BRT Apartments Corp. quarterly report, Q3 FY2011

Business Context and Reporting Period

The supplied filing is BRT Realty Trust’s unaudited Form 10-Q for the quarter and nine months ended June 30, 2011 (fiscal third quarter), compared with the periods ended June 30, 2010. The request identifies BRT Apartments Corp.; the filing itself names BRT Realty Trust. Verify the intended issuer.

BRT’s primary business is originating and holding short-term senior mortgage loans secured by U.S. commercial and multifamily properties. It also holds and operates real estate and invests in ventures and securities.

Financial Results and Position

At June 30, 2011, total assets were $188.260 million, cash and cash equivalents were $26.723 million, and available-for-sale securities were $3.600 million. BRT reported total available liquidity of approximately $30.3 million. Debt obligations totaled $51.016 million: $37.400 million of junior subordinated notes and $13.616 million of mortgages payable. Total equity was $133.714 million.

Net cash used in investing activities for the nine months was $27.736 million, principally reflecting $112.442 million of loan originations, partly offset by collections and loan-sale proceeds. Financing activities used $3.839 million. Cash fell by $31.774 million from the start of the period to $26.723 million.

Changes Versus Prior Comparable Period

• Quarterly revenue rose 128% to $5.344 million; nine-month revenue rose 116% to $13.493 million. Higher loan interest and fees reflected a larger loan portfolio, while recoveries of prior loan-loss allowances also boosted revenue.
• Quarterly common-shareholder income improved from a $2.971 million loss to $3.172 million of income; nine-month results improved from a $6.849 million loss to $4.511 million of income.
• Prior-year periods included $2.625 million of impairment charges and, for the nine months, a $3.165 million loan-loss provision. No such charges were recorded in the 2011 periods.
• Year-to-date results included a $2.138 million debt-extinguishment loss, partly offset by a $3.568 million recovery of previously provided loan-loss allowances and $1.190 million of securities-sale gains. Nine-month discontinued operations contributed $1.342 million.
• Performing real estate loans increased from $17.3 million at September 30, 2010 to $85.9 million at June 30, 2011. BRT originated $112.4 million of loans in the nine months, compared with $14.7 million a year earlier.

Outlook, Risks, and Notable Items

• Management said it expected sufficient funds and funding sources to meet cash requirements for the next 12 months, including lending activity and Newark Joint Venture contributions. No specific earnings or revenue forecast was provided.
• A new Capital One revolving facility allows borrowing up to the lesser of $25 million and a borrowing base; no amount was drawn at June 30. It includes minimum net-worth and liquidity covenants, as well as subsidiary coverage tests.
• A Torchlight-affiliated joint venture may be capitalized up to $100 million, with BRT funding 20% and Torchlight 80% as loans are acquired. The arrangement includes tiered returns, workout-reserve requirements, and related-party participation by the advisor, which is owned by BRT’s board chairman.
• For one non-earning loan with an $8.488 million principal balance, a bankruptcy reorganization plan approved in July 2011 provides for the collateral to be conveyed to BRT and its participant for an aggregate $1.5 million payment. The loan was reported as not impaired with no allowance at June 30; verify the subsequent accounting and recovery implications.
• The Newark Joint Venture was seeking up to $125 million in financing for further Teachers Village development; the filing cautions that financing may not be obtained on acceptable terms and the project may not be profitable. BRT also disclosed a $2.154 million potential guarantee exposure if a specified mortgage is fully drawn.
• About 61% of the loan portfolio was located in New York. Approximately 37% of loans were variable rate; management estimated a one-percentage-point rate increase would add about $252,000 annually to pretax income, while a one-point decline would have no annual effect under its assumptions.
• BRT declared no dividend during the nine months and said a dividend in 2011 and for several years thereafter was highly unlikely, citing tax losses and net operating loss carryforwards.

Important Facts to Verify

• Confirm the intended issuer and reporting period, given the request’s BRT Apartments Corp. label versus the filing’s BRT Realty Trust identity.
• Assess the expected recovery and financial-statement treatment of the non-earning loan and July 2011 bankruptcy plan.
• Check loan portfolio credit quality, geographic concentration, and dependence on allowance recoveries and other nonrecurring items in reported earnings.
• Verify liquidity-covenant headroom, availability under the borrowing-base facility, and funding plans for Newark development and joint-venture commitments.
• Review the Torchlight venture’s economics, required BRT capital contribution, reserve obligations, and related-party arrangements.