Item 1A. Risk Factors.
Set forth below is a discussion of certain risks affecting our business. The categorization of risks set forth below is meant to help you better understand the risks facing our business and is not intended to limit your consideration of the possible effects of these risks to the listed categories. Any adverse effects arising from the realization of any of the risks discussed, including our financial condition and results of operation, may, and likely will, adversely affect many aspects of our business.
Risks Related to our Business
Our acquisition, development and property improvement activities are limited by available funds.
Our ability to acquire additional multi-family properties, to improve our multi-family properties and to develop our Newark Joint Venture properties, is limited by the funds available to us. At September 30, 2014, we had approximately $23.2 million of cash and cash equivalents and approximately $9.6 million and $22.0 million designated as restricted cash for multi-family property improvements and Newark Joint Venture development activities, respectively. Our multi-family acquisition and improvement activities and the Newark Joint Venture development activities are constrained by funds available to us which will limit growth in our revenues and operating results.
It is unlikely that we will declare any dividends in the next several years.
We have not declared or paid any dividends since 2010. In order to qualify as a REIT, we are required to distribute 90% of our taxable income. At December 31, 2013, we had a tax loss carry-forward of approximately $54 million. Under current tax laws, we can offset our future taxable income against our tax loss carry-forward until 2028 or until the tax loss carry-forward has been fully used, whichever occurs first. As a result, we do not expect to pay a dividend in 2015 and it is unlikely that we will be required to pay a dividend for many years thereafter in order to maintain our REIT status. The non-payment of cash dividends may negatively impact the price of our common shares.
We may not be able to compete with competitors many of which have greater financial and other resources than we possess.
We compete with many third parties engaged in the ownership and operation of multi-family properties, including other REITs, specialty finance companies, public and private investors and lenders, investment and pension funds and other entities. The Newark Joint Venture competes (i) with real estate developers for tax credit allocations and financing provided by governmental and quasi-governmental authorities, and (ii) for tenants, with landlords and developers with, or interested in developing, properties in Newark, New Jersey and the surrounding area. Many of these competitors have substantially greater financial and other resources than we do. Larger and more established competitors enjoy significant competitive advantages that result from, among other things, enhanced operating efficiencies and more extensive networks providing greater and more favorable access to capital, financing and tax credit allocations and more favorable lending and acquisition opportunities. Larger multi-family property operators have the ability and capacity to acquire a greater number of higher quality properties at more favorable locations and on more favorable terms and conditions.
We may incur impairment charges in 2015.
We evaluate on a quarterly basis our real estate portfolios for indicators of impairment. Impairment charges reflect management's judgment of the probability and severity of the decline in the value of real estate assets we own. These charges and provisions may be required in the future as a result of factors beyond our control, including, among other things, changes in the economic environment and market conditions affecting the value of real property assets. If we are required to take impairment charges, our results of operations will be adversely impacted.
Our revenues and the value of our portfolio may be negatively affected by casualty events occurring on our properties.
The joint ventures in which we are an equity participant carry all risk property insurance covering the property and any improvements to the property owned by the joint venture for the cost of replacement in the event of a casualty. Further, we carry insurance for such purpose on properties owned by us. However, the amount of insurance coverage maintained for any property may be insufficient to pay the full replacement cost following a casualty event. In addition, the rent loss coverage under a policy may not extend for the full period of time that a tenant or tenants may be entitled to a rent abatement that is a result of, or that may be required to complete restoration following a casualty event. In addition, there are certain types of losses, such as those arising from earthquakes, floods, hurricanes and terrorist attacks, that may be uninsurable or that may not be economically feasible to insure. Changes in zoning, building codes and ordinances, environmental considerations and other factors may make it impossible for a joint venture or us, as the case may be, to use insurance proceeds to replace damaged or destroyed improvements at a property. If any of these or similar events occur, the amount of coverage may not be sufficient to replace a damaged or destroyed property. As a result, our returns and the value of our investment may be reduced.
In order for real estate properties to generate positive cash flow or to make real estate properties suitable for sale, we may need to make significant capital improvements and incur deferred maintenance costs with respect to these properties.
Some of our properties, and in particular, our multi-family properties, face competition from newer, and updated properties. At September 30, 2014, the approximate weighted average age (based on the number of units) of our multi-family properties is approximately 28 years. To remain competitive and increase occupancy at these properties and/or make them attractive to potential tenants or purchasers, we may have to make significant capital improvements and/or incur deferred maintenance costs with respect to these properties. The cost of these improvements and deferred maintenance items may impair our financial condition and liquidity.
