Item 2. PROPERTIES.
The Trust's executive offices are located at 60 Cutter Mill Road, Great Neck, New York, where it occupies approximately 14,500 square feet with Gould Investors L.P., REIT Management Corp., One Liberty Properties, Inc. and other related entities. The building in which the executive offices are located is owned by an affiliate of Gould Investors L.P. The Trust contributed $156,654 to the annual rent in Fiscal 1994.
For a description of the real estate acquired by the Trust in foreclosure, see Item 1, Business; Real Estate Owned.
Item 3.
Item 3. LEGAL PROCEEDINGS.
The Trust is not a defendant in any material pending legal proceedings.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted during the fourth quarter of the fiscal year to a vote of the Trust's security holders.
PART II
Item 5.
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED MATTERS
The Trust's shares of Beneficial Interest ("Beneficial Shares") are listed on the New York Stock Exchange. The following table shows for the quarters indicated, the high and low sales prices of the Trust's Beneficial Shares on the New York Stock Exchange as reported on the Composite Tape.
As of December 1, 1994 there were approximately 2,900 holders of record of the Trust's Beneficial Shares.
The Trust did not declare any cash distributions to shareholders during the years ended September 30, 1993 and 1994.
The Trust qualifies as a real estate investment trust for Federal income tax purposes. In order to maintain that status, it is required to distribute to its shareholders at least 95% of its taxable income. Management believes that as a result of accumulated tax losses the Trust will not be required to make cash distributions for a number of years to maintain its real estate investment trust status. The resumption of cash distributions and the amount and timing of future distributions, if any, will be at the discretion of the Board of Trustees and will depend upon the Trust's financial condition, earnings, cash flow and other factors. The Restated Credit Agreement precludes payment of cash dividends on Beneficial
Shares unless required in order for the Trust to maintain its real estate investment trust status.
Item 6.
Item 6. SELECTED FINANCIAL INFORMATION
The following table, not covered by the report of independent certified public accountants, sets forth selected historical financial data of the Trust for each of the fiscal periods in the five years ended September 30, 1994. This table should be read in conjunction with the detailed information and financial statements of the Trust appearing elsewhere herein.
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Trust was engaged in the business of making and participating in senior and junior real estate mortgages, secured by income producing property and to a lesser extent by unimproved real property. The Trust's investment policy emphasized short-term mortgage loans. Repayments of real estate loans in the amount of $48,513,000 are due during the twelve months ending September 30, 1995 ("Fiscal 1995"), including $18,255,000 which is due on demand. Although there has been improvement in the real estate environment, it is still diffi- cult to refinance existing commercial mortgages and, accordingly the Trust anticipates that a large portion of loans maturing in Fiscal 1995 will be extended for a fixed term or on a month to month basis. The Trust cannot estimate the principal amount of loans which will be paid down and/or paid off over the next twelve months.
Effective September 23, 1992, the Trust entered into an Amended and Restated
Credit Agreement ("Restated Credit Agreement") with five banks. The Restated Credit Agreement extended the maturity date of the loan to June 30, 1995, with the Trust having the right to extend for two additional one year terms if it satisfies certain conditions, principally making certain mandatory repayments and meeting certain ratios. The Trust intends to extend the maturity date of the Restated Credit Agreement to June 30, 1996 and, as of December 1, 1994 the Trust had made all mandatory repayments required by June 30, 1995 and 47% of the mandatory repayment due by June 30, 1996 and meets the required ratios. The Restated Credit Agreement precludes the Trust from engaging in any lending activities except for taking back purchase money mortgages in connection with the sale of real estate.
Under the Restated Credit Agreement the Trust is required to apply 75% of capital event proceeds (proceeds from the sale of real property and mortgages receivable and from pay downs or payoffs of real estate loans) to reduce the principal balance due to the banks, and the balance of 25% is deposited in a cash collateral account maintained with the agent bank. The agent bank is required to disburse funds to the Trust from the cash collateral account upon requisition by the Trust, provided there is no monetary default under the Restated Credit Agreement. To the extent the cash collateral account exceeds $9,000,000 at the end of any month or $10,000,000 within a month, such excess is to be applied to reduce principal. To the extent the cash collateral account is reduced below $9,000,000, the Trust can utilize 25% of capital event proceeds and excess operating cash flow to build the account up to $9,000,000. In October, 1994, the Banks agreed to reduce the 75% requirement to 50% on the next $6,000,000 of capital event proceeds so the Trust can reestablish the cash collateral account to $9,000,000, as the Trust's requirement for funds for capital expenditures at properties owned exceeded the budget established for Fiscal 1994 by about $3,500,000. The increase in capital expenditures is due in large measure to the renovation of a shopping mall in Dover, Delaware from a retail mall to an office park at a cost of approximately $7,000,000. The Restated Credit Agreement also requires a segregated interest reserve account as part of the $9,000,000 cash collateral account, amounting to approximately three months interest payments ($1,448,000 at September 30, 1994). In addition, the Trust maintains its own operating accounts, into which all operating revenues are deposited and from which all operating expenses are paid, and to the extent the operating accounts exceed $500,000 at the end of any month, the excess is deposited into the cash collateral account.
During the twelve months ended September 30, 1994 ("Fiscal 1994"), the Trust had an increase in cash provided by investing activities, as a result of collections from real estate loans of $22,562,000 (net of repayments to participating lenders of $5,479,000) and proceeds from the sale of real estate owned of $8,980,000, net of purchase money mortgages of $6,242,000. The cash provided by investing activities was used in part to reduce the bank debt outstanding to $66,192,000 at
September 30, 1994, a reduction of $26,593,000 from the prior year end. The Trust also paid off loans and mortgages payable in the amount of $4,822,000, $4,237,000 of which was satisfied in conjunction with two sales of real estate owned.
The Trust intends to satisfy its short term liquidity needs from cash flow generated from interest on outstanding real estate loans, net cash flow generated from the operation of properties (all of which were acquired as a result of foreclosure, deed in lieu of foreclosure, or a confirmed plan of reorganization) and from the funds in the cash collateral account. In the opinion of Management, the Restated Credit Agreement by its terms, and the mechanics of the cash collateral account, provide adequate funds for the Trust to operate its business in the ordinary course, to protect its receivables and to operate its real estate (which includes making necessary capital improvements) and sufficient time to dispose of assets and apply the net proceeds therefrom to reduce the amounts outstanding under the Restated Credit Agreement.
