UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended December 31, 2003 OR [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number 1-7172 BRT REALTY TRUST ---------------- (Exact name of Registrant as specified in its charter) Massachusetts 13-2755856 ---------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 60 Cutter Mill Road, Great Neck, NY 11021 --------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (516) 466-3100 -------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act) Yes No X ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of stock, as of the latest practicable date. 7,607,565 Shares of Beneficial Interest, $3 par value, outstanding on February 10, 2004
Part 1 - FINANCIAL INFORMATION Item 1. Financial Statements <TABLE> <CAPTION> BRT REALTY TRUST AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Amounts In Thousands) December 31, September 30, 2003 2003 ---- ---- (Unaudited) (Audited) ASSETS <S> <C> <C> Real estate loans - Note 3: Earning interest, including $6,872 and $7,134 from related parties $ 87,151 $ 63,733 Not earning interest 3,145 3,145 -------- -------- 90,296 66,878 Allowance for possible losses (881) (881) -------- -------- 89,415 65,997 -------- -------- Real estate assets - Note 4: Real estate properties net of accumulated depreciation of $1,521 and $1,462 6,408 6,461 Investment in unconsolidated real estate ventures at equity 6,975 6,930 -------- -------- 13,383 13,391 Valuation allowance (325) (325) -------- -------- 13,058 13,066 -------- -------- Cash and cash equivalents 6,966 21,694 Securities available-for-sale at market - Note 5 40,408 36,354 Other assets 2,341 1,891 -------- -------- Total Assets $152,188 $139,002 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Borrowed funds - Note 6 $ 11,875 $ 4,755 Mortgage payable 2,663 2,680 Accounts payable and accrued liabilities, including deposits of $1,228 and $1,103 3,356 5,635 Dividends payable 2,888 - -------- -------- Total Liabilities 17,984 13,070 -------- -------- Shareholders' Equity - Note 2: Preferred shares, $1 par value: Authorized 10,000 shares, none issued - - Shares of beneficial interest, $3 par value: Authorized number of shares - unlimited, issued - 8,883 shares at each date 26,650 26,650 Additional paid-in capital 81,086 81,151 Accumulated other comprehensive income - net unrealized gain on available-for-sale securities 23,808 19,282 Unearned compensation (384) (406) Retained earnings 11,560 11,154 -------- -------- 142,720 137,831 Cost of 1,313 and 1,381 treasury shares of beneficial interest at each date (11,314) (11,899) -------- -------- Total Shareholders' Equity 131,406 125,932 -------- -------- Total Liabilities and Shareholders' Equity $152,188 $139,002 ======== ======== See Accompanying Notes to Consolidated Financial Statements. </TABLE>
<TABLE> <CAPTION> BRT REALTY TRUST AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Amounts In Thousands except for Per Share Data) Three Months Ended December 31, 2003 2002 ---- ---- <S> <C> <C> Revenues: Interest and fees on real estate loans, including interest from related parties of $171 and $189 $ 2,570 $ 2,910 Operating income on real estate owned 528 547 Other, primarily investment income 571 673 ------- ------- Total revenues 3,669 4,130 ------- ------- Expenses: Interest on borrowed funds 169 106 Advisor's fee 298 234 General and administrative 798 676 Other taxes 74 130 Operating expenses relating to real estate owned, including interest on mortgages of $64 and $65 303 311 Amortization and depreciation 76 85 ------- ------- Total expenses 1,718 1,542 ------- ------- Income before equity in earnings of unconsolidated joint ventures and gain on sale 1,951 2,588 Equity in earnings of unconsolidated entities 43 63 Net gain on sale of real estate assets 591 195 Net realized gain on sale of available-for -sale securities 720 - ------- ------- Income before minority interest 3,305 2,846 Minority interest (11) (10) ------- ------- Net income $ 3,294 $ 2,836 ======= ======= Income per share of beneficial interest: Basic earnings per share $ .44 $ .38 ======= ======= Diluted earnings per share $ .43 $ .38 ======= ======= Cash distributions per common share $ .38 $ .30 ======= ======= Weighted average number of common shares outstanding: Basic 7,513,383 7,407,189 ========= ========= Diluted 7,671,566 7,536,538 ========= ========= See Accompanying Notes to Consolidated Financial Statements. </TABLE>
