BRT Apartments - 10-Q quarterly report FY

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BRT REALTY TRUST AND SUBSIDIARIES

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Part 1 - FINANCIAL INFORMATION

Item 1. Financial Statements

BRT REALTY TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share data)

See accompanying notes to consolidated financial statements.

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BRT REALTY TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Dollars in thousands, except share data)

See accompanying notes to consolidated financial statements.

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BRT REALTY TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in Thousands)

See accompanying notes to consolidated financial statements.

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BRT REALTY TRUST AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2011

Note 1 — Organization and Background

BRT Realty Trust is a business trust organized in Massachusetts.  Our primary business is to originate and hold for investment senior mortgage loans secured by commercial and multi-family real estate property in the United States. This includes originating loans to persons purchasing their own or third party mortgage debt, at a discount to the principal amount thereof.  Generally, in such transactions, we purchase the mortgage and our counterparty is obligated to repurchase such mortgage within a specified period. The loans we originate generally have relatively high yields and are short-term or bridge loans with a duration ranging from six months to one year.  It is our policy to lend at a floating rate of interest based on a spread over the prime rate, with a stated minimum rate, though we originate fixed rate loans as circumstances dictate.  We generally receive an origination fee for the loans we originate. We conduct our operations to qualify as a real estate investment trust, or REIT, for Federal income tax purposes.

We also participate as an equity investor in joint ventures which acquire multi-family residential or other real estate assets located throughout the United States, and purchase securities of other REITs.

Note 2- Basis of Preparation

The accompanying interim unaudited consolidated financial statements as of December 31, 2011 and for the three months ended December 31, 2011 and 2010 reflect all normal recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the results for such interim periods. The results of operations for the three months ended December 31, 2011 are not necessarily indicative of the results for the full year.  The balance sheet as of September 30, 2011 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

Certain items on the consolidated financial statements for the preceding period have been reclassified to conform with the current year’s presentation.

The consolidated financial statements include the accounts and operations of BRT Realty Trust, its wholly owned subsidiaries, and its majority-owned or controlled real estate entities and its interests in variable interest entities in which it is the primary beneficiary.  Material intercompany items and transactions have been eliminated. BRT Realty Trust and its subsidiaries are hereinafter referred to as “BRT” or the “Trust.”

With respect to its unconsolidated joint ventures, as (i) the Trust is primarily the managing member but does not exercise substantial operating control over these entities or the Trust is not the managing member and (ii) such entities are not variable interest entities, the Trust has determined that such joint ventures should be accounted for under the equity method of accounting for financial statement purposes.

RBH-TRB Newark Holdings LLC was determined to be a Variable Interest Entity (“VIE”) because the total equity investment at risk is not sufficient to permit it to finance its activities without additional subordinated financial support by its equity holders.  The Trust was determined to be the primary beneficiary as it has a controlling financial interest in the VIE as it has the power to direct the

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Note 2 - Basis of Preparation (Continued)

activities of the VIE and has the obligation to absorb a majority of the VIE’s expected losses.  For these reasons, the Trust has consolidated the operations and assets of this VIE in the Trust’s consolidated financial statements.

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, 2011.

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 consolidated financial statements.  Actual results could differ from those estimates.

Note 3 - Equity

Common Share Dividend Distribution

During the quarter ended December 31, 2011, the Trust did not declare a dividend to its shareholders.

Restricted Shares

An aggregate of 850,000 shares have been authorized for issuance under the Trust’s equity incentive plans, of which 229,560 shares remain available for future grants at December 31, 2011. The restricted shares issued vest five years from the date of grant and under specified circumstances, including a change in control, may vest earlier. Since inception of the plans, 126,410 shares have vested and 491,705 shares have been granted and have not yet vested. For accounting purposes, the restricted stock is not included in the outstanding shares shown on the consolidated balance sheet until they vest, but is included in the earnings per share computation.  The estimated fair value of restricted stock at the date of grant is being amortized ratably into expense over the applicable vesting period. For the three months ended December 31, 2011 and 2010, the Trust recorded $210,000 and $208,000 of compensation expense, respectively, as a result of the outstanding restricted shares.  At December 31, 2011, $1,591,000 has been deferred as unearned compensation and will be charged to expense over the remaining weighted average vesting period of approximately 2.85 years.