During Fiscal 1994, the Trust entered into a project to convert one of its properties held for sale, a regional mall located in Dover, Delaware, into an office park. The Trust has entered into a lease with a major insurance company, requiring the Trust to segregate the funds required for the improvements required under the lease (approximately $5,650,000) into a separate account. The aforementioned segregated funds were deemed restricted at September 30, 1994. A modification to the existing Restated Credit Agreement has been provided by the banks, allowing the Trust to exceed its $9,000,000 budget by $1,000,000, in order to pay for the aforementioned improvements, in addition to its other operational requirements. A further modification was permitted by the banks for the Trust to exceed its $10,000,000 budget, as amended, by an additional $2,500,000. These additional funds will allow the Trust to complete the improvements required under a lease entered into with a bank at the office park, in addition to required expenditures at other real estate owned. In order for the Trust to replenish its cash collateral account, the banks have also agreed to modify the allocation on the next $6,000,000 of capital event proceeds (effective October 28, 1994) and will permit the Trust to retain 50% of such proceeds as opposed to the 25% provided in the Restated Credit Agreement.
RESULTS OF OPERATIONS
1994 VS 1993
The Trust's loan portfolio at September 30, 1994, before giving effect to the allowance for possible losses was $78,007,000 of which $10,268,000 (13% of total real estate loans) is categorized as nonearning, as compared to $122,103,000 at September 30, 1993, of which $26,750,000 (22% of total real estate loans) is
categorized as nonearning. The $44,096,000 decrease in the loan portfolio is due to a combination of repayments of principal on real estate loans (net of repayments to participating lenders), an increase in real estate owned as a result of completion of foreclosure actions and receipt of deeds in lieu of foreclosure, and a settlement with the holder of a first mortgage for $161,000 which represented the net book value on a real estate loan on which the Trust had reserved approximately $10,000,000 in the quarter ended September 30, 1990. This is offset in part by $6,242,000 of purchase money mortgages issued by the Trust in connection with the sale of real estate.
Real estate owned (prior to a valuation allowance of $2,717,000) increased to $54,793,000 at September 30, 1994 from $51,162,000 (prior to a valuation allowance of $3,229,000) at September 30, 1993. The increase of $3,631,000 in real estate owned is primarily a result of real estate acquired by foreclosure or deed in lieu of foreclosure at the aggregate estimated fair value of approximately $17,745,000, offset by the sale of real estate owned, with an aggregate cost basis of approximately $14,401,000 (prior to a valuation allowance of $1,505,000).
Interest and fees on real estate loans decreased to $10,999,000 for Fiscal 1994 as compared to $12,395,000 for the twelve months ended September 30, 1993 ("Fiscal 1993"). This decrease of $1,396,000 was a result of a number of events which occurred during Fiscal 1993, including receipt of past due and accumulated interest of $440,000 upon refinancing by a borrower, collection of approximately $586,000 from court appointed receivers who operated properties securing certain loans, receipt of an $800,000 fee from a borrower as part of a workout and additional interest of $325,000 received upon repayment of two participating real estate loans secured by properties located in Texas. Interest and fees on real estate loans was also reduced in Fiscal 1994 as compared to Fiscal 1993 due to a decrease in earning real estate loans, as a result of payoffs and properties securing real estate loans becoming real estate owned. This decrease was offset in part by receipt of additional interest of approximately $1,100,000 upon payoff of a real estate loan secured by a property located in the Texas marketplace, recognition of an unamortized discount of $565,000 upon early payoff of a real estate loan, collection of approximately $480,000 from court appointed receivers who operated properties securing certain loans and the accrual of deferred interest of approximately $745,000 on another real estate loan secured by properties located in the Texas area.
Operating income on real estate owned increased during Fiscal 1994 by $4,007,000 to $9,175,000 from $5,168,000 in Fiscal 1993. This increase was a result of an increase in the number of properties acquired in foreclosure or by deed in lieu of foreclosure, as well as the leasing of certain of the properties.
Gain on sale of foreclosed properties held for sale for the twelve months ended September 30, 1994, was $1,507,000, as compared to $186,000 for the twelve months ended September 30, 1993. It is the policy of the Trust to offer for sale all real estate owned at prices which management believes represents fair value in the geographic area in which the property is located.
Fiscal 1993 includes a gain on the sale of marketable securities of $115,000. There was no comparable gain during Fiscal 1994.
Interest expense decreased by $1,015,000 in 1994 as compared to 1993 due to a decrease throughout the year of outstanding bank debt, offset by an increase in the average prime interest rate.
The expenses for the twelve months ended September 30, 1994 include a provision for possible loan losses of $4,340,000 as compared to $3,111,000 for Fiscal 1993. A majority, or $2,950,000, of the provision was taken during the fourth quarter of Fiscal 1994, with respect to a real estate loan in which the Trust has a subordinate position in a securitized mortgage portfolio which, although interest is current, went into default in October 1994. Fiscal 1994 also includes a provision for valuation adjustment of $993,000 as compared to $3,388,000 for the prior fiscal year. Of the total valuation allowance taken during the fiscal year ended September 30, 1994, $900,000 was taken with respect to unsold shares and related proprietary leases in three cooperative apartment buildings.
Advisor's fee decreased to $1,052,000 for the twelve months ended September 30, 1994 from $1,295,000 for the prior years comparative period. This decrease of $243,000 is a result of a decrease in total invested assets, the basis on which the advisory fee is calculated. There was a decrease in the real estate loan portion (a 1% fee is paid on real estate loans) offset by a slight increase in the real estate owned portion (a 1/2 of 1% fee is paid on real estate owned).
Operating expenses relating to real estate owned increased in Fiscal 1994 to $5,112,000 from $3,016,000 for Fiscal 1993. The increase is a direct result of an increase in the number of properties acquired in foreclosure or by deed in lieu of foreclosure.
1993 VS 1992
The Trust's loan portfolio at September 30, 1993, before giving effect to the allowance for possible losses, was $122,103,000, of which $26,750,000 (22% of total real estate loans) is categorized as non-earning, as compared to $151,821,000 at September 30, 1992, of which $44,250,000 (29% of total real estate loans) is
categorized as non-earning. The $29,718,000 decrease in the loan portfolio is due to a combination of repayments of principal on real estate loans (net of repayments to participating lenders) and an increase in real estate owned as a result of either completion of foreclosure actions, delivery of deeds in lieu of foreclosure, or conveyances of property as a result of consummation of reorganization plans confirmed by the Bankruptcy Court.
Real estate owned (prior to a valuation allowance of $3,229,000) increased to $51,162,000 at September 30, 1993 from $35,574,000 at September 30, 1992. The increase in real estate owned is primarily a result of real estate acquired by foreclosure, deed in lieu of foreclosure and conveyance of real estate as a result of confirmation and consummation of plans of reorganization, at the aggregate estimated fair value of approximately $19,532,000, and the capitalization of improvements on real estate owned. This increase was offset in part by the sale of a shopping center, a retail/office building, and an office building with an aggregate cost basis of $3,697,000, as well as the sale of unsold shares in cooperative apartments resulting in net proceeds of approximately $693,000 (net of purchase money mortgages of $970,000).
Interest and fees on real estate loans increased to $12,395,000 for Fiscal 1993 as compared to $11,781,000 for Fiscal 1992. This increase was a result of a number of events, including receipt of past due and accumulated interest of $440,000 upon refinancing by a borrower, collection of approximately $586,000 from court appointed receivers who operated properties securing certain loans, receipt of $800,000 from a borrower as part of a workout, a receipt of addi- tional interest of $325,000 upon repayment of participating real estate loans secured by properties located in Texas, and commencement of receipt of interest on a loan from a borrower who reorganized under Chapter XI of the Bankruptcy Act. These increases were offset by payoffs and paydowns of earning real estate loans from $107,571,000 at September 30, 1992 to $95,353,000 at September 30, 1993, in addition to a slight decrease in the average prime interest rate.
Operating income on real estate owned increased during the twelve months ended September 30, 1993 by $2,777,000 to $5,168,000 from $2,391,000 for the comparable prior fiscal year. This increase is a result of an increase in the number of properties acquired in foreclosure, deed in lieu of foreclosure, and under confirmed plans of reorganization, offset in part by the sale of an apartment building in Queens, New York in the last quarter of the fiscal year ended September 30, 1992, and a shopping center in Dayton, Ohio, during the first quarter of the current fiscal year.
Fiscal 1993 includes a gain on the sale of marketable securities of $115,000 which took place during the first quarter of the fiscal year. There was no
comparable gain during the fiscal year ended September 30, 1992, but rather a net loss on marketable securities of $43,000.
Other income, primarily investment income, decreased by $428,000 for the fiscal year ended September 30, 1993, as compared to the prior fiscal year. This decrease was primarily due to a decrease in the average cash available to invest, in addition to a decrease in interest rates.
Interest expense decreased for Fiscal 1993 to $7,630,000 from $9,963,000 for Fiscal 1992, as a result of a decrease in notes payable and subordinated debt, as well as a slight decrease in the average prime interest rate.
The twelve months ended September 30, 1993 include a provision for possible loan losses of $3,111,000 as compared to a provision of $7,940,000 for the prior comparable twelve month period. Two events resulted in the majority of the provision taken during Fiscal 1993. A provision of approximately $1,500,000 was taken during the first quarter of the current fiscal year, relating to three loans to entities controlled by one borrower, as a result of a refinancing by this borrower during the following quarter. During the fourth quarter of Fiscal 1993 a provision of approximately $800,000 was taken in order to record an impaired loan at the fair value of its underlying collateral. This property was recorded as real estate owned during the first quarter of the fiscal year ended September 30, 1994, when physical possession was obtained. The fiscal year ended September 30, 1993 also includes a provision for valuation adjustment of $3,388,000 with no comparable adjustment for the fiscal year ended September 30, 1992. Approximately 50% of the valuation adjustment was taken during the quarter ended March 31, 1993, as a result of a possible bulk sale of the shares in a cooperative apartment building located in Suffolk County in which the Trust was the holder of unsold shares. The bulk sale which was being discussed was contemplated to be at a discount from book value, and as a result the aforementioned provision was recorded. The bulk sale was consummated subsequent to the year ended September 30, 1993 at its recorded fair value as of September 30, 1993. Other valuation adjustments taken during Fiscal 1993 were as follows: (i) A strip shopping center located in Suffolk County being foreclosed upon by the holder of the first mortgage and accordingly the Trust reserved its entire position, and (ii) three properties located in New York City where there has been a decrease in value since foreclosure.
General and administrative expenses decreased by $607,000 for the twelve months ended September 30, 1993 as compared to the prior fiscal year. These reductions are primarily due to a reduction of professional fees, in addition to a reimbursement of professional fees of approximately $232,000 from a borrower with whom a workout was in process, and a settlement with a previous borrower. These reductions were offset in part by an increase in other general and administrative
costs.
Operating expenses relating to real estate owned increased for Fiscal 1993 to $3,016,000 from $1,384,000 for Fiscal 1992. This increase of $1,632,000 is a direct result of an increase in the number of properties owned.
The fiscal year ended September 30, 1993 includes depreciation and amortization of $544,000 as compared to $157,000 for the fiscal year ended September 30, 1992. On September 14, 1993, upon conversion of a subordinated note in the principal amount of $3,375,000 to cumulative preferred stock, the remaining unamortized discount relating to the subordinated note (approximately $240,000) was recognized. The remaining increase is due to depreciation on a property held long term for the production of income rather than for sale.
During the year ended September 30, 1993, the Trust sold a shopping center and an office building with an aggregate cost basis of $2,335,000, at a gain of approximately $152,000, and unsold shares in cooperative corporations resulting in a net gain of $34,000. Also during Fiscal 1993 a retail/office building located in New York City with a cost basis of $1,362,000 was sold. Simultaneous with this sale an additional valuation adjustment was recognized in the amount of approximately $91,000. Fiscal year ended September 30, 1992 includes a gain on sale of real estate owned of $318,000, primarily from the sale of an apartment complex in Queens, New York.
The fiscal year ended September 30, 1992 includes an extraordinary gain of $969,000 resulting from the transfer by the Trust of its junior participation interest in a real estate loan of approximately $2,000,000 (after an allowance for losses of $2,000,000) to the Resolution Trust Corporation in exchange for which the RTC transferred to the Trust a Subordinated Note held by it. There was no extraordinary item in Fiscal 1993.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
This information appears in a separate section of this report following Part IV.
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Items 10, 11, 12 and 13 will be included in the Trust's proxy statement to be filed pursuant to Regulation 14A not later than January 30, 1995.
PART IV
Item 14.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements - The response is submitted in a separate section of this report following Part IV.
2. Financial Statement Schedules - The response is submitted in a separate section of this report following Part IV.
3. Exhibits:
3(a). Second Amended and Restated Declaration of Trust dated June 13, 1972. Incorporated by reference to Exhibit 3A to Form 10-K for the year ended September 30, 1984.
3(b). First Amendment to Second Amended and Restated Declaration of Trust dated August 20, 1986. Incorporated by reference to the Trust's Registration Statement on Form S-2 (No. 33-8125).
3(c). Second Amendment to Second Amended and Restated Declaration of Trust dated March 2, 1987. Incorporated by reference to the Trust's Registration Statement on Form S-2 (No. 33-12172).
3(d). Third Amendment to Second Amended and Restated Declaration of Trust dated March 2, 1988. Incorporated by reference to Exhibit 3D to Form 10-K for the year ended September 30, 1988.
3(e). By-laws - Incorporated by reference to the Trust's Registration Statement on Form S-2 (No. 33-8125).
4. Statement of Rights of Preferred Stock. Incorporated by reference to Exhibit 4 to Form 10-K for the year ended September 30, 1993.
