BRT Apartments Corp. — Form 10-Q Summary
Reporting period: Quarter and six months ended March 31, 2017 (the company’s fiscal second quarter). Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context
BRT is a REIT focused primarily on owning, operating and developing multifamily properties, generally through joint ventures. At March 31, 2017, it owned 32 multifamily properties with 8,805 units across 11 states, including 271 units in lease-up; average occupancy at stabilized properties during the quarter was 93.3%. It also held interests in two unconsolidated ventures and other real estate assets, including a $5.9 million loan.
On March 18, 2017, BRT converted from a Massachusetts business trust to a Maryland corporation. The filing says the conversion did not change the business or management and was treated as a tax-free exchange.
Financial performance and position
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Total revenue | 2017: $24.9; 2016: $26.0 | 2017: $50.5; 2016: $48.3 |
| Net income (loss) attributable to common stockholders | 2017: $(4.2); 2016: $24.9 | 2017: $11.5; 2016: $22.9 |
| Basic and diluted EPS | 2017: $(0.30); 2016: $1.76 | 2017: $0.83; 2016: $1.62 |
| NAREIT FFO attributable to common stockholders | 2017: $1.8; 2016: $2.2 | 2017: $3.6; 2016: $3.8 |
| AFFO attributable to common stockholders | 2017: $2.3; 2016: $3.8 | 2017: $5.2; 2016: $6.0 |
For the six-month period, rental and other property revenue rose 7.4%, while total revenue increased 4.5%. GAAP net income and EPS declined year over year; 2016 included discontinued-operation income and gains on property sales. In 2017, a $35.8 million property-sale gain substantially supported six-month earnings. Excluding real estate sale gains, revenue less expenses was a loss of $6.0 million for the six months and $3.6 million for the quarter. The filing does not present a single comparable margin measure.
Six-month operating cash flow was $11.6 million, versus $9.5 million in 2016. Investing activities provided $62.8 million, mainly reflecting $128.6 million in property-sale proceeds and a $13.6 million loan principal collection, partly offset by property additions and joint-venture investment. Financing activities used $58.6 million, including $22.8 million of distributions to non-controlling interests. Cash and cash equivalents were $43.1 million at March 31, compared with $27.4 million at September 30, 2016; restricted cash of $6.6 million was designated for property improvements.
Total assets were $870.5 million and total liabilities were $653.6 million at March 31. Mortgage debt was $608.4 million gross ($603.1 million net of deferred costs); junior subordinated notes were $37.4 million gross ($37.0 million net). Available cash excluding restricted cash was approximately $43.1 million at March 31 and $34.4 million at May 1, 2017. The company reported no cash dividends during the periods and said it had not paid cash dividends since 2010.
Material changes and unusual items
- Quarterly total revenue fell 4.4%, primarily because the prior-year quarter included $1.9 million of previously deferred interest income on the Newark Joint Venture loan. Property rental revenue itself increased 3.0%.
- Six-month property-sale gains were $35.8 million in 2017 versus $24.8 million in 2016. The company sold four multifamily properties and a cooperative apartment unit for $130.7 million in the 2017 period.
- Six-month expenses rose 10.5% to $56.5 million. Depreciation increased 32.5% and interest expense increased 13.0%, reflecting acquisitions and the associated debt; property purchases also expanded the portfolio.
- The company received a $13.6 million principal paydown and $2.6 million of interest on its Newark Joint Venture loan in February; the remaining $5.9 million balance was due in June 2017 and bore 11% interest.
- Effective October 1, 2016, BRT early adopted guidance that led it to capitalize acquisition costs rather than expense them. It capitalized $1.2 million in the six-month period, favorably affecting reported income relative to prior-period treatment.
Outlook, liquidity and risks
Management said operating expenses and debt service through 2018 were expected to be funded from property operating cash flow and, if needed, supplemental financings. It noted that acquisitions depend on available cash and mortgage financing. The North Charleston development was expected to be funded by contributed capital and construction financing; $25.4 million of the $30.3 million facility had been drawn, with $4.8 million available at March 31. No specific earnings or occupancy guidance was provided.
Most mortgage debt was fixed-rate; four mortgages were variable-rate, three of which were subject to swaps. A 100-basis-point increase in rates was estimated to reduce annual net income by $254,000 on the remaining variable-rate mortgage and increase annual interest expense on the floating-rate subordinated notes by approximately $374,000. Management identified geographic concentration as a risk: 31% of units were in Texas, with other significant concentrations in Florida, Georgia, Alabama, Mississippi and South Carolina. The filing also refers investors to the risk factors in the 2016 Form 10-K.
Management stated that disclosure controls and procedures were effective as of March 31, 2017, with no material change in internal control over financial reporting during the quarter. The filing reported no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether the remaining $5.9 million Newark loan was repaid at its June 2017 maturity and whether any collection issues arose.
- How subsequent acquisitions, including the April 2017 Creve Coeur property, affected cash, debt, occupancy and operating results.
- Whether rental growth and stabilized occupancy offset higher interest, operating and depreciation expenses.
- The sustainability of earnings and FFO/AFFO apart from property-sale gains, and the effect of capitalized acquisition costs on comparability.
- Mortgage maturities, refinancing needs, variable-rate exposure, construction funding and the company’s cash needs for property improvements and joint-venture distributions.