assets were $1.013 billion, total liabilities $769.4 million, and total equity $243.3 million.
- Debt obligations, net of deferred costs, totaled $749.1 million: mortgages of $712.1 million net and junior subordinated notes of $37.0 million net. Debt increased from $734.8 million at September 30, 2017.
- Cash and cash equivalents were $13.7 million; restricted cash was an additional $8.1 million and was designated for property capital improvements, not generally available for corporate purposes.
- Operating cash flow was $8.4 million; investing activities used $18.2 million, while financing activities provided $11.2 million. Cash and cash equivalents plus restricted cash increased $1.3 million to $21.8 million.
- Management reported approximately $13.7 million of available cash excluding restricted cash at December 31 and approximately $26.7 million at February 1, 2018.
Changes, transactions, and management commentary
- Revenue rose 10.6% year over year, mainly from acquisitions, same-store rent and occupancy increases, and the Factory at Garco property entering lease-up. These gains were partly offset by property sales and concessions at the hurricane-damaged Retreat at Cinco Ranch.
- Expenses increased 15.2%, including higher interest expense and depreciation, largely associated with acquired properties and lease-up activity. General and administrative expense declined 11.3%, partly because the prior-year quarter included conversion-related professional fees.
- During the quarter, BRT acquired 204 units in Madison, Alabama, and 120 units in Boerne, Texas, for a combined $30.4 million, using $24.2 million of acquisition mortgage debt. It sold the 208-unit Waverly Place property for $22.3 million and recognized a $12.5 million gain.
- After quarter-end, BRT sold The Fountains Apartments for $97.2 million and estimated an approximately $41.8 million gain for the March 2018 quarter, before allocating approximately $20.5 million to non-controlling interests. It also acquired a 50% interest in a 522-unit Florida property through a joint venture.
- FFO and AFFO increased year over year despite lower GAAP earnings, which were affected by the lower property-sale gain. Management cautions that these non-GAAP measures are not substitutes for GAAP results or cash flows and do not measure whether cash is sufficient for all capital needs.
Outlook, risks, and contingencies
- Management expects operating costs through 2019 to be funded from property operations. It expects 2018–2019 debt service to be funded through operating cash, mortgage refinancing, property-sale proceeds, and potential stock sales. These are expectations, not assurances.
- BRT intends to refinance $56.3 million of adjustable-rate mortgages on two properties after stabilization, but warns that stabilization or acceptable refinancing may not occur. The loans, after extension options, mature in April 2019 and October 2020.
- Hurricane Harvey damaged the 268-unit Retreat at Cinco Ranch; 96 ground-floor units were uninhabitable. BRT had received $2.0 million of insurance proceeds by February 8, 2018, continued to pursue recovery, and anticipated substantial repairs by September 2018. Reimbursement of tenant concessions was not assured.
- BRT declared a quarterly dividend of $0.18 per share. Management intends to continue quarterly cash dividends but gives no assurance it will do so. Estimated net operating losses of $7–$11 million meant the company was not then required to pay dividends to maintain REIT status.
- The filing identifies exposure to interest-rate changes, regional economic concentration, REIT qualification and tax-law changes, and joint-venture arrangements. A 100-basis-point increase in rates was estimated to reduce annual net income by $681,000 on the three remaining variable-rate mortgages and increase annual interest expense on the subordinated notes by $374,000.
- The Tax Cuts and Jobs Act was enacted in December 2017. Management said its effects appeared generally favorable for REITs but could have unintended consequences for BRT or its stockholders.
- No impairment charges or off-balance-sheet arrangements were reported. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Retreat at Cinco Ranch repairs, rent recovery, and insurance claims proceed as expected, and what amounts are ultimately reimbursed.
- Actual operating performance and stabilization of lease-up and development properties, and the availability and terms of refinancing for upcoming maturities.
- The timing and realized proceeds from property sales, including The Fountains, and the portion of gains and cash proceeds attributable to non-controlling partners.
- Future cash generation, capital spending, debt service, and the sustainability of the $0.18 quarterly dividend.
- The filing reports different commissions on ATM stock sales: $50,000 in Note 3 versus $30,000 in MD&A. Verify the correct amount and associated net proceeds.