<TABLE> <CAPTION> BRT REALTY TRUST AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited) (Amounts In Thousands except for Per Share Data) Accumulated Shares of Additional Other Com- Unearned Beneficial Paid-In prehensive Compen- Retained Treasury Interest Capital Income sation Earnings Shares Total --------- -------- ------ ------ -------- ------ ----- <S> <C> <C> <C> <C> <C> <C> <C> Balances, September 30, 2003 $26,650 $81,151 $19,282 $ (406) $11,154 $(11,899) $125,932 Distributions - common share ($.38 per share) - - - - (2,888) - (2,888) Exercise of stock options - (65) - - - 585 520 Compensation expense - restricted stock - - - 22 - - 22 Net income - - - - 3,294 - 3,294 Other comprehensive income - net unrealized gain on available-for-sale securities (net of reclassi- fication adjustment for gains included in net income of $720) - - 4,526 - - - 4,526 ----- Comprehensive income - - - - - - 7,820 -------------------------------------------------------------------------------------- Balances, December 31, 2003 $26,650 $81,086 $23,808 $ (384) $11,560 $(11,314) $131,406 ====================================================================================== See Accompanying Notes to Consolidated Financial Statements. </TABLE>
<TABLE> <CAPTION> BRT REALTY TRUST AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Amounts In Thousands) Three Months Ended December 31, 2003 2002 ---- ---- <S> <C> <C> Cash flows from operating activities: Net income $ 3,294 $ 2,836 Adjustments to reconcile net income to net cash provided by operating activities: Amortization and depreciation 76 85 Restricted stock expense 22 - Net gain on sale of real estate loans and properties (591) (195) Net gain on sale of available-for-sale securities (720) - Equity in earnings of unconsolidated real estate ventures (43) (63) Increase in straight line rent (38) (38) (Increase) Decrease in interest and dividends receivable (305) 126 (Increase) Decrease in prepaid expenses (65) 20 Increase in accounts payable and accrued liabilities 174 1,029 Increase (Decrease) in deferred revenues 246 (62) Decrease in escrow deposits (75) (195) Other (53) 82 ------- ------- Net cash provided by operating activities 1,922 3,625 ------- ------- Cash flows from investing activities: Collections from real estate loans 11,333 25,139 Additions to real estate loans (34,751) (9,933) Net costs capitalized to real estate assets (70) (32) Proceeds from the sale of real estate 655 214 Investment in real estate ventures (82) (91) Sales of available-for-sale securities 1,192 - (Decrease) Increase in deposits payable 81 9 Partnership distributions 80 65 ------- ------- Net cash used in investing activities (21,562) 15,371 ------- ------- Cash flows from financing activities: Net change in borrowed funds - credit facility (250) (14,552) Net change in borrowed funds - margin account 7,370 - Payoff/paydown of loan and mortgages payable (17) (15) Cash distribution - common shares (2,711) - Exercise of stock options 520 488 ------- ------- Net cash provided by (used in) financing activities 4,912 (14,079) ------- ------- Net (decrease) increase in cash and cash equivalents 14,728 4,917 Cash and cash equivalents at beginning of period 21,694 4,688 ------- ------- Cash and cash equivalents at end of period $ 6,966 $ 9,605 ======= ======= Supplemental disclosure of cash flow information: Cash paid during the period for interest $ 206 $ 191 ======= ======= Non cash investing and financing activity: Accrued distributions $ 2,888 $ 2,238 ======= ======= See Accompanying Notes to Consolidated Financial Statements. </TABLE> BRT REALTY TRUST AND SUBSIDIARIES Notes to Consolidated Financial Statements Note 1 - Basis of Preparation The accompanying interim unaudited consolidated financial statements as of December 31, 2003 and for the three months ended December 31, 2003 reflect all normal recurring adjustments which are, in the opinion of management, necessary for a fair statement of the results for such interim periods. The results of operations for the three months ended December 31, 2003 are not necessarily indicative of the results for the full year. Certain items on the consolidated financial statements for the preceding periods have been reclassified to conform with the current consolidated financial statements. The consolidated financial statements include the accounts of BRT Realty Trust, its wholly owned subsidiaries, and its majority-owned or controlled real estate entities. Investments in less than majority-owned entities have been accounted for using the equity method. Material intercompany items and transactions have been eliminated. BRT Realty Trust and its subsidiaries are hereinafter referred to as "BRT" or the "Trust". These statements should be read in conjunction with the consolidated financial statements and related notes which are included in BRT's Annual Report on Form 10-K for the year ended September 30, 2003. The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from those estimates. Note 2 - Shareholders' Equity Distributions During the quarter ended December 31, 2003, BRT declared a cash distribution to shareholders of $.38 per share. This distribution totaled $2,888,000 and was payable January 2, 2004 to shareholders of record on December 22, 2003. Stock Options During the quarter ended December 31, 2003, 67,813 previously issued options were exercised. Proceeds from these options totaled $519,000. The Trust adopted Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25), and related interpretations in accounting for its employee stock options. Under APB 25, no compensation expense is recognized because the exercise price of the Trust's employee stock options equals the market price of the underlying stock on the date of grant. Note 2 - Shareholders' Equity (Continued) Pro forma information regarding net income and earnings per share is required by FAS No. 123, and has been determined as if the Trust had accounted for its employee stock options under the fair value method. The fair value for these options was estimated at the date of the grant using the Black-Scholes option pricing model with the following weighted-average assumptions for both 2004 and 2003: risk free interest rate of 4.43%, volatility factor of the expected market price of the Company's common stock based on historical results of .207, dividend yield of 5.5% and an expected option life of six years. Pro forma net income and earnings per share calculated using the Black-Scholes option valuation model is as follows: Three Months Ended December 31, 2003 2002 ---- ---- Net income to common shareholders as reported $3,294 $2,836 Less: Total stock-based employee compensation expense determined under fair value based methods for all awards 30 31 ------ ------ Pro forma net income $3,264 $2,805 ====== ====== Pro forma earnings per share of beneficial interest Basic $ .43 $ .38 ====== ====== Diluted $ .43 $ .38 ====== ====== The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including expected stock price volatility. Because the Trust's employee stock options have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect the fair value estimated, management believes the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. Restricted Stock During the prior year ended September 30, 2003, the Company issued 28,800 shares of restricted stock under its 2003 Incentive Plan which was approved by BRT's shareholders in March of 2003. The total number of shares allocated to this Plan is 350,000. The shares issued vest five years from the date of issuance and under certain circumstances may vest earlier. The Company records compensation expense under APB 25 over the vesting period, measuring the compensation cost based upon the market value of the shares on the date of grant. For the quarter ended December 31, 2003, the Trust recorded $22,000 of compensation expense.
Note 2 - Shareholders' Equity (Continued) Per Share Data Basic earnings per share was determined by dividing net income for the period by the weighted average number of shares of common stock outstanding during each period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of BRT. The following table sets forth the computation of basic and diluted shares: For the three months ended December 31, 2003 2002 ---- ---- Basic 7,513,383 7,407,189 Effect of dilutive securities 158,183 129,349 ------- ------- Diluted 7,671,566 7,536,538 ========= ========= Note 3 - Real Estate Loans Management evaluates the adequacy of the allowance for possible losses periodically and believes that the allowance for losses is adequate to absorb probable losses on the existing portfolio. If all loans classified as non-earning were earning interest at their contractual rates for the three months ended December 31, 2003 and 2002, interest income would have increased by approximately $103,000 and $21,000, respectively. Included in real estate loans are four second mortgages and two first mortgages to ventures in which the Trust (through wholly owned subsidiaries) holds a 50% interest. At December 31, 2003, the aggregate balance of these mortgage loans was $6,872,000. Interest earned on these loans totaled $171,000 and $189,000 for the three months ended December 31, 2003 and December 31, 2002, respectively. On February 6, 2003 BRT closed a loan for $16,100,000 to a borrower who currently has several loans outstanding. As of February 11, 2004 these loans totaled $40,600,000 which is approximately 34% of total loans and 23% of total assets.
