BRT Apartments Corp. — FY2017 Form 10-K
Reporting period: Fiscal year ended September 30, 2017; the filing also reports fourth-quarter results. BRT is an internally managed REIT focused on owning, operating, and developing multifamily properties, mostly through joint ventures. At year-end it owned 33 properties with 9,568 units in 11 states, including 402 units under development, and held interests in three properties through unconsolidated ventures. The company converted from a Massachusetts business trust to a Maryland corporation in March 2017.
Key financial results
| Metric | FY2017 | FY2016 |
|---|---|---|
| Total revenue | $105.8 million | $98.5 million |
| Total expenses | $119.3 million | $107.7 million |
| Net income attributable to common stockholders | $13.6 million; $0.97 per diluted share | $31.3 million; $2.23 per diluted share |
| Funds from operations (FFO) | $9.3 million; $0.67 per diluted share | $6.6 million; $0.47 per diluted share |
| Adjusted funds from operations (AFFO) | $12.3 million; $0.88 per diluted share | $10.9 million; $0.78 per diluted share |
| Cash provided by operating activities | $13.1 million | $10.1 million |
| Cash and cash equivalents at year-end | $12.4 million | $27.4 million |
| Total assets | $993.9 million | $874.9 million |
| Mortgages payable, net of deferred costs | $697.8 million | $588.5 million |
FY2017 revenue increased 7.4%, primarily from acquired properties and higher rents. Same-store average rent per occupied unit rose to $918 from $888. Net income fell from FY2016, when it included income from discontinued Newark operations and a related sale gain. FY2017 included $52.6 million of real estate sale gains, of which $24.8 million was allocated to non-controlling partners; operating revenue less expenses was a $13.6 million loss before sale gains and other items. The filing does not provide a single comparable operating margin that adjusts for property-level ownership interests.
Fourth-quarter revenue was $28.4 million and net income attributable to common stockholders was $5.5 million, or $0.39 per share. Quarterly performance included a $16.8 million real estate sale gain.
Mortgage principal outstanding was $704.2 million, with a 4.03% weighted-average interest rate and 6.9-year weighted-average remaining term. Separately, $37.4 million of junior subordinated notes is outstanding; the rate was 3.31% at year-end and resets quarterly based on three-month LIBOR plus 200 basis points. Total debt obligations, including notes and net of deferred mortgage costs, were $734.8 million. Scheduled mortgage principal payments were $35.0 million in 2018 and $59.9 million in 2019. Cash available excluding restricted cash was $12.4 million at September 30 and approximately $20.3 million at November 30, 2017; $6.2 million of restricted cash was designated for property improvements.
Changes and notable developments
- BRT acquired seven multifamily properties or development sites totaling 1,728 units for $231.6 million, including $161.8 million of acquisition mortgage debt; it also invested $21.8 million in three unconsolidated joint ventures.
- It sold seven multifamily properties and one cooperative unit for $169.8 million, generating $52.6 million in gains. Acquisitions and dispositions contributed to higher revenue, expenses, depreciation, and interest costs.
- Interest expense rose 18.0% to $28.2 million, principally reflecting debt on acquired properties. Depreciation rose 31.5% to $30.5 million.
- Operating cash flow increased to $13.1 million, while year-end cash declined by $15.0 million. Investing activities used $76.9 million and financing activities provided $48.8 million.
- FFO and AFFO increased year over year, although both exclude or adjust certain items and are non-GAAP measures. No real estate impairment charges were recorded in 2015–2017.
Outlook, risks, and unusual items
Management estimated 2018 multifamily revenue of $108.5 million, generally assuming 2017 rental and occupancy rates. The estimate includes expected occupancy gains at properties in lease-up, assumes no revenue from the 402-unit Nashville development, and includes estimated Hurricane Harvey rent concessions. It is an estimate, not a guarantee. Management expected 2018–2019 operating expenses to be funded by property cash flows and anticipated funding $180.1 million of debt service over those years through operating cash flow, mortgage refinancing, and property-sale proceeds. The West Nashville development was expected to be completed by December 2018; construction financing of up to $47.4 million was in place for that project, with no amount drawn at year-end.
Hurricane Harvey damaged the 268-unit Retreat at Cinco Ranch in Texas. Ninety-six ground-floor units were uninhabitable, and damage affected common areas and HVAC equipment. BRT reduced the property's book value by $3.6 million and recognized $3.5 million of expected insurance recoveries, net of a deductible. The claim remained unresolved; $1.1 million had been received by December 12, 2017. Repairs were expected to be substantially complete by September 2018. Rent concessions were estimated at $117,000 through January 2018, with no assurance of reimbursement.
After year-end, BRT sold Waverly Place for $22.3 million and estimated a $12.7 million gain, and acquired a 204-unit Alabama property for $18.4 million. It declared dividends of $0.18 per share in September and December 2017. Management stated that existing net operating loss carryforwards meant the company was not then required to pay dividends to maintain REIT status, but future dividends were not assured.
Key risks include refinancing and interest-rate exposure, limited liquidity and acquisition funding, geographic concentration (about 31% of estimated 2018 revenue was attributed to Texas), reliance on joint-venture partners and third-party managers, development and lease-up risk, property insurance limitations, natural disasters, and maintaining REIT qualification. Mortgage debt is generally non-recourse, subject to customary carve-outs; BRT was a carve-out guarantor on approximately $86.6 million of mortgage principal. The filing reports no legal proceedings and no material environmental claims known to management. Related-party services and shared personnel create potential conflicts of interest.
Important facts for investors to verify
- Whether the Harvey insurance claim is fully recovered and the property is repaired and stabilized on the expected schedule.
- Actual refinancing outcomes and debt-service capacity, especially for the 2018–2019 maturities and variable-rate debt.
- Whether estimated 2018 revenue, lease-up assumptions, development timing, and expected property cash flows are achieved.
- Realized proceeds and gains from post-year-end dispositions, and how much sale cash is available to BRT after joint-venture allocations and debt repayment.
- The distinction between consolidated property figures and BRT’s economic share, given varying ownership and distribution arrangements across joint ventures.
- Future dividend decisions, REIT taxable income and NOL utilization, and related-party service costs and governance.