Our transactions with affiliated entities involve conflicts of interest.
Entities affiliated with us and with certain of our executive officers provide services to us and on our behalf. Although our policy is to obtain terms in transactions with affiliates that are at least as favorable as those that we would receive if the transactions were entered into with unaffiliated entities, these transactions raise the potential that we may not receive terms as favorable as those that we would receive if the transactions were entered into with unaffiliated entities.
Liability relating to environmental matters may impact the value of properties that we acquire.
We may be subject to environmental liabilities arising from the ownership of properties we acquire. Under various federal, state and local laws, an owner or operator of real property may become liable for the costs of removal of certain hazardous substances released on its property. These laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the release of such hazardous substances.
If we acquire properties, the presence of hazardous substances on a property may adversely affect our ability to finance or sell the property and we may incur substantial remediation costs. The discovery of material environmental liabilities attached to such properties could have a material adverse effect on our results of operations and financial condition.
The presence of hazardous substances may adversely affect our ability to sell real estate or borrow using the real estate as collateral.
Senior management and other key personnel are critical to our business and our future success may depend on our ability to retain them.
We depend on the services of Jeffrey A. Gould, our president and chief executive officer, and other members of senior management to carry out our business and investment strategies. Although Jeffrey A. Gould devotes substantially all of his business time to our affairs, he devotes a limited amount of his business time to entities affiliated with us. In addition to Jeffrey A. Gould, only two other executive officers, Mitchell Gould, our executive vice president, and George Zweier, a vice president and our chief financial officer, devote all or substantially all of their business time to us. The remainder of our executive management personnel share their services on a part-time basis with entities affiliated with us and located in the same executive offices pursuant to a shared services agreement. We rely on part-time executive officers to provide certain services to us, including legal and accounting services, since we do not employ full-time executive officers to handle these services. If the shared services agreement is terminated, we will have to obtain such services or hire employees to perform them. We may not be able to replace these services or hire such employees in a timely manner or on terms, including cost and level of expertise, that are as favorable as those we receive under the shared services agreement.
In addition, in the future we may need to attract and retain qualified senior management and other key personnel, both on a full-time and part-time basis. The loss of the services of any of our senior management or other key personnel or our inability to recruit and retain qualified personnel in the future, could impair our ability to carry out our business and our investment strategies.
We do not carry key man life insurance on members of our senior management.
Risks Related to our Multi-Family Activities
Unfavorable changes in market and economic conditions could adversely affect occupancy, rental rates, operating expenses, and the overall market value of multi-family properties we acquire.
Conditions in markets in which we acquire multi-family properties may significantly affect occupancy, rental rates and the operating performance of such assets. The risks that may adversely affect conditions in those markets include the following:
• industry slowdowns, plant closings and other factors that adversely affect the local economy;
• an oversupply of, or a reduced demand for, multi-family units;
• a decline in household formation or employment or lack of employment growth;
• the inability or unwillingness of residents to pay rent increases;
• rent control or rent stabilization laws, or other laws regulating housing, that could prevent us from raising rents to offset increases in operating costs; and
• economic conditions that could cause an increase in our operating expenses, such as increases in property taxes, utilities, and routine maintenance.
We may be unable to refinance our multi-family mortgage debt as it matures.
We are subject to the risks associated with mortgage financing, including the risk that our cash flow will be insufficient to meet required payments of principal and interest and that we will be unable to refinance our mortgage debt as it matures. At September 30, 2014, the weighted average annual interest rate on our multi-family mortgage debt is 4.15%, the weighted average remaining term on this mortgage debt is 7.1 years and approximately $10.1 million, $5.2 million, $6.6 million and $41.3 million in principal amount of mortgage debt becomes due in 2015, 2016, 2017 and 2018, respectively. As we will not have sufficient cash flow available to make all required principal payments when due, we will
need to refinance a significant portion, if not all, of our outstanding multi-family debt as it matures. We may not be able to refinance existing debt or, in the event of increased interest rates, refinance on as favorable terms as currently in effect; either of these outcomes could have a material adverse effect on our financial condition and results of operations.
We could be negatively impacted by the condition of Fannie Mae or Freddie Mac and by changes in government support for multi-family housing.
Fannie Mae and Freddie Mac have been a major source of financing for multi-family real estate in the United States and we have used loan programs sponsored by one or more of these entities to finance many of our acquisitions. Should these entities have their mandates changed or reduced, lose key personnel, be disbanded or reorganized by the government or otherwise discontinue providing liquidity for the multi-family sector, it would significantly reduce our access to debt capital and/or increase borrowing costs and could significantly limit our ability to acquire properties on acceptable terms and reduce the values to be realized upon property sales.