Per Share Data

Basic earnings (loss) per share attributable to holders of shares of beneficial interest was determined by dividing net income (loss) for the period by the weighted average number of common shares outstanding during each period.

Diluted earnings (loss) per share attributable to holders of shares of beneficial interest reflects the potential dilution that could occur if securities or other contracts to issue common shares were exercised or converted into common shares or resulted in the issuance of common shares that shared in the earnings of the Trust.

Basic and diluted shares outstanding for the three months ended December 31, 2011 and 2010 were 13,982,164 and 13,977,706, respectively.

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Note 6 - Allowance for Possible Losses

A loan evaluated for impairment is deemed to be impaired when based on current information and events, it is probable, in the judgment of management, that the Trust will not be able to collect all amounts due according to the contractual terms of the loan documents. When making this evaluation numerous factors are considered, including, market evaluations of the underlying collateral, estimated operating cash flow from the property during the projected holding period, and estimated sales value computed by applying an estimated capitalization rate to the projected stabilized net operating income of the specific property, less selling costs, discounted at market discount rates. If upon completion of the evaluation, the value of the collateral securing the loan is less than the recorded investment in the loan, an allowance is created with a corresponding charge to expense. The fair values related to the collateral securing impaired loans, if any,  are based on discounted cash flow models, which are considered to be level 3 within the fair value hierarchy.  When the Trust acquires title to the property, the loan loss allowance is adjusted by charging off all amounts related to the loan and recording the property at its adjusted carrying value.

At December 31, 2011 and September 30, 2011 the Trust did not have an allowance for possible loan loss.

Note 7 - Real Estate Properties

A summary of real estate properties owned is as follows (dollars in thousands):

(a) Represents the real estate assets of RBH-TRB Newark Holdings LLC, a consolidated VIE which owns 26 operating and development properties in Newark, NJ.  These properties contain a mix of office and retail space, totaling approximately 637,000 square feet.  These assets are subject to blanket mortgages aggregating $27,000,000, held by the Trust, which are eliminated in consolidation.  Several of the assets are also encumbered by other mortgages which are discussed in Note 10 Debt Obligations — Mortgages Payable. The risks associated with our involvement in this VIE have not changed in the three months ended December 31, 2011.  These risks are described in the 10-K for the fiscal year ended September 30, 2011.

For the three months ended December 31, 2011 and 2010 this VIE recorded revenues of $439,000 and $426,000 and operating expenses of $629,000 and $520,000, respectively, excluding interest expense and depreciation.  The Trust made no capital contributions to this venture in the three months ended December 31, 2011.

See Note 11 — Commitments and Contingencies for a discussion of financing transactions entered into by the Newark Joint Venture between December 2011 and February 2012.

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Note 8 — Investment in Unconsolidated Ventures

The Trust was a partner in an unconsolidated joint venture (the “Torchlight Joint Venture”) which venture had the right, but not the obligation, to purchase certain loans originated by the Trust. On November 30, 2011, the parties to this joint venture agreed to terminate the investment and exclusivity periods of such venture. As a result, commencing as of November 30, 2011, the Trust is not obligated to present loans it originated for sale to the joint venture.   The Trust wrote off $297,000 of capitalized costs in the current quarter relating to the termination of this arrangement.

The Trust is also a partner in two unconsolidated ventures, each of which owns and operates one property.

The Trust’s share of these three ventures’ earnings was $222,000 and $49,000 for the three months ended December 31, 2011 and 2010, respectively.   The Trust’s equity in these three unconsolidated ventures totaled $1,014,000 and $4,247,000 at December 31, 2011 and September 30, 2011, respectively.

On January 12, 2012, the Trust entered into an unconsolidated joint venture which purchased a 207 unit multi-family complex in Marietta, Georgia.  The Trust’s equity investment was $2.56 million representing an 80% interest in the venture.

Note 9 — Available-For-Sale Securities

The Trust had available for sale securities which consisted solely of equity securities.  Details regarding our available-for-sale securities are presented in the table below (dollars in thousands):

Unrealized gains and losses are reflected as accumulated other comprehensive income-net unrealized gain on available-for-sale securities in the accompanying consolidated balance sheets.

The Trust’s available-for-sale equity securities were determined to be Level 1 financial assets within the valuation hierarchy established by current accounting guidance, and the valuation is based on current market quotes received from financial sources that trade such securities.  All of the available-for-sale securities in an unrealized loss position are not considered to be other than temporary impairment because the Company expects the value of these securities to recover and plans on holding them until at least such recovery.

During the three months ended December 31, 2011, the Trust sold equity securities for $556,000 with a cost basis of $574,000, determined by specific identification.  Accordingly, the Trust recognized a loss of $18,000 from these sales.  In the three months ended December 31, 2010, the Trust sold equity securities for $640,000 with a cost basis of $219,000, determined using average cost.  Accordingly, the Trust recognized a gain of $421,000 from these sales.

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Note 10 — Debt Obligations

Debt obligations consist of the following (dollars in thousands):

Line of credit

On June 22, 2011, the Trust, through a wholly owned subsidiary, entered into a senior secured revolving credit facility with Capital One, N.A. For the three months ended December 31, 2011, fee amortization was $37,000 and is a component of interest expense. At December 31, 2011 and September 30, 2011, there were no outstanding balances on this facility.

Junior Subordinated Notes

At December 31, 2011, the Trust’s junior subordinated notes had an outstanding principal balance of $37,400,000.  The interest rates on the outstanding notes is set forth in the table below:

Interest expense relating to the junior subordinated notes for the three months ended December 31, 2011 and 2010 was $281,000 and $521,000, respectively. Amortization of the deferred costs which is a component of interest expense on borrowed funds was $5,000 and $8,000 for the three months ended December 31, 2011 and 2010, respectively.

Mortgages Payable

The Trust has five first mortgages and one second mortgage outstanding with an aggregate principal balance at December 31, 2011 of $18,629,000.  One of these mortgages, with an outstanding balance at December 31, 2011 of $2,016,000, is secured by a long term leasehold position on a shopping center owned by a consolidated joint venture.  The remaining five mortgages, with outstanding balances at December 31, 2011 of $16,613,000, are secured by individual parcels on two land assemblages in Newark, NJ owned by another consolidated joint venture. The Trust has guaranteed $2,065,000 of one of the mortgage obligations at December 31, 2011, based on the current outstanding balance.  The guarantee will increase to $2,154,000 if the full amount of the $8,600,000 loan is drawn and outstanding.

Interest expense relating to the mortgages payable including amortized mortgage costs for the three months ended December 31, 2011 and 2010 was $456,000 and $290,000 respectively.

During the three months ended December 31, 2011 and 2010, the Trust capitalized interest expense of $311,000 and $162,000 respectively. This interest is being capitalized in connection with the development of a portion of our Newark Joint Venture’s properties.

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Note 11 — Commitment and Contingencies

From December 29, 2011 through February 3, 2012, RBH-TRB East Mezz Urban Renewal Entity LLC (the “NJV Subsidiary”), entered into a series of agreements and transactions pursuant to which it obtained access to approximately $50 million of financing for the construction of two buildings at properties owned by the Newark Joint Venture (as defined).  Generally, the properties are located along Halsey Street and Maiden Lane in Newark, NJ (collectively, the “Property”).  The funds are to be used to construct: (i) an approximately 92,000 gross square foot building of which 58,608 rentable square feet have been leased to two charter schools and 19,822 rentable square feet will be used for retail space; and (ii) an approximately 40,000 gross square foot building of which approximately 30,225 rentable square feet has been leased to a charter school and a day care center and approximately 5,700 rentable square feet will be leased for retail space. The funds will be made available to the NJV Subsidiary upon the satisfaction of specified benchmarks.

The schools and the day care have entered into 20 year leases - the term of the applicable lease generally commences when the tenant is able to move into its leased space. The leases with the three schools and day care center provide for aggregate annual rental payments of approximately $1.26 million in the first year after construction increasing to approximately $2.2 million at the end of the lease term.