10(a). Advisory Agreement dated February 7, 1983 between the Trust and REIT Management Corp. Incorporated by reference to the Trust's Registration Statement on Form S-2 (No. 33-8125).
10(b). Amended and Restated Credit Agreement dated September 23, 1992. Incorporated by reference to Exhibit 1 to Form 8-K filed on October 8, 1992.
10(c). Amendment Number 1 to Amended and Restated Credit Agreement. Incorporated by reference to Exhibit 10(c) to Form 10-K for the year ended September 30, 1993.
10(d). Amendment Number 2 to Amended and Restated Credit Agreement. Incorporated by reference to Exhibit 10(c) to Form 10-K for the year ended September 30, 1993.
10(e). Cash Collateral Agreement dated September 23, 1992. Incorporated by reference to Exhibit 2 to Form 8-K filed on October 8, 1992.
21. Subsidiaries - Each subsidiary is 100% owned by the Trust. Filed with this Form 10-K.
27. Financial Data Schedule - Filed with electronic filing.
(b) Reports on Form 8-K: There were no reports on Form 8-K filed in the fourth quarter of Fiscal 1994.
(c) Exhibits - See Item 14(a) 3., above.
(d) See Item 14(a) 2., above.
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
Date: December 23, 1994 By: s/Israel Rosenzweig ------------------- Israel Rosenzweig President and Trustee
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
SIGNATURE TITLE DATE
s/Fredric H. Gould Chairman of the Board December 23, 1994 - - ------------------ Fredric H. Gould
s/Israel Rosenzweig President (Principal December 23, 1994 - - ------------------- Executive Officer) Israel Rosenzweig and Trustee
s/Patrick J. Callan Trustee December 23, 1994 - - ------------------- Patrick J. Callan
_________________ Trustee December __, 1994 Stuart S. Gould
s/Arthur Hurand Trustee December 23, 1994 - - --------------- Arthur Hurand
s/Gary Hurand Trustee December 23, 1994 - - ------------- Gary Hurand
s/Nathan Kupin Trustee December 23, 1994 - - -------------- Nathan Kupin
s/Herbert C. Lust II Trustee December 23, 1994 - - -------------------- Herbert C. Lust II
s/Marshall Rose Trustee December 23, 1994 - - --------------- Marshall Rose
s/David W. Kalish Vice President December 23, 1994 - - ----------------- (Principal Financial David W. Kalish and Accounting Officer)
ANNUAL REPORT ON FORM 10-K ITEM 8, ITEM 14(A)(1) AND (2)
Index to Consolidated Financial Statements and Consolidated Financial Statement Schedules
September 30, 1994
The following consolidated financial statements of BRT Realty Trust are included in Item 8:
PAGE NO.
Independent Auditors' Report
Consolidated Balance Sheets as of September 30, 1994 and 1993
Consolidated Statements of Operations for the three years ended September 30, 1994, 1993 and 1992
Consolidated Statements of Shareholders' Equity for the three years ended September 30, 1994, 1993 and 1992
Consolidated Statements of Cash Flows for the three years ended September 30, 1994, 1993 and 1992 -6
Notes to Consolidated Financial Statements -22
Schedules for the year ended September 30, 1994
XI - Real Estate and Accumulated Depreciation -24 XII - Mortgage Loans on Real Estate -26
All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or the notes thereto.
INDEPENDENT AUDITORS' REPORT ----------------------------
To the Trustees and Shareholders BRT Realty Trust
We have audited the accompanying consolidated balance sheets of BRT Realty Trust (the "Trust") as of September 30, 1994 and 1993, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended September 30, 1994 and the consolidated schedules listed in the accompanying index. These consolidated financial statements and consolidated schedules are the responsibility of the Trust's management. Our responsibility is to express an opinion on these consolidated financial statements and consolidated schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of BRT Realty Trust as of September 30, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1994, in conformity with generally accepted accounting principles. Further, in our opinion the consolidated schedules referred to above, when considered in relation to the consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
Kenneth Leventhal & Company
New York, New York December 9, 1994
BRT REALTY TRUST
CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS)
ASSETS
See accompanying notes to consolidated financial statements.
BRT REALTY TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS (AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
See accompanying notes to consolidated financial statements.
BRT REALTY TRUST
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1992, 1993, AND 1994 (AMOUNTS IN THOUSANDS)
See accompanying notes to consolidated financial statements.
BRT REALTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS)
See accompanying notes to consolidated financial statements.
BRT REALTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (AMOUNTS IN THOUSANDS)
See accompanying notes to consolidated financial statements.
BRT REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION; BASIS OF PREPARATION
The consolidated financial statements include the accounts of BRT Realty Trust, its wholly-owned subsidiaries, and its majority-owned or controlled real estate entities. Material intercompany items and transactions have been eliminated. Many of the wholly-owned subsidiaries were organized to take title to various properties acquired by BRT Realty Trust. BRT Realty Trust and its subsidiaries are hereinafter referred to as the Trust.
INCOME TAX STATUS
The Trust qualifies as a real estate investment trust under Sections 856-860 of the Internal Revenue Code.
The Trustees may, at their option, elect to operate the Trust as a business trust not qualifying as a real estate investment trust. It is the present intention of the Trustees to operate the Trust as a qualifying real estate investment trust.
INCOME RECOGNITION
Effective for the year ended September 30, 1994, the Trust elected early adoption of Statement of Financial Accounting Standards No. 118 ("FASB 118"), "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures", which would be effective for the Trust's fiscal year ending September 30, 1996. FASB 118 amends FASB 114 (see Allowance for Possible Losses), by eliminating the provisions that describe how creditors should report income on impaired loans, thereby allowing creditors to use existing methods for recognizing interest income on impaired loans. In addition, FASB 118 amends the disclosure requirements in FASB 114 to require information about the recorded investment in certain impaired loans and the creditor's recognition of interest income related to those impaired loans. (See Note 2).
Income and expenses are recorded on the accrual basis of accounting for both financial reporting and income tax purposes. The Trust does not accrue interest or rental income on impaired loans or real estate owned where, in the judgment of management and the Trustees, collection of interest or rent according to the contractual terms is considered doubtful. Among the factors the Trust considers in making an evaluation of the collectibility of interest or rent are, the status of the loan or property, the financial condition of the borrower or tenant and anticipated future events. Loan discounts are amortized over the life of the real estate loan using the constant interest method. (See Allowance for Possible Losses and Valuation Allowance on Real Estate Owned).
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (Continued)
INCOME RECOGNITION (Continued)
Loan commitment and extension fee income is deferred and recorded as income over the life of the commitment and loan. If a loan subsequently becomes nonearning, the unamortized portion of the fee is offset against the loan balance. If a committed loan is not taken by the borrower, the unamortized commitment fee is recognized as income at that time.
DEBT DISCOUNT
Debt discount is amortized over the life of the related debt obligation using the constant interest method.
ALLOWANCE FOR POSSIBLE LOSSES
Effective for the year ended September 30, 1993, the Trust elected early adoption of Statement of Financial Accounting Standards No. 114 ("FASB 114"), "Accounting by Creditors for Impairment of a Loan", which would be effective for the Trust's fiscal year ending September 30, 1996. FASB 114 defines impairment as the probability that all amounts due under a loan agreement will not be collected according to the contractual terms, and requires the valuation of impaired loans based on either the present value of expected future cash flows discounted at the loan's effective interest rate or the fair value of the collateral if the loan is collateral dependent. The Trust measures the impairment of its real estate loans based upon the fair value of the underlying collateral which is determined on an individual loan basis. In arriving at the fair value of the collateral, numerous factors are considered, including, market evaluations of the underlying collateral, operating cash flow from the property during the projected holding period, and estimated sales value computed by applying an expected capitalization rate to the stabilized net operating income of the specific property, less selling costs, discounted at market discount rates. If upon completion of the valuations, the fair value of the underlying collateral securing the impaired real estate loan is less than the recorded investment in the loan, an allowance is created with a corresponding charge to expense. The adequacy of the allowance is predicated on the assumption that the Trust will be able to hold assets and dispose of, or realize, the assets in the ordinary course of business. Adjustments may be necessary in the event that effective interest rates, rent-up periods, future economic conditions including the terms and availability of long term permanent financing for the property, or other relevant factors vary significantly from those assumed in estimating the allowance for possible losses. The existing allowances will be either increased or decreased based upon future valuations, with a corresponding increase or reduction in the provision for loan losses.
Since the Trust had previously evaluated impaired loans at the lower of recorded investment or fair value, the adoption of FASB 114 did not have a material impact on the Trust's financial statements.
VALUATION ALLOWANCE ON REAL ESTATE OWNED
Real estate owned assets held for sale are valued at the lower of cost or fair value, on an individual asset basis. Upon evaluating the property, many indicators of value are considered, including current and expected operating cash flow from the property during the projected holding period, costs necessary to extend the life or improve the asset, expected capitalization rates, projected stabilized net operating income, selling costs, and the ability to hold and dispose of such real estate owned in the ordinary course of business. Valuation adjustments may be necessary in the event that effective interest rates, rent-up periods, future economic conditions, and other relevant factors vary significantly from those assumed in valuing the property at the time of foreclosure. If future evaluations result in a diminution in the value of the property, the
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (Continued)
VALUATION ALLOWANCE ON REAL ESTATE OWNED (Continued)
reduction will be recognized as a valuation allowance. If the value of the property subsequently increases, the valuation allowance will be reduced.
Effective September 30, 1992, the Trust elected early adoption of Statement of Position 92-3 ("SOP 92-3") "Accounting for Foreclosed Assets", which would have been effective for the fiscal year ending September 30, 1993 ("Fiscal 1993"). Since the Trust evaluated foreclosed assets at the lower of cost or fair value, the adoption of SOP 92-3 did not have a material impact on the Trust's financial statements.
REAL ESTATE OWNED
Foreclosed properties (real estate acquired by foreclosure or by a deed in lieu of foreclosure) are recorded at estimated fair value, net of foreclosure costs, at the time of foreclosure. In subsequent periods, individual foreclosed assets held for sale are valued at the lower of the recorded cost or estimated fair value, as described in the previous paragraph; and if required, a valuation allowance is recognized. Assets acquired through foreclosure and held for sale, are not depreciated, while assets held long-term for the production of income are depreciated over their estimated useful lives. Costs incurred in connection with the foreclosure of the properties collateralizing the real estate loans and costs incurred to extend the life or improve the assets subsequent to foreclosure are capitalized. With respect to the operating properties, operating income and expenses are reflected in the statement of operations. For residential apartment units acquired through foreclosure which are subject to an offering for the sale of units or cooperative shares, the net effect of income and expenses is applied to the basis of the asset to the extent that fair value is not exceeded.
FAIR VALUE OF FINANCIAL INSTRUMENTS
In December 1991, the Financial Accounting Standards Board issued Statement No. 107, "Disclosures about Fair Value of Financial Instruments," effective for fiscal years ending after December 15, 1992. The statement requires disclosure about fair value for all financial instruments for which it is practicable to estimate that value. The following methods and assumptions were used to estimate the fair value of each class of financial instruments:
Cash and short term investments: The carrying amounts reported in the balance sheet for these instruments approximate their fair values.
Real estate loans: The earning mortgage loans of the Trust have either variable interest rate provisions, which are based upon a margin over the prime rate, or are currently fixed at effective interest rates which approximate market. At September 30, 1994 these interest rates are reflective of current market conditions for these loans. Accordingly, the carrying amounts of the earning, non-impaired mortgage loans approximate their fair values. For earning loans which are impaired and non-earning loans, the Trust has valued them based upon the fair value of the underlying collateral. Accordingly, their carrying amounts are recorded at fair value.
Notes, loans and mortgages payable: The Trust determined the estimated fair value of its debt by discounting future cash payments at their effective rates of interest, which approximate current market rates of interest for similar loans. Accordingly, there is no material difference between their carrying amount and fair value.
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (Continued)
PER SHARE DATA
Primary earnings per share of beneficial interest is based upon the weighted average number of common shares and the assumed equivalent shares outstanding during each year, after giving effect to dividends relating to the Trust's preferred stock. The preferred stock, issued on September 14, 1993, is not considered a common stock equivalent for the purpose of computing primary earnings per share in Fiscal 1994. The assumed exercise of outstanding share options, using the treasury stock method, is antidilutive for the primary earnings per share computation for the years ended September 30, 1994, 1993 and 1992.
Fully diluted earnings per share of beneficial interest amounts are based on an increased number of common shares that would be outstanding assuming the exercise of common share options and the conversion of preferred stock to shares of beneficial interest at the year end market price. Since fully diluted earnings per share of beneficial interest amounts are antidilutive, such amounts are not presented.
CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments, primarily money market type U.S. Government obligations, with maturities of three months or less when purchased.
RECLASSIFICATION OF FINANCIAL STATEMENTS
Certain amounts reported in previous financial statements have been reclassified in the accompanying financial statements to conform to the current year's presentation.
NOTE 2 - REAL ESTATE LOANS
At September 30, 1994, information as to real estate loans is summarized as follows:
Of the real estate loans not earning interest at September 30, 1994 and 1993, $10,268 and $26,750, respectively were deemed impaired (as defined in FASB 114) as it is probable that the Trust will be unable to collect all amounts due according to the contractual terms. Allowances for possible losses were provided for all such non-earning loans, with the exception of loans in the amount of $577 and $5,445 at September 30, 1994 and 1993, respectively. Of the real estate loans earning interest at September 30, 1994 and 1993, $11,009 and $11,279, respectively, were deemed impaired and all are subject to allowances for possible losses.
For the years ended September 30, 1994, 1993 and 1992, respectively, an average $29,653, $47,656 and $70,287 of real estate loans were deemed impaired, on which $1,733, $2,146 and $2,264 of interest income was recognized.
NOTE 2 - REAL ESTATE LOANS (Continued)
The Trust's earning loans generally provided for interest rates which were related to the prime rate, whereas the new purchase money mortgages have fixed interest rates, with incremental annual increases. The weighted average interest rate on earning loans was 9.51% and 10.63% at September 30, 1994 and 1993, respectively.
Annual maturities of real estate loans receivable during the next five years, reflect revised maturities as a result of debt restructurings and are summarized as follows:
The Trust's portfolio consists of (i) senior and junior mortgage loans, secured by residential and commercial property, 59% of which are located principally in the New York metropolitan area, and (ii) 21% by participating senior mortgage loans, secured by garden apartment developments in the Dallas/Fort Worth, Houston and Austin, Texas areas.
Although there has been some improvement in real estate lending by institutional lenders, it is still difficult to refinance existing commercial mortgages and sell properties. If a loan is not repaid at maturity, in addition to foreclosing on the property, the Trust may either extend the loan or consider the loan past due. The Trust analyzes each loan separately to determine the appropriateness of an extension. In analyzing each situation, management examines many attributes of the loan receivable, including the value of the collateral, the financial strength of the borrower and past payment history. Management anticipates that similar conditions will continue for a period of time with respect to the availability of financing from lenders and sales of cooperative units. Accordingly, extensions are expected to be granted for a significant portion of those loans maturing during Fiscal 1995. Of the $48,513 of real estate loans receivable which mature in Fiscal 1995, $23,576 were extended during the fiscal year ended September 30, 1994. The Trust received $21 in extension fees.
Over the past three years, the Trust has restructured certain loans. Although maturities were extended and interest rates were reduced, principal remained unchanged. The effects of interest rate reductions which were applicable to real estate loans aggregating approximately $25,700, are insignificant as compared to what the Trust would have otherwise received for the year ended September 30, 1994. If all loans classified as nonearning were earning interest at their contractual rates for the years ended September 30, 1994, 1993 and 1992, interest income would have increased by $748, $2,157 and $4,371, respectively.
The Trust's interests in wraparound mortgages are subject to underlying mortgages aggregating $3,919 at September 30, 1994. Senior participations in the Trust's loans at September 30, 1994 and 1993 amounted to approximately $24,000 and $26,000, respectively.
NOTE 2 - REAL ESTATE LOANS (Continued)
At September 30, 1994 there are loans to various partnerships and corporate entities with common principals. The two largest relationships had aggregate principal balances outstanding of approximately $14,500 (net of senior participations of approximately $5,000) and $9,400, respectively. Of the total interest and fees earned on real estate loans during the fiscal year ended September 30, 1994, 21% and 5% related to these relationships, respectively.
NOTE 3 - REAL ESTATE OWNED
A summary of real estate owned, for the year ended September 30, 1994 is as follows:
Future minimum rentals to be received by the Trust, pursuant to noncancellable operating leases in excess of one year, from properties on which the Trust has title at September 30, 1994 are as follows:
NOTE 4 - ALLOWANCE FOR POSSIBLE LOSSES AND VALUATION ALLOWANCE ON REAL ESTATE OWNED
As discussed in Note 1, the Trust adopted SOP 92-3 effective September 30, 1992, "Accounting for Foreclosed Assets." Upon adoption of this accounting policy, each real estate owned asset is valued at the lower of cost or fair value, whereby any previously provided allowance prior to adoption is recognized. If future evaluations result in a diminution in the value of the property, the reduction should be recognized as a valuation allowance. If the value of the property subsequently increases, the valuation allowance should be reduced.
Further, as discussed in Note 1, the Trust adopted FASB 114 during the fiscal year ended September 30, 1993. FASB 114 requires the valuation of impaired loans based on either the present value of expected future cash flows or the fair value of the underlying collateral. The Trust measures the impairment of its real estate loans based upon the fair value of the underlying collateral which is determined on an individual loan basis. If the valuation is less than the recorded investment in the loan an allowance is created with a corresponding charge to expense. The existing allowance will be either increased or decreased based upon future valuations with a corresponding increase or reduction in the provision for loan losses.
The Trust evaluates its portfolio of mortgage loans and real estate owned held for sale on an individual asset basis, comparing the amount at which the asset is carried to its estimated fair value, as applicable. In making its evaluations, the Trust considers many indicators of asset impairment and value including current and expected operating income and expected capitalization rates. The Trust has assumed that it will be able to acquire property collateralizing mortgage loans by foreclosure if deemed appropriate, and hold and dispose of such assets and real estate currently owned in the ordinary course of business, to maximize the return to the Trust. The Trust has also assumed that it will not be required to liquidate assets other than in the ordinary course of business, in order to repay debt (see Note 5). The evaluations and related assumptions are dependent upon current estimates of future operations, proceeds, costs, events, and general market and economic conditions, all of which are influenced by many unpredictable factors. Accordingly, the ultimate realizations of the Trust's assets, including future income, may differ from amounts presently estimated.
In view of the fact that difficulties in the real estate market existed during the three years ended September 30, 1994, particularly in the New York metropolitan area, the primary real estate market served by the Trust as discussed in Note 2, and the continued general lack of liquidity in the real estate industry, the Trust recorded provisions for possible losses aggregating $4,340, $3,111 and $7,940 ($4,120 relating to real estate loans and $3,820 to real estate owned) during the years ended September 30, 1994, 1993 and 1992, respectively. A majority, or $2,950,000, of the provision for possible loan losses recorded during the year ended September 30, 1994, was taken against a real estate loan in which the Trust has a subordinate position in a securitized mortgage portfolio which, although interest is current, went into default in October 1994.
The Trust recorded provisions for valuation adjustment of $993 and $3,388 for the years ended September 30, 1994 and 1993, respectively. There was no valuation allowance at September 30, 1992.
NOTE 4 - ALLOWANCE FOR POSSIBLE LOSSES AND VALUATION ALLOWANCE ON REAL ESTATE OWNED (Continued)
An analysis of the allowance for possible losses is as follows:
The allowance for possible losses applies to assets aggregating $20,700 at September 30, 1994, $32,583 at September 30, 1993 and $50,000 at September 30, 1992.
The allowance for possible losses consists of the following components:
An analysis of the valuation allowance is as follows:
The valuation allowance applies to assets aggregating $13,917 at September 30, 1994 and $16,678 at September 30, 1993.
NOTE 5 - DEBT OBLIGATIONS
Debt obligations consist of the following:
On September 23, 1992 an Amended and Restated Credit Agreement (the "Agreement") was executed between the Trust and five banks, which were parties to an existing credit agreement. Simultaneously with the execution, the Trust reduced the principal amount outstanding to $105,000 by paying $9,800 to the banks. Pursuant to the Agreement, the Trust granted the banks a lien on all mortgages receivable and pledged the stock of its wholly-owned subsidiaries, which own all of the Trust's real estate, to the banks. During the fiscal year ended September 30, 1993 the interest held by a governmental agency in the Agreement (approximately 17% of the Trust's indebtedness) was sold at a public auction. Subsequently, an entity related to the Trust, One Liberty, purchased approximately 29% of the 17% portion of the indebtedness purchased at a public sale by an unrelated entity.
The principal balance bears interest at the prime lending rate plus 1%, and in addition, the "Agent Bank", which represents the five banks involved in the Agreement, receives an annual fee equal to the lesser of 1/8 of 1% of the aggregate outstanding principal balance or $100. The Trust is precluded from making any mortgage loans except for specified unfunded commitments and purchase money mortgage loans in connection with the sale of properties (with limitations as to percentage of sale price, rates of interest and term). The Trust must maintain tangible net worth at the lesser of $55,000 or 55% (60% starting July 1, 1995) of the sum of total bank debt plus the aggregate amount of all nonrecourse indebtedness incurred for borrowed money (as defined). Total liabilities (excluding subordinated debt and any nonrecourse indebtedness existing as of the date of the Agreement, or assumed in connection with the exercise of remedies under a mortgage loan) can not exceed two times the sum of tangible net worth plus subordinated debt. The Agreement extends the maturity date to June 30, 1995 with two, one year options based on satisfying certain ratios and principal payments. The Trust is required to make mandatory principal payments of $10,000 no later than June 30, 1995, and $20,000 no later than June 30, 1996. Once a principal payment is made by the Trust to the banks it may not be re-borrowed. To the extent that in any July 1 to June 30 year, the Trust makes payments in excess of the mandatory repayment due for such year plus 50% of the mandatory repayment due in the next succeeding year, the excess shall be applied to the reduction of the principal payment due at maturity. The requirements through June 30, 1995 have been satisfied and assuming the Trust exercises its right to extend for the first, one year term, as of December 1, 1994 approximately $9,369 has been paid towards the required $20,000 June 30, 1996 principal payment.
Upon execution of the Agreement, the Trust entered into a Cash Collateral Agreement which establishes a cash collateral account with the Agent Bank. This account is the repository of a portion of all defined capital event proceeds and excess operating cash flow. The funds in the cash collateral account are available to the Trust for specific business purposes, including interest
NOTE 5 - DEBT OBLIGATIONS (Continued)
payments, capital improvements to real estate owned, protection of mortgages receivable and funding operating deficits. The cash collateral account which the banks have a security interest in, is not restricted as to use other than an amount equal to three months interest totaling $1,448 at September 30, 1994. The Agent Bank is required to disburse funds (in an amount not greater than an approved budget) from the cash collateral account on requisition by the Trust as long as there is no monetary default. The budget, for the budget period July 1, 1993 to June 30, 1994 was $9,000 and for the period July 1, 1994 to June 30, 1995 (as revised), is $12,500. To the extent the cash collateral account exceeds $9,000 at the end of any month, or $10,000 within a month, the Agent Bank may apply such excess to reduce principal. Under the terms of the Agreement, 75% of capital event proceeds (as defined) is to be applied to reduce principal. The balance of capital event proceeds is to be deposited into the cash collateral account. The Agreement also authorizes the Trust to maintain cash in operating accounts up to $500. Any excess is to be deposited into the cash collateral account at the end of each month. During the fourth quarter of Fiscal 1994, a modification to the Agreement has been permitted by the banks, allowing the Trust to exceed its $9,000 budget by $1,000 in order to pay for the improvements required under the lease entered into with a major insurance company at the corporate center in Dover, Delaware (see Note 3). Further modification was permitted by the banks, subsequent to September 30, 1994, for the Trust to exceed its budget by another $2,500, bringing the total permitted excess to $3,500. The additional funds will allow the Trust to complete improvements required under the lease entered into with a bank, at the Delaware Corporate Center, in addition to expenditures anticipated for real estate which is held long term for the production of income. In addition, in order for the Trust to replenish its cash collateral account, the banks have also agreed to modify the split of the next $6,000 of capital event proceeds (effective October 28, 1994) and will permit the Trust to retain 50% of such proceeds as opposed to the 25% which is currently provided in the Agreement.
In 1986 the Trust issued a floating rate subordinated note to a financial institution. This note provided for monthly payments of interest at prime plus 2% with the entire principal due in 1996. The financial institution which purchased and owned the subordinated note was taken over by the Resolution Trust Corporation ("RTC"). The same institution also participated, as a senior participant in an approximately $81,000 mortgage receivable secured by 108 properties located in the metropolitan New York City area. The Trust's junior participation in this loan had a carrying amount (which approximated fair value) of $2,053 on September 23, 1992 at which time, after extensive negotiations, the Trust transferred its junior participation to the RTC, and One Liberty paid cash of $2,250 to the RTC, in exchange for which the RTC transferred $3,266 of the principal amount with a carrying amount of $3,022 of the subordinated note to the Trust and $3,375 of the principal amount to One Liberty, who thereupon extended the subordinated note to December 31, 1997 and was given a first mortgage lien on certain real estate owned by the Trust. During the year ended September 30, 1992, the Trust recorded an extraordinary gain of $969 on the transfer of the participation in settlement of the subordinated debt obligation.
On September 14, 1993, 1,030 $1.00 par value shares of newly issued, Series A cumulative convertible preferred stock of the Trust were issued to One Liberty in exchange for the cancellation of the subordinated note with a principal amount of $3,375. On December 4, 1992 the Trust's independent directors approved the exchange of this subordinated note for the preferred shares of the Trust, and on April 30, 1993, this exchange was approved by the Trust's shareholders. The preferred shares provide for cumulative annual dividends of $.2622 per share, payable quarterly and are convertible into shares of beneficial interest on a one-for-one basis,
NOTE 5 - DEBT OBLIGATIONS (Continued)
and have one vote per share. In addition, the preferred shares may be redeemed in whole or in part by the Trust, at its option, at prices ranging from $3.57 per share in 1994 to $3.28 per share after July 1, 2001. The Trust has agreed with the banks that it will not redeem such shares prior to December 31, 1997.