Most of our multi-family properties are located in a limited number of markets, which makes us susceptible to adverse economic developments in such markets.
In addition to general, regional and national economic conditions, the operating performance of our multi-family residential properties is impacted by the economic conditions of the specific markets in which our properties are concentrated. Approximately 24%, 23%, 20% and 15% of our estimated 2015 revenues from multi-family properties is attributable to properties located in Texas, Georgia, Tennessee and Florida, respectively. Accordingly, adverse economic developments in such markets could adversely impact the operations of these properties and therefore our operating results and cash flow. The concentration of properties in a limited number of markets exposes us to risks of adverse economic developments which are greater than the risks of owning properties with a more geographically diverse portfolio.
The failure of third party property management companies to properly manage our properties may adversely affect us.
We and our joint venture partners rely on third party property management companies to manage our properties. These management companies are responsible for, among other things, leasing and marketing rental units, selecting tenants (including an evaluation of the creditworthiness of tenants), collecting rent, paying operating expenses, and maintaining the property. If these property management companies do not perform their duties properly or we or our joint venture partners do not effectively supervise the activities of these companies, we may be adversely affected. Eleven property managers and their affiliates manage our 27 properties, and one property manager manages seven properties-the loss of such manager could adversely impact us. Further, some of management companies are owned by our joint venture partners or their affiliates. The termination of a management company may require the approval of the mortgagee, our joint venture partner or both. If we are unable to terminate on a timely basis a property manager not performing its duties, we may be adversely affected.
Increased competition and increased affordability of residential homes could limit our ability to retain our tenants or increase or maintain rents.
Our multi-family properties compete with numerous housing alternatives, including other multi-family and single-family rental homes, as well as owner occupied single and multi-family homes. Our ability to retain tenants and increase or maintain rents could be adversely affected by the alternative housing in a particular area and, due to declining housing prices, mortgage interest rates and government programs to promote home ownership, the increasing affordability of owner occupied single and multi-family homes.
Risks involved in conducting real estate activity through joint ventures.
We have in the past and in the future intend to acquire properties in joint ventures with other persons or entities when we believe that circumstances warrant the use of such structure. Joint venture investments involve risks, including the possibility that our partner might engage in unlawful or fraudulent conduct with respect to our jointly owned properties or other properties in which they have an ownership interest; might become insolvent or otherwise refuse to make capital contributions or property distributions when due; that we may be responsible to our partner for indemnifiable losses; that our partner may not perform its property oversight responsibilities; that our partner may have business goals which are inconsistent with ours; and that our partner may be in a position to take action or withhold consent contrary to our instructions or requests. We and our partner may each have the right to trigger a buy-sell arrangement, which could cause us to sell our interest, or acquire our partner's interest, at a time when we otherwise would not have initiated such a transaction.
In some instances, joint venture partners may have competing interests in our markets that could create conflicts of interest. Further, our joint venture partners may experience financial distress, including bankruptcy, and to the extent they do not meet their obligations to us or our joint venture with them, we may be adversely affected.
Seven of our 27 multi-family property joint ventures are owned with one venture partner or its affiliates. We may be adversely effected if we are unable to maintain a satisfactory working relationship with this joint venture partner or if this partner becomes financially distressed.
Risks Related to the Newark Joint Venture and Other Real Estate Operations.
The Newark Joint Venture likely will have an operating loss for the foreseeable future.
We anticipate that the Newark Joint Venture will operate at a loss in 2015 and for several years thereafter. If the Newark Joint Venture operates at a loss, we and our partners in the venture may be required to fund the operating losses and capital requirements by making additional capital contributions. No assurance can be given that we or our venture partners will have the resources or be willing to make such contribution and the failure to make the required contribution may have an adverse impact on us.
If we are unable to pay debt service as it becomes due, we may be forced to sell properties at disadvantageous terms or relinquish our rights to such properties, which would result in the loss of revenues and in a decline in the value of our real property portfolio.
At September 30, 2014, approximately $3.2 million of debt service relating to the Newark Joint Venture is payable prior to the end of 2015 and $4.4 million of debt service is payable from 2016 through 2017. The cash flow from the properties securing the mortgage debt may be insufficient to meet required debt service payments. In particular, the rental revenues from the current tenants at Teachers Village are insufficient to cover all of the Newark Joint Ventures debt service obligations payable from 2015 through 2017. If efforts to generate additional rental revenues from the Teachers Village site are unsuccessful (due to, among other things, the failure to complete the buildings under construction or contemplