BRT Apartments - 10-Q quarterly report FY

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC  20549

FORM 10-Q

For the quarterly period ended June 30, 2012

OR

Commission File Number 001-07172

BRT REALTY TRUST

(Exact name of Registrant as specified in its charter)

516-466-3100

(Registrant’s telephone number, including area code)

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 o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

Indicate the number of shares outstanding of each of the issuer’s classes of stock, as of the latest practicable date.

14,056,212 Shares of Beneficial Interest,

$3 par value, outstanding on August 5, 2012

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Note 3 — Equity (Continued)

vesting period. For the three months ended June 30, 2012 and 2011 the Trust recorded $183,000 and $210,000 of compensation expense, respectively, and for the nine months ended June 30, 2012 and 2011, recorded $574,000 and $636,000 of compensation expense, respectively.  At June 30, 2012, $2,076,000 has been deferred as unearned compensation and will be charged to expense over the remaining weighted average vesting period of approximately 2.84 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 June 30, 2012 and 2011 were 14,056,357 and 14,070,774, respectively and for the nine months ended June 30, 2012 and 2011 were 14,029,364 and 14,031,861, respectively.

The impact of dilutive securities is not included in the computation of loss per share for the three and nine months ended June 30, 2011, as the inclusion of such common share equivalents would be anti-dilutive.

Note 4 - Real Estate Loans

Information relating to real estate loans, all of which are earning interest, is summarized as follows (dollars in thousands):

The Trust recognized cash basis interest of $149,000 and $452,000 on non-earning loans in the three and nine months ended June 30, 2011, respectively.

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Note 4 - Real Estate Loans (Continued)

At June 30, 2012, one borrower had two loans outstanding that in the aggregate were in excess of 5% of total assets. Information regarding these loans are set forth in the table below (dollars in thousands):

Substantially all of the Trust’s loan portfolio consists of senior mortgage loans secured by real properties, 44% of which are located in New York, 19% in Florida, 18% in Maryland, and 19% in Georgia.

Note 5 - Real Estate Loan Held For Sale

At September 30, 2011, the Trust had one loan classified as held for sale. The loan, which represented a pari passu interest in a loan with a principal balance of approximately $17 million, had a carrying value of approximately $8.5 million. In October 2011, pursuant to a Federal Bankruptcy Court approved joint plan of reorganization, the Trust and its loan participant sold the rights to the loan for net proceeds of approximately $23.5 million.  The Trust recognized a gain of $3.2 million on the sale representing its 50% interest in the loan. The Trust provided $15 million of financing for the purchase which was paid off on December 5, 2011.

Note 6 - Allowance for Possible Losses

At June 30, 2012 and September 30, 2011 the Trust did not have an allowance for possible loan losses.

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 operating and development properties in Newark, NJ.  These properties contain a mix of office and retail space, totaling approximately 640,000 square feet.  These assets are subject to blanket mortgages aggregating $23,250,000, held by the Trust, which are eliminated in

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Note 7 - Real Estate Properties (Continued)

consolidation.  Several of the assets are also encumbered by other mortgages which are discussed in Note 10 Debt Obligations — Mortgages Payable.

(b) On March 22, 2012, the Trust, through a consolidated joint venture, purchased a 542 unit multi-family residential property located in Palm Beach Gardens, Florida.  The purchase price was $59,400,000 exclusive of acquisition costs of $1,550,000 which were expensed in the three months ended March 31, 2012.  The Trust has an 80% interest in this joint venture.  The property is encumbered by a $45,200,000 mortgage — see Note 10 Debt Obligations — Mortgages Payable.  The Trust made a capital contribution of $14,480,000 representing its proportionate share of capital required to purchase and improve the property.

On March 30, 2012, the Trust, through a consolidated joint venture, purchased a 208 unit multi-family residential property located in Melbourne, Florida.  The purchase price was $9,300,000 exclusive of $238,000 of acquisition costs which were expensed in the quarter ended March 31, 2012.  The Trust has an 80% interest in this joint venture.  The property is encumbered by a $7,680,000 mortgage — see Note 10 Debt Obligations — Mortgages Payable.  The Trust made a capital contribution of $3,120,000 representing its proportionate share of capital required to purchase and improve the property.