Set forth below is a summary of the material terms of these financing arrangements:

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The following table summarizes our segment reporting for the three months ended December 31, 2011 (dollars in thousands):

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Note 13 -Segment Reporting (Continued)

The following table summarizes our segment reporting for the three months ended December 31, 2010 (dollars in thousands):

Note 14 — Fair Value of Financial Instruments

Financial Instruments Not Measured at Fair Value

The following methods and assumptions were used to estimate the fair value of each class of financial instruments that are not recorded at fair value on the consolidated balance sheets:

Cash and cash equivalents, accounts receivable (included in other assets), accounts payable and accrued liabilities:  The carrying amounts reported in the consolidated balance sheet for these instruments approximate their fair value due to the short term nature of these accounts.

Real estate loans:  The earning mortgage loans of the Trust which have variable rate provisions, based upon a margin over prime rate, have an estimated fair value which is equal to their carrying value assuming market rate of interest between 12% and 13%.  The earning mortgage loans of the Trust which have fixed rate provisions have an estimated fair value of $13,000 greater than their carrying value assuming market rates of interest between 11% and 12% which we believe reflect institutional lender yield requirements.

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Note 14 — Fair Value of Financial Instruments (Continued)

Junior Subordinated Notes:

At December 31, 2011, the estimated fair value of the Trust’s junior subordinated notes is higher than their carrying value by approximately $349,000 based on a market rate of 4.06%.

Mortgages Payable:

At December 31, 2011, the estimated fair value of the Trust’s mortgages payable is less than their carrying value by approximately $765,000 assuming market interest rates between 4.58% and 17%.  Market rates were determined using current financing transactions provided by third party institutions.

Considerable judgment is necessary to interpret market data and develop estimated fair value.  The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value assumptions.

Financial Instruments Measured at Fair Value

The Trust’s fair value measurements are based on the assumptions that market participants would use in pricing the asset or liability.  As a basis for considering market participant assumptions in fair value measurements, there is a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity and the reporting entity’s own assumptions about market participant assumptions.  Level 1 assets/liabilities are valued based on quoted prices for identical instruments in active markets, Level 2 assets/liabilities are valued based on quoted prices in active markets for similar instruments, on quoted prices in less active or inactive markets, or on other “observable” market inputs and Level 3 assets/liabilities are valued based significantly on “unobservable” market inputs.  The Trust does not currently own any financial instruments that are classified as Level 3.

At December 31, 2011 information regarding the Trust’s financial assets measured at fair value are as follows (dollars in thousands):

Note 15 — New Accounting Pronouncements

In May 2011, the FASB issued ASU No. 2011-04, which is included in ASC 820, Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S GAAP and IFRS. This update defines fair value, clarifies a framework to measure fair value, and requires specific disclosures of fair value measurements. The guidance is effective for the Trust’s interim and annual reporting periods beginning October 1, 2011, and applied prospectively. The Trust does not expect adoption of this guidance to have a material impact on its financial condition, results of operations, or disclosures.

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Note 15 — New Accounting Pronouncements (Continued)

In June 2011, the FASB issued ASU No. 2011-05, which is included in ASC 220, Presentation of Comprehensive Income. This update improves the comparability, consistency, and transparency of financial reporting and increases the prominence of items reported in other comprehensive income. The guidance requires all non-owner changes in shareholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The guidance will be effective for the Trust’s interim and annual reporting periods beginning January 1, 2012, and applied retrospectively. The Trust does not expect adoption of this guidance to have a material impact on its financial condition, results of operations, or disclosures.

Note 16 — Subsequent Events

Subsequent events have been evaluated and any significant events, relative to our consolidated financial statements as of December 31, 2011 that warrant additional disclosure, have been included in the notes to the consolidated financial statements.

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Liquidity and Capital Resources

Liquidity is a measurement of our ability to meet cash requirements, including to fund loan originations, pay operating expenses, repay borrowings, and other general business needs. We require capital to fund loan originations, acquire properties and pay operating expenses.  Our current sources of capital and liquidity primarily consist of our cash, marketable securities, and our participation arrangement with 512 Lending LLC.  In the first quarter of fiscal 2012, we originated $25.5 million in mortgage loans and had loan payoffs of $51.7 million and as a result, at December 31, 2011, our total available liquidity increased to approximately $80.2 million, including approximately $76.6 million of cash and cash equivalents.

We believe we have sufficient capital to meet our operating expenses in fiscal 2012, to fund any capital contributions required by the general operations of the Newark Joint Venture, to engage in our primary lending business and to acquire properties.

The Newark Joint Venture may borrow up to $8.6 million (of which $8.2 million had been borrowed at December 31, 2011) to fund specified development activities with respect to the Teachers Village project. 

From December 29, 2011 through February 3, 2012, a subsidiary of the venture entered into a series of agreements and transactions pursuant to which it gained access to approximately $50 million of financing to fund the construction of two buildings at the Teacher’s Village site in Newark, New Jersey.  These funds will be released to the venture from time to time upon satisfaction of specified conditions of this project. The venture is seeking up to an additional $85 million to complete the construction of an additional six residential/retail buildings at such site. No assurance can be given that the Newark Joint Venture will obtain the remaining financing or that if such financing is obtained, that the project will be profitable.  BRT does not anticipate using its own capital to provide the required financing.

Participation Arrangement

In November 2011, we entered into an arrangement with 512 Lending, LLC pursuant to which each of us, with specified exceptions, must present to the other the opportunity (but not the obligation) to participate in loans such party originates. The arrangement expires in November 2014, subject to earlier termination by either party on not less than 60 days’ notice for any reason. It is generally anticipated that 512 Lending will fund between 50% to 80% of the principal amount of loans we originate and in which they elect to participate and that we will fund up to 20% of the principal amount of loans they originate and in which we elect to participate.  To date, neither party has, pursuant to this arrangement, participated in loans originated by the other party.

Cash Distribution Policy

The Board of Trustees reviews the dividend policy regularly. The Trust has net operating loss carry forwards from prior years to offset future income.  It is highly unlikely that we will pay or be required to pay any dividend in 2012 and for several years thereafter in order for the Trust to retain its REIT status.

Off Balance Sheet Arrangements

At December 31, 2011, the Trust had guaranteed $2,065,000 of a mortgage obligation of its Newark Joint Venture.  The outstanding balance of the mortgage at December 31, 2011 was $8,244,000.  The guarantee will increase to $2,154,000 if the full amount of the $8,600,000 loan is drawn and outstanding.

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Item 3.  Quantitative and Qualitative Disclosures About Market Risks

Our primary component of market risk is interest rate sensitivity.  Our interest income 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. At December 31, 2011, approximately 84% the principal amount of our outstanding mortgage loans were comprised of variable rate based loans tied to the prime rate and with a stated minimum interest rate. 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 as of December 31, 2011 and believe that a one percent increase in interest rates would have a positive annual effect of approximately $424,000 on income before taxes and a one percent decline in interest rates would have no annual effect on income before taxes because all of our variable rate loans have a stated minimum rate.  As of December 31, 2011, 40% of our loan portfolio was secured by properties located in the New York metropolitan area, 28% in Florida and 23% in Maryland and we are therefore subject to risks associated with those markets.

Item 4.  Controls and Procedures

As required under Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, we carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer, Senior Vice President-Finance and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2011.  Based upon that evaluation, the Chief Executive Officer, Senior Vice President-Finance and Chief Financial Officer concluded that our disclosure controls and procedures as of December 31, 2011 are effective.

There have been no changes in our internal control over financial reporting during the quarter ended December 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

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The schools and the day care have entered into 20 year leases - the term of the applicable lease generally commences when the tenant is able to move into its leased space. The leases with the three schools and day care center provide for aggregate annual rental payments of approximately $1.26 million in the first year after construction increasing to approximately $2.2 million at the end of the lease term.  The marketing effort to lease the retail space in these buildings has commenced.

Set forth below is a summary of the material terms of these financing arrangements:

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Item 6.  Exhibits

*  Indicates management contract or compensatory plan or arrangement.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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