Note 4 - Investment in Unconsolidated Joint Ventures at Equity The Trust is a partner in seven unconsolidated joint ventures which own and operate seven properties. In addition to making an equity contribution, the Trust may hold a first or second mortgage on the property owned by the venture. Unaudited condensed financial information for the two most significant joint ventures is shown below. <TABLE> <CAPTION> Blue Hen Venture ---------------- December 31, September 30, 2003 2003 ---- ---- <S> <C> <C> Condensed Balance Sheet Cash and cash equivalents $ 1,040 $ 1,211 Real estate investments, net 14,828 14,712 Other assets 325 409 -------- -------- Total assets $ 16,193 $ 16,332 ======== ======== Mortgages payable $ 2,897 $ 3,158 Other liabilities 182 266 Equity 13,114 12,908 -------- -------- Total liabilities and equity $ 16,193 $ 16,332 ======== ======== Trust's equity investment $ 5,501 $ 5,368 ======== ======== Three Months Ended December 31, 2003 2002 ---- ---- Condensed Statement of Operations Revenues, primarily rental income $ 754 $ 689 -------- ------- Operating expenses 362 296 Depreciation 124 117 Interest expense 62 82 -------- -------- Total expenses 548 495 -------- -------- Net income attributable to members $ 206 $ 194 ======== ======== Trust's share of net income $ 103 $ 97 ======== ======== Amount recorded in income statement $ 134 $ 97 ======== ======== </TABLE> The unamortized excess of the Trust's share of the net equity over its investment in the Blue Hen joint venture that is attributable to building and improvements is being amortized over the life of the related property. The portion that is attributable to land will be recognized upon the disposition of the land. During the quarter ended December 31, 2003 $31,000 of the excess was amortized into income.
Note 4 - Investment in Unconsolidated Joint Ventures at Equity (Continued) <TABLE> <CAPTION> Rutherford Glen December 31, September 30, 2003 2003 ---- ---- <S> <C> <C> Condensed Balance Sheet Cash and cash equivalents $ 100 $ 195 Real estate investments, net 18,450 18,632 Other assets 272 293 -------- -------- Total assets $ 18,822 $ 19,120 ======== ======== Mortgages payable $ 18,912 $ 18,966 Other liabilities 332 481 Equity (422) (327) -------- -------- Total liabilities and equity $ 18,822 $ 19,120 ======== ======== Trust's equity investment $ (162) $ (120) ======== ======= </TABLE> <TABLE> <CAPTION> Three Months Ended December 31, 2003 2002 ---- ---- <S> <C> <C> Condensed Statement of Operations Revenues, primarily rental income $ 578 $ 597 ------- ------- Operating expenses 288 227 Depreciation 182 182 Interest expense 357 367 ------- ------- Total expenses 827 776 ------- ------- Net income attributable to members $ (249) $ (179) ======== ======= Trust's share of net income $ (124) $ (89) ======== ======= Amount recorded in income statement $ (124) $ (89) ======== ======= </TABLE> Note 5 - Available-For-Sale Securities Included in available-for-sale securities are 1,059,200 shares of Entertainment Properties Trust (NYSE:EPR), which have a cost basis of $13,913,000 and a fair value at December 31, 2003 of $36,765,000. The shares held by the Trust represent approximately 5.26% of the outstanding shares of Entertainment Properties Trust as of October 24, 2003. During the quarter ended December 31, 2003 the Trust sold 35,600 shares of EPR. These shares, which had a cost basis of $468,000, were sold for $1,188,000 resulting in a gain of $720,000. Also included in available-for-sale securities are 133,950 shares of Atlantic Liberty Financial Corp. (NASDAQ:ALFC), which have a cost basis of $2,034,000 and a fair market value of $2,621,000. The shares held by the Trust represent approximately 7.83% of the outstanding shares of Atlantic Liberty as of September 30, 2003. Note 6 -Borrowed Funds We maintain a $30 million revolving credit agreement with North Fork Bank. The facility matures on June 1, 2006. The Trust also may extend the term of the facility for two one year periods for a fee of $75,000 each year. Borrowings under the facility are secured by specific receivables and the credit agreement provides that the amount borrowed will not exceed 65% of the collateral pledged. As of December 31, 2003, BRT had provided collateral, as defined under the credit agreement, that would permit BRT to borrow the full amount of the facility. Interest charged on the outstanding balance is at prime plus 1/2%. At December 31, 2003, there was $750,000 outstanding on this facility. For the three months ended December 31, 2003 the average balance outstanding on the credit line was $3,981,000 and the Trust recorded $46,000 of interest expense. In addition to its credit facility BRT has the ability to borrow funds through a margin account. In order to maintain the account BRT pays an annual fee, equal to .3% of the market value of the pledged securities, which is included in interest expense. At December 31, 2003, there was an outstanding balance of $11,125,000. The average outstanding balance for the three months ended December 