BRT

Business Context and Reporting Period

Company: BRT Realty Trust (BRT Apartments Corp.)
Filing Type: Form 10-K (Annual Report)
Period Ended: September 30, 2006
Business Overview: BRT is a Real Estate Investment Trust (REIT) organized under Massachusetts law, primarily engaged in originating and holding senior and junior commercial mortgage loans secured by U.S. real property. The portfolio consists largely of short-term bridge loans with floating interest rates. As of September 30, 2006, the portfolio included 61 loans totaling approximately $284.6 million across 12 states, with significant concentration in the New York metropolitan area (53%) and Florida (34%).

Key Financial Metrics

Liquidity: The company maintains a $185 million revolving credit facility. As of September 30, 2006, $122 million was outstanding with $152 million available. Additionally, the company held $8.39 million in cash and cash equivalents.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 47% to $37.49 million, driven by a 54% increase in interest and fees on loans ($33.26 million vs. $21.55 million). This was due to a higher average loan balance ($216.4 million vs. $145.7 million) and higher interest rates.
• Expense Increases: Interest expense on borrowed funds surged 148% to $10.72 million, reflecting increased borrowing to fund loan originations. General and administrative expenses rose 32% to $5.81 million due to staff additions, commissions, and costs related to a cancelled public offering.
• Portfolio Expansion: Loan originations totaled $309.7 million in 2006 compared to $259.3 million in 2005. The portfolio mix shifted, with 39% of loans now secured by residential properties pending renovation and conversion to condominiums.
• Investment Income: The company realized a $2.53 million gain on the disposition of real estate related to an unconsolidated joint venture (Rutherford Glen), which was sold in December 2005. Conversely, there was no gain on the sale of available-for-sale securities in 2006, compared to $0.68 million in 2005.

Guidance, Outlook, and Risks

Recent Capital Activity: On December 11, 2006, BRT completed a public offering of 2.8 million shares, raising approximately $74.3 million in net proceeds. Underwriters exercised an over-allotment option for an additional 132,500 shares, raising another $3.5 million. Proceeds were used to reduce indebtedness under the revolving credit facility and margin lines of credit.

Joint Venture: In November 2006, BRT entered a joint venture with CIT Capital USA, Inc. (BRT Funding LLC) to originate bridge loans. BRT agreed to present loan proposals to the venture on a first-refusal basis until the venture originates $100 million (or $150 million with a credit line).

Risks and Contingencies:

• Loan Defaults: One loan ($1.35 million) was not earning interest as of September 30, 2006. The company maintains an allowance for loan losses of $669,000.
• Concentration Risk: Significant geographic concentration in New York and Florida exposes the portfolio to local economic downturns. Additionally, 39% of the portfolio is secured by condominium conversion projects, which are sensitive to market conditions.
• SEC Investigation: An affiliate, One Liberty Properties, Inc., is under SEC investigation regarding related-party transactions. The SEC has subpoenaed BRT for documents; BRT is cooperating but cannot predict the outcome.
• Interest Rate Sensitivity: Approximately 95% of the loan portfolio is floating rate. A 1% increase in interest rates is estimated to increase pre-tax income by $1.3 million, while a 1% decrease would increase income by $134,000 (due to the mix of assets and liabilities).

Investor Verification Checklist

• Debt Covenants: Verify compliance with the revolving credit facility covenants, specifically the debt coverage ratio (1.50 to 1.00) and equity to debt ratio (1.00 to 1.00), especially given the high leverage used to fund growth.
• Condominium Market Exposure: Assess the current market conditions for condominium conversions in New York and Florida, as 39% of the loan portfolio depends on the successful sale of these units for repayment.
• SEC Investigation Status: Monitor the status of the SEC investigation into affiliate One Liberty Properties and any potential impact on BRT's reputation or operations.
• Joint Venture Performance: Track the origination volume and performance of the new CIT Capital USA joint venture to ensure it meets the $100 million target and does not cannibalize BRT's standalone origination pipeline.
• Loan Loss Allowance Adequacy: Review the specific details of the two loans covered by the $669,000 allowance to ensure the provision is sufficient given the economic environment.