Business Context and Reporting Period
Company: BRT Realty Trust (BRT Apartments Corp.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2006
Business Overview: BRT is a real estate investment trust (REIT) primarily engaged in originating and holding senior and junior commercial mortgage loans secured by real property in the United States. The company also participates as an equity investor and mortgage lender in joint ventures.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2006 |
Nine Months Ended June 30, 2006 |
Nine Months Ended June 30, 2005 |
|---|---|---|---|
| Total Revenues | $10,106,000 | $25,627,000 | $17,562,000 |
| Net Income | $4,950,000 | $13,784,000 | $10,537,000 |
| Diluted EPS | $0.62 | $1.74 | $1.35 |
| Cash Distributions per Share | $0.54 | $1.58 | $1.46 |
| Net Cash from Operating Activities | N/A | $12,821,000 | $8,945,000 |
| Total Assets | $328,833,000 | N/A | N/A |
| Total Liabilities | $183,775,000 | N/A | N/A |
| Shareholders' Equity | $145,058,000 | N/A | N/A |
| Cash and Cash Equivalents | $9,853,000 | N/A | N/A |
Debt and Liquidity:
- Borrowed Funds: $109,757,000 outstanding at June 30, 2006.
- Junior Subordinated Notes: $56,702,000 outstanding (issued in March and April 2006).
- Credit Facility: $155 million facility with $90 million outstanding and $55 million available.
- Margin Accounts: $19.8 million outstanding against $46.9 million in pledged securities.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 68% for the three months ended June 30, 2006, compared to the same period in 2005. Interest and fees on real estate loans rose 79% to $9.0 million, driven by a $103.8 million increase in the average loan balance and higher interest rates (average yield increased to 13.19%).
- Expense Increases: Interest expense on borrowed funds surged 228% to $3.3 million for the quarter, reflecting higher borrowing levels ($165 million average balance vs. $61.3 million) and increased rates (7.99% vs. 6.49%). General and administrative expenses increased 29% due to higher payroll, commissions, and legal fees.
- Asset Quality: Non-earning loans increased to $13.4 million (5.45% of total net loans) from $1.6 million in the prior year-end, representing a significant deterioration in loan performance.
- Joint Ventures: Equity in earnings of unconsolidated ventures turned to a loss of $180,000 for the nine-month period, primarily due to interest expense on a prepayment of a mortgage related to a sold Atlanta property.
Guidance, Outlook, Risks, and Unusual Items
- Outlook: Management notes that 92% of the mortgage portfolio ($228.2 million) is due within 12 months. The company cannot project the portion of loans that will be paid versus extended due to cyclical market conditions.
- Unusual Items:
- Gain on Disposition: A one-time gain of $2.5 million was recorded in the nine-month period from the sale of a real estate asset related to an unconsolidated joint venture.
- Discontinued Operations: Included a $315,000 gain on the sale of a cooperative unit in New York.
- Cancelled Offering: The company incurred $296,000 in expenses related to a contemplated public offering that was cancelled due to adverse market conditions.
- Risks:
- Interest Rate Sensitivity: 91% of the loan portfolio is variable-rate. A 1% increase in rates would positively impact pre-tax income by ~$1.2 million, while a 1% decrease would negatively impact it by ~$0.9 million.
- Concentration Risk: Two borrowers hold loans exceeding 10% of the total portfolio (11% and 18% respectively).
- SEC Investigation: An affiliated entity (One Liberty Properties) received a formal order of investigation from the SEC regarding related party transactions. The SEC served a subpoena on BRT, which is complying.
Investor Verification Checklist
- Loan Portfolio Quality: Verify the status of the $13.4 million in non-earning loans and the specific borrowers involved, as this represents a significant increase in credit risk.
- Liquidity Coverage: Confirm the ability to refinance or extend the $228 million in loans maturing within 12 months given the current credit facility utilization.
- Related Party Transactions: Review the details of the SEC subpoena and related party transactions with Gould Investors L.P. and other affiliates.
- Interest Rate Exposure: Assess the impact of potential prime rate fluctuations on net interest income, given the high percentage of variable-rate assets.
- Dividend Sustainability: Evaluate whether the $0.54 per share quarterly distribution is fully covered by FFO (Funds From Operations) given the rise in interest expenses.