31, 2003 was $8,596,000 and the average interest rate paid was 5.57%. Interest expense for the three months ended December 31, 2003 was $123,000, which includes the fees charged to maintain the margin account. At December 31, 2003, marketable securities with a fair value of $36,765,000 were pledged as collateral. Note 7 - Comprehensive Income Comprehensive income for the three month period ended was as follows: Three Months Ended December 31, 2003 2002 ---- ---- Net income $ 3,294 $ 2,836 Other comprehensive income - Unrealized gain on available - for-sale securities 4,526 1,926 ------- ------- Comprehensive income $ 7,820 $ 4,762 ======= ======= Accumulated other comprehensive income, which is solely comprised of the net unrealized gain on available-for-sale securities was $23,808,000 and $14,352,000 at December 31, 2003 and 2002, respectively. Note 8 - Recent Accounting Pronouncements Accounting for Stock-Based Compensation The Financial Accounting Standards Board issued Statement No. 148 to amend Statement No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, Statement No. 148 amends the disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. However, the Company has continued to account for options in accordance with the provision of APB Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations. See Note 2 for pro forma net income information. Consolidation of Variable Entities Interest In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, "Consolidation of Variable Interest Entities", which explains how to identify variable interest entities ("VIE") and how to assess whether to consolidate such entities. The provisions of this interpretation apply to the first fiscal year or interim period beginning after March 15, 2004. Management is currently reviewing its unconsolidated joint ventures to determine if any of them represent variable interest entities which would require consolidation by the Trust pursuant to the interpretation. Accounting for Certain Financial Instruments With Characteristics of Both Liabilities and Equity. In May, 2003 the FASB issued SFAS No. 150 "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity, and is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. As a result of further discussion by FASB on October 8, 2003, the FASB clarified that minority interests in consolidated partnerships with specified finite lives should be reclassified as liabilities and presented at fair market value unless the interests are convertible into the equity of the parent. Fair market value adjustments occurring subsequent to July 1, 2003 would be recorded as a component of interest expense. At their October 29, 2003 meeting, the FASB agreed to indefinitely defer the implementation of a portion of SFAS No. 150 regarding the accounting treatment for minority interests in finite life partnerships. Therefore, until a final resolution is reached, the Company will not implement this aspect of the standard. If the Company were to adopt this aspect of the standard under its current provisions, it is not expected to have a material impact on the Company's financial statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements With the exception of historical information, this report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933. We intend such forward-looking statements to be covered by the safe harbor provision for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and include this statement for purposes of complying with these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words "may", "will", "believe", "expect", "intend", "anticipate", "estimate", "project", or similar expressions or variations thereof. Forward-looking statements should not be relied on since they involve known and unknown risks, uncertainties and other factors which are, in some cases, beyond our control and which could materially affect actual results, performance or achievements. Investors are cautioned not to place undue reliance on any forward-looking statements. Liquidity and Capital Resources We are primarily engaged in the business of originating and holding for investment senior and junior real estate mortgages secured by income producing property. Our investment policy emphasizes short-term mortgage loans. We also purchase senior and junior participations in short term mortgage loans and originate participating mortgage loans and loans to joint ventures in which we are an equity participant. Repayments of real estate loans in the amount of $81,133,000 are due and payable to us during the twelve months ending December 31, 2004, including $3,145,000 currently not earning interest and due on demand. The availability of mortgage financing secured by real property and the market for selling real estate is cyclical. Since these are the principal sources for the generation of funds by our borrowers to repay our outstanding real estate loans, we cannot project the portion of loans maturing during the next twelve months which will be paid or the portion of loans which will be extended