On June 20, 2012, the Trust, through a consolidated joint venture, purchased a 324 unit multi-family residential property located in Collierville, Tennessee.  The purchase price was $32,100,000 exclusive of $476,000 of acquisition costs which were expensed in the quarter ended June 30, 2012.  The Trust has an 80% interest in this joint venture.  The property is encumbered by a $25,680,000 mortgage — see Note 10 Debt Obligations — Mortgages Payable.  The Trust made a capital contribution of $6,220,000 representing its proportionate share of capital required to purchase and improve the property.

Note 8 — Investment in Unconsolidated Ventures

The Trust is a partner in unconsolidated ventures which own and operate in the aggregate four properties.  The Trust’s share of earnings (loss) in all of its unconsolidated joint ventures, including a joint venture engaged in purchasing loans that ceased investment activities in November 2011, was $20,000 and $60,000 for the three months ended June 30, 2012 and 2011, respectively, and $(95,000) and $195,000 for the nine months ended June 30, 2012 and 2011, respectively.  The Trust’s equity in these unconsolidated ventures totaled $3,914,000 and $4,247,000 at June 30, 2012 and September 30, 2011, respectively.

On January 12, 2012, an unconsolidated joint venture in which the Trust has an 80% interest purchased a 207 unit multi-family residential property in Marietta, Georgia.  The Trust’s equity investment was $2,560,000.

On February 23, 2012, an unconsolidated joint venture in which the Trust has an 80% interest purchased a 170 unit multi-family residential property in Lawrenceville, Georgia.  The Trust’s equity investment was $2,200,000.

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Note 9 — Available-For-Sale Securities

Information regarding our available-for-sale securities is set forth in the table below (dollars in thousands):

Unrealized gains and losses are reflected as accumulated other comprehensive income 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 impaired on an other than temporary basis because the Company expects the value of these securities to recover and plans on holding them until at least such recovery.

Information regarding the sales of available-for-sale equity securities is presented in the table below (dollars in thousands):

For 2011 the calculation of gain or loss on sale was determined using an average cost.  For 2012, the gain or loss on sale was determined using specific identification.

During the nine months ended June 30, 2011, the Trust sold available-for-sale debt securities for $3,417,000 which had a basis of $2,925,000 determined using specific cost.  Accordingly, the Trust recognized a gain of $492,000 from these sales.

Note 10 — Debt Obligations

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

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Note 10 — Debt Obligations (Continued)

Mortgages Payable

The Trust had the following obligations outstanding as of the dates indicated all of which are, except as indicated, secured by real property (dollars in thousands):

(1)         On March 29, 2012, a consolidated joint venture which owns a property in Yonkers, NY, refinanced an existing mortgage in the amount of $ 1,990,000 with the current lender.  The new mortgage bears interest at one-month LIBOR plus 3.15%.  In connection with the transaction, the venture entered into an interest rate swap agreement which effectively fixes the interest rate at 5.25%.

(2)         Reflects the mortgage debt obtained with respect to the acquisition of such property in March 2012.

(3)         Reflects the mortgage debt obtained with respect to the acquisition of such property in June 2012.

(4)         From December 29, 2011 through February 2, 2012, subsidiaries of our consolidated Newark Joint Venture entered into a series of agreements and transactions pursuant to which such entities obtained $31.8 million of mortgage financing and $13.7 million in Federal New Markets Tax Credit (the “NMTC”) proceeds.  The NMTC proceeds are recorded as a deferred income on the consolidated balance sheet at June 30, 2012.  The net proceeds of the foregoing, together with $2.5 million in NMTC proceeds received in May 2012, are to be used to construct two buildings at the Teachers Village site.  The remaining proceeds from the transaction which totaled $30.3 million at June 30, 2012 are to be used for construction and are reflected on the consolidated balance sheet as restricted cash-construction holdbacks.  See Note 11 to the Trust’s consolidated financial statements.

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Note 10 — Debt Obligations (Continued)

(5)         TD Bank has the right, in 2018, to require subsidiaries of the Newark Joint Venture to repurchase such debt.  If such right is exercised, such subsidiaries will be required to refinance such debt.  The stated rate of interest thereon is 5.5% per year; however, the United States Treasury Department is covering the interest at the rate of 4.99% per year and accordingly, the effective rate of interest thereon until 2018 is 0.51% per year.

(6)         The debt is to be serviced in full by annual payment-in-lieu of taxes (“PILOT”) of $256,000 in 2013 increasing to approximately $281,000 at maturity.  This obligation is not secured by real property.

(7)         As of June 30, 2012, The Trust had guaranteed $1,653,000 of this mortgage obligation.

Note 11 — Deferred Income (New Markets Tax Credit Transaction)

On February 3, 2012, subsidiaries of the Newark Joint Venture entered into a transaction with an affiliate of Goldman Sachs (“Goldman”) related to the Teacher’s Village project and received proceeds from NMTC credits.  The NMTC program was enacted by Congress to serve low-income and distressed communities by providing investors with tax credit incentives to make capital investments in those communities.  The program permits taxpayers to claim credits against their Federal income tax for up to 39% of qualified investments.

Goldman contributed a net amount of $16,400,000 to the project through a special-purpose entity created to effect the financing transaction and is entitled to receive tax credits against the $60 million qualified investment in the project over the next seven years.  At the end of the seven years, the Newark Joint Venture subsidiaries have the option to acquire the special purpose entity for a nominal fee and it is anticipated that it will exercise this option.

Included in deferred income on the Trust’s consolidated balance sheet at June 30, 2012 is $16,080,000 of the Goldman contribution.  This amount will be recognized into income when the obligation to comply with the requirements of the New Markets Tax Credit program as set forth in the applicable provisions of the Internal Revenue Code of 1986, as amended (the “Code”), is eliminated.  Risks of non-compliance include recapture (i.e. reversal of the benefit the tax credit and the related indemnity obligation of the Newark Joint Venture).  The tax credits are subject to recapture for a seven year period as provided in the Code.

Costs incurred in structuring this transaction are deferred and will be recognized as an expense based on the maturities of the various mortgage financings related to the NMTC transaction.  At June 30, 2012, these costs totaled $7,000,000 and are included in deferred costs on the consolidated balance sheet.

The Trust determined that the special purpose entity is a VIE.  The VIE’s ongoing activities, which include collecting and remitting interest and fees and NMTC compliance, were all considered in the design and are not anticipated to affect the economic performance during the life of the VIE.  Management considered the obligation to deliver tax benefits and provide guarantees to Goldman and the Trust’s obligations to absorb the losses of the VIE.  Management also considered Goldman’s lack of a material interest in the underlying economics of the project.  Management concluded that the Trust is the primary beneficiary and has therefore consolidated the VIE.

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Note 14 — Derivative Financial Instruments

Financial Liabilities

Available-for-sale securities:  Fair values are approximated based on current market quotes from financial sources that track such securities. All of the available-for-sale securities in an unrealized loss position are equity securities and amounts are not considered to be impairment on an other than temporary basis because the Trust expects the value of these securities to recover and plans on holding them until at least such recovery occurs.

Derivative financial instrument:  Fair values are approximated using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of the derivatives. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves, foreign exchange rates, and implied volatilities.  At June 30, 2012, this derivative is included in accounts payable and accrued liabilities on the consolidated balance sheet.

Although the Trust has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with it utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparty.  As of June 30, 2012, the Trust assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives.  As a result, the Trust determined that its derivative valuation is classified in Level 2 of the fair value hierarchy.

Cash Flow Hedges of Interest Rate Risk

The Trust’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements.  To accomplish this objective, the Trust primarily uses interest rate swaps as part of its interest rate risk management strategy.  Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Trust making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income on our consolidated balance sheet and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings.  In March 2012, the Trust entered into an interest rate swap agreement used to hedge the variable cash flows associated with existing variable-rate debt.  The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings.

Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Trust’s variable-rate debt.

As of June 30, 2012, the Trust had the following outstanding interest rate derivative that was designated as a cash flow hedge of interest rate risk (dollars in thousands):

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations