BRT

Business Context and Reporting Period

This Form 10-Q covers BRT Realty Trust (BRT), a real estate investment trust (REIT) organized under Massachusetts law. The report covers the quarterly period ended December 31, 2005. BRT is primarily engaged in originating and holding senior and junior commercial mortgage loans secured by real property, with a focus on high-yield, short-term bridge loans. The company also participates in equity joint ventures and holds available-for-sale securities.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 27% year-over-year to $7.4 million, driven primarily by a 32% increase in interest and fees on real estate loans ($6.4 million vs. $4.9 million). This was due to a $46.2 million increase in the average loan balance and higher interest rates (average yield rose to 13.09% from 11.15%).
• Expense Increases: Total expenses rose significantly to $4.3 million from $2.4 million. Interest expense on borrowed funds surged 165% to $1.77 million due to higher borrowing levels and increased rates. General and administrative expenses increased 66% to $1.6 million, largely due to $328,000 in costs related to a cancelled preferred securities offering and increased professional fees.
• Unconsolidated Ventures: Equity in earnings of unconsolidated ventures swung from a $55,000 gain in Q4 2004 to an $877,000 loss in Q4 2005. This was primarily due to a $995,000 loss from the Rutherford Glen joint venture operations (including prepayment penalties), partially offset by a $2.53 million gain on the disposition of that same property.
• Discontinued Operations: The company reported a $62,000 loss from discontinued operations, compared to a $109,000 gain in the prior year, reflecting the operations of a foreclosed property pending sale.

Guidance, Outlook, and Risks

• Liquidity and Financing: On January 11, 2006, BRT replaced its existing credit facilities with a new $150 million revolving credit facility maturing in February 2008. Borrowings are secured by receivables and limited to 65% of first mortgages or 50% of second mortgages/owned real estate. The company also utilizes margin accounts secured by available-for-sale securities (primarily Entertainment Properties Trust shares).
• Market Risks: Approximately 98% of the loan portfolio is variable-rate, indexed to the prime rate. Management estimates a 1% increase in interest rates would positively impact pre-tax income by approximately $788,000, while a 1% decrease would negatively impact it by $334,000.
• Operational Risks: The company faces concentration risk, with six loans to a single borrower totaling $42.2 million (23% of the loan portfolio). Additionally, the value of margin borrowing capacity is tied to the market value of EPR shares; a decline in these shares could trigger margin calls.
• Unusual Items: The quarter included a significant one-time gain of $2.53 million from the sale of a joint venture property and $328,000 in non-recurring expenses related to a cancelled public offering.

Investor Verification Checklist

• Verify the status and repayment terms of the $42.2 million loan concentration to a single borrower (23% of portfolio).
• Monitor the market value of Entertainment Properties Trust (EPR) shares, as they serve as collateral for margin loans and represent a significant portion of available-for-sale securities.
• Confirm the timeline for the sale of the foreclosed property currently classified under discontinued operations.
• Review the impact of rising interest rates on the company's borrowing costs versus the yield on its variable-rate loan portfolio.
• Assess the sustainability of net income given the inclusion of a $2.53 million one-time gain on the disposition of a joint venture.