for a fixed term or on a month to month basis. We maintain a $30,000,000 revolving credit facility with North Fork Bank. Borrowings under the facility are secured by specific receivables and the agreement provides that the amount borrowed will not exceed 65% of qualified first mortgage loans pledged to North Fork Bank. As of December 31, 2003, we had provided collateral that would permit us to borrow the entire amount under the facility. Interest is charged on the outstanding balance at prime plus 1/2% (currently 4 1/2% per annum). The facility matures June 1, 2006 and may be extended, at our option, for two one year terms. At December 31, 2003, there was $750,000 outstanding on this facility. We also have the ability to borrow on margin, using the shares we own in Entertainment Properties Trust as collateral. At December 31, 2003 there was approximately $14,678,000 available under this facility of which $11,124,000 was outstanding. The amount available under the facility will be reduced if the market value of the stock of Entertainment Properties Trust declines. During the three months ended December 31, 2003, we generated cash of $1,922,000 from operations, $11,333,000 from real estate loan collections, $7,120,000 from borrowings on existing facilities and $1,192,000 from the sale of securities. These funds, in addition to cash on hand, were used primarily to fund real estate loan originations of $34,751,000 and pay shareholder dividends of $2,711,000. Our cash and cash equivalents were $6,966,000 at December 31, 2003. We will satisfy our liquidity needs from cash and liquid investments on hand, the credit facility with North Fork Bank, the availability in our margin account collateralized by shares of Entertainment Properties Trust, interest and principal payments received on outstanding real estate loans and net cash flow generated from the operation and sale of real estate assets. Results of Operations Interest and fees on real estate loans declined by $340,000, or 12%, to $2,570,000 for the three months ended December 31, 2003 from $2,910,000 for the three months ended December 31, 2002. A decrease in the average rate earned on the portfolio to 11.15% in the three months ended December 31, 2003 from 12.11% in the three months ended December 31, 2002 caused a $194,000 decrease. The decline in the average interest rate earned is due to a general decline in interest rates and an increase in non-accruing loans as compared to the prior year's quarter. During the three months ended December 31, 2002 a previously non-earning loan was paid off resulting in the recognition of accumulated earned interest of $105,000. A $10,000 decline in fee income was realized in the three months ended December 31, 2003 as a result of decreased extension fee income. During the current quarter the average balance of loans outstanding declined by $1.0 million accounting for a decline of $30,000 Other revenues, primarily investment income, decreased to $571,000 in the three months ended December 31, 2003, from $673,000 in the three months ended December 31, 2002, a decrease of $102,000, or 15%. The decline was primarily caused by a decrease in the amount of dividends received on our REIT securities caused by the sale of a portion of these securities over the prior fiscal year and the current quarter. Interest expense on borrowed funds increased to $169,000 in the three months ended December 31, 2003 from $106,000 in the three months ended December 31, 2002. The increase of $63,000, or 60%, is due to an increase in the average balance of borrowings outstanding to $12.6 million in the current three month period from $8.2 million in the comparable three month period in the prior fiscal year. This resulted in an increase of $40,000. The remaining $23,000 of increase in interest expense was caused by an overall increase in the cost of borrowings from 5.02% in the prior period quarter to 5.25% in the current quarter. The average interest rate includes an annual fee of .3%, which is based on the market value of the pledged shares we own in Entertainment Properties Trust, that have appreciated in value over the prior period. The Advisor's fee, which is calculated based on invested assets, increased $64,000, or 28%, in the three months ended December 31, 2003 to $298,000 from $234,000 in the three months ended December 31, 2002. In the current quarter we experienced an increase of $29 million in the outstanding balance of invested assets, the basis upon which the fee is calculated, thereby causing an increase in the fee. General and administrative expenses increased $122,000, or 18%, from $676,000 in the three months ended December 31, 2002 to $798,000 in the three months ended December 31, 2003. An increase of $52,000 was recorded in professional fees. In the prior years quarter we received reimbursement of legal expenses from borrowers upon the payoff of two loans thereby reducing our professional fee expense. Compensation and related costs increased $39,000 from the prior period quarter, the result of increased staffing and the amortization of restricted stock issued in the prior fiscal year. In addition, there was a $13,000 increase in the allocation of personnel and other expenses computed in accordance with our Shared Services Agreement, as compared to the prior years quarter, the result of an increase in the level of business activity in the last two months of the current quarter. Other taxes decreased $56,000, or 44%, in the three months ended December 31, 2003 from $130,000 to $74,000. The amounts in both periods represents primarily federal excise tax on income generated but not yet distributed. In the current quarter the Trust lowered the accrual for Federal excise tax expense to reflect the classification of a portion of dividends received from another REIT as a non taxable return of capital. Equity in earnings of unconsolidated ventures decreased $20,000, or 33%, in the three months ended December 31, 2003 to $43,000 from $63,000 in the three months ended December 31, 2002. This decline is primarily due to a loss generated by one of the Trust's joint ventures. This venture, which owns and operates a multifamily apartment complex in the Atlanta, Georgia area, continues to show losses due to a weak rental market in the area. Gain on the sale of real estate assets increased $396,000 or 202% in the three months ended December 31, 2003 to $591,000 from $195,000 in the three month period ended December 31, 2002. This resulted from the sale of two cooperative apartment units in the current period versus one unit sold in the prior period. Gain on sale of available-for-sale securities increased to $720,000 in the three month period ended December 31, 2003 from $-0- in the three month period ended December 31, 2002. The gain in the current three month period resulted from the sale of 35,600 shares of Entertainment Properties Trust which resulted in net proceeds of $1,188,000 and had a cost basis of $468,000. Item 3. Quantitative and Qualitative Disclosures About Market Risks Our primary component of market risk is interest rate sensitivity. Our interest income and to a lesser extent our interest expense is subject to changes in interest rates. We seek to minimize these risks by originating loans that are indexed to the prime rate, with a stated minimum interest rate, and borrowing, when necessary, from our available credit line which is also indexed to the prime rate. At December 31, 2003, approximately 68% of our loan portfolio was variable rate based primarily on the prime rate. Any changes in the prime interest rate could have a positive or negative effect on our net interest income. When determining interest rate sensitivity, we assume that any change in interest rates is immediate and that the interest rate sensitive assets and liabilities existing at the beginning of the period remain constant over the period being measured. We assessed the market risk for our variable rate mortgage receivables and variable rate debt and believe that a one percent increase in interest rates would have approximately a $402,000 positive effect on income before taxes and a one percent decline in interest rates would also have approximately a $15,000 positive effect on income before taxes. In addition, we originate loans with short maturities and maintain a strong capital position. At December 31, 2003 our loan portfolio was primarily secured by properties located in the New York metropolitan area, New Jersey, California and Delaware and it is therefore, subject to risks associated with the economies of these localities. Item 4. Controls and Procedures Our president and chief executive officer, senior vice president-finance and vice president and chief financial officer have participated in the design and implementation of our disclosure controls and procedures and have evaluated our disclosure controls and procedures as of the end of the period covered by this quarterly report on Form 10-Q. Based on that evaluation they have concluded that the controls and procedures are effective as of December 31, 2003. There have not been any significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation, no corrective actions were taken with regard to significant deficiencies and material weaknesses. PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 31.1 Certification of President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Exhibit 31.2 Certification of Senior Vice President-Finance pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Exhibit 31.3 Certification of Vice President and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Exhibit 31.4 Certification of President and Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Exhibit 31.5 Certification of Senior Vice President-Finance pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Exhibit 31.6 Certification of Vice President and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K On December 19, 2003 BRT filed an 8-K attaching a copy of its press release reporting its results of operations for the fiscal year ended September 30, 2003.
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BRT REALTY TRUST Registrant February 12, 2003 /s/ Jeffrey A. Gould - ------------------ ----------------------------------- Date Jeffrey A. Gould, President February 12, 2003 /s/ George Zweier - ----------------- ----------------------------------- Date George Zweier, Vice President and Chief Financial Officer (principal financial officer)
EXHIBIT 31.1 CERTIFICATION I, Jeffrey A. Gould, President and Chief Executive Officer of BRT Realty Trust, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q for the quarter ended December 31, 2003 of BRT Realty Trust; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; c) Disclosed in this report any change in the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 12, 2004 /s/ Jeffrey A. Gould -------------------- Jeffrey A. Gould President and Chief Executive Officer
EXHIBIT 31.2 CERTIFICATION I, David W. Kalish, Senior Vice President-Finance of BRT Realty Trust, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q for the quarter ended December 31, 2003 of BRT Realty Trust; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; c) Disclosed in this report any change in the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): c) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and d) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 12, 2004 /s/ David W. Kalish ------------------- David W. Kalish Senior Vice President-Finance
EXHIBIT 31.3 CERTIFICATION I, George Zweier, Vice President and Chief Financial Officer of BRT Realty Trust, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q for the quarter ended December 31, 2003 of BRT Realty Trust; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; c) Disclosed in this report any change in the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): e) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and f) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 12, 2004 /s/ George Zweier ----------------- George Zweier Vice President and Chief Financial Officer
EXHIBIT 32.1 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 (SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002) The undersigned, Jeffrey A. Gould, the Chief Executive Officer of BRT Realty Trust, (the "Registrant"), does hereby certify, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge, based upon a review of the Quarterly Report on Form 10-Q for the quarter ended December 31, 2003 of the Registrant, as filed with the Securities and Exchange Commission on the date hereof (the "Report"): (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. Date: February 12, 2004 /s/ Jeffrey A. Gould -------------------- Jeffrey A. Gould Chief Executive Officer
EXHIBIT 32.2 CERTIFICATION OF SENIOR VICE PRESIDENT-FINANCE PURSUANT TO 18 U.S.C. SECTION 1350 (SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002) The undersigned, David W. Kalish, Senior Vice President-Finance of BRT Realty Trust, (the "Registrant"), does hereby certify, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge, based upon a review of the Quarterly Report on Form 10-Q for the quarter ended December 31, 2003 of the Registrant, as filed with the Securities and Exchange Commission on the date hereof (the "Report"): (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. Date: February 12, 2004 /s/ David W. Kalish -------------------------------- David W. Kalish Senior Vice President-Finance
EXHIBIT 32.3 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 (SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002) The undersigned, George Zweier, the Chief Financial Officer of BRT Realty Trust, (the "Registrant"), does hereby certify, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge, based upon a review of the Quarterly Report on Form 10-Q for the quarter ended December 31, 2003 of the Registrant, as filed with the Securities and Exchange Commission on the date hereof (the "Report"): (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. Date: February 12, 2004 /s/ George Zweier ----------------------------------- George Zweier Chief Financial Officer