During the first quarter of Fiscal 1993, the Trust funded one of its unfunded commitments, as specified in the Agreement, which consisted of a $3,000 real estate loan receivable with a $2,000 loan payable. The loan payable bears interest at prime +1% with monthly principal amortization of $28, maturing in January 1996. The balance at September 30, 1993 and 1994 is $1,805 and $1,472 respectively. The underlying collateral for the said loan receivable consists of a 50% partnership interest in which the Chairman and Vice Chairman of the Board of Trustees of the Trust hold the other 50% partnership interest. As of September 30, 1993, $2,637 is included in loans and mortgages payable representing an amount borrowed from a financial institution to pay off a senior participation. This loan which was paid in full in Fiscal 1994 was nonrecourse and was secured by the senior participation interest reacquired by the Trust. Additionally, the Trust has non-recourse mortgages payable on foreclosed property as of September 30, 1994 and 1993 of $5,200 and $5,866, respectively. These loans and mortgages payable bear interest at rates ranging from 8.75% to 11.25% per annum, and mature November, 1995 to June, 1997, although $1,005 is currently due on demand.
NOTE 6 - FEDERAL INCOME TAXES
Cumulative taxable loss since inception is less than cumulative loss reported for financial statement purposes principally because a substantial portion of the allowance for possible losses has not yet been deducted for tax purposes.
The taxable loss is expected to be approximately $621 less than the financial statement income during Calendar 1994.
At December 31, 1993, the Trust had available tax operating loss carryforwards of $33,000 of which $2,469 will expire in 2005, $2,638 will expire in 2006, $13,605 will expire in 2007 and $14,288 will expire in 2008.
NOTE 7 - SHAREHOLDERS' EQUITY
DISTRIBUTIONS
There were no distributions on the Trust's shares of beneficial interest declared during the years ended September 30, 1992, 1993, and 1994.
STOCK OPTIONS
On March 4, 1991 the Board of Trustees granted, under the 1988 Stock Option Plan (Incentive/Nonstatutory Stock Option Plan) options to purchase a total of 412,000 shares of beneficial interest at $3.50 per share to a number of officers and employees of the Trust. On May 20, 1991 the Board of Trustees granted, also under the 1988 Stock Option Plan, options to purchase a total of 50,000 shares of beneficial interest at $3.625 per share to certain trustees of the Trust. Options are exercisable at per share amounts at least equal to the fair market value of the Trust's beneficial shares at the date of grant. The options are cumulatively exercisable at the rate of 25% per annum, commencing after six months, and expire five years after the date of grant. A maximum of 500,000 shares of beneficial interest were reserved for issuance under the 1988 Stock Option Plan, of which 38,000 remain available at September 30, 1994. At September 30, 1994 options to purchase 449,500 shares are exercisable.
On May 22, 1984 the Board of Trustees adopted a stock option plan. A maximum of 300,000 shares of beneficial interest were reserved for issuance, of which 31,581 remain available for grant, to the Trust's officers and employees. Options are granted at per share amounts at least equal to their fair market value at the date of grant. The options are cumulatively exercisable at the rate of 20% per annum, commencing after one year, and expire five and one-half years after granting. During the fiscal year ended September 30, 1994 no options were granted and no options remain unexercised.
Changes in the number of shares under all option arrangements are summarized as follows:
NOTE 8 - ADVISOR'S COMPENSATION AND CERTAIN TRANSACTIONS
Certain of the Trust's officers and trustees are also officers, directors and shareholders of REIT Management Corp. ("REIT"), to which the Trust pays advisory fees for administrative services and investment advice. The agreement, which expires on December 31, 1998, provides that directors and officers of REIT may serve as trustees, officers and employees of the Trust, but shall not be compensated for services rendered in such latter capacities. Advisory fees are charged to operations at a rate of 1% on real estate loans and 1/2 of 1% on other invested assets. Advisory fees amounted to $1,052, $1,295, and $1,240 for the years ended September 30, 1994, 1993 and 1992, respectively. REIT reduced its advisory fees by 20% for the year ended September 30, 1992. Commencing in the year ended September 30, 1993, such 20% reduction was discontinued.
The borrower may pay fees to REIT for services rendered in arranging and restructuring significant loans by the Trust. These fees, which are allowed by the advisory agreement, on loans arranged on behalf of the Trust and which are paid directly by the borrower to REIT. There were no such fees paid to REIT during the three years ended September 30, 1994.
A company with the same shareholders as REIT manages certain foreclosed properties for the Trust under renewable year-to-year agreements. Management fees and leasing/selling commissions incurred for the years ended September 30, 1994, 1993 and 1992 aggregated $617, $706, and $547, respectively.
A law firm in which the partners are officers of the Trust, received fees directly from borrowers of the Trust totalling approximately $67 and $95, for the years ended September 30, 1994 and 1993, respectively.
The Chairman and Vice Chairman of the Board of Trustees of the Trust hold similar positions in One Liberty (Notes 3 and 5) and are executive officers of the managing general partner and are general partners of Gould Investors L.P. During the years ended September 30, 1994, 1993 and 1992, allocated general and administrative expenses charged to the Trust by Gould Investors L.P. aggregated $1,264, $1,283, and $1,205, respectively.
NOTE 9 - COMMITMENT
In August 1984, the Board of Trustees approved a non-contributory pension plan covering eligible employees and officers. Contributions by the Trust are made through a money purchase plan, based upon a percent of qualified employees' total salaries. Pension expense approximated $100, $113, and $92 during the years ended September 30, 1994, 1993 and 1992, respectively.
NOTE 10 - QUARTERLY FINANCIAL DATA (UNAUDITED)
BRT REALTY TRUST SCHEDULE XI - REAL ESTATE AND ACCUMULATED DEPRECIATION SEPTEMBER 30, 1994 (Amounts in Thousands)
BRT REALTY TRUST SCHEDULE XI - REAL ESTATE AND ACCUMULATED DEPRECIATION SEPTEMBER 30, 1994 (Amounts in Thousands)
Notes to the schedule:
(a) With respect to residential apartment units acquired through foreclosure which are subject to an offering for sale of units or cooperative shares, the net effect of income and expenses is applied to the basis of the asset to the extent that the realizable value is not exceeded. With respect to the other operating properties, all operating income and expenses are reflected in the consolidated Statement of Operations.
(1) For Federal income tax purposes, the aggregate cost of foreclosed properties is approximately $43,000.
(c) Assets acquired through foreclosure which are held long term for the production of income are depreciated, while those held for sale are not depreciated.
(d) Information not readily obtainable.
(e) A reconciliation of real estate owned, including in-substance foreclosures is as follows:
BRT REALTY TRUST SCHEDULE XII - MORTGAGE LOANS ON REAL ESTATE SEPTEMBER 30, 1994 (Amounts in Thousands)
BRT REALTY TRUST SCHEDULE XII - MORTGAGE LOANS ON REAL ESTATE SEPTEMBER 30, 1994 (Amounts in Thousands)
Notes to the schedule:
(a) The following summary reconciles mortgages receivable at their carrying values:
(b) The aggregate cost of investments in mortgage loans is the same for financial reporting purposes and Federal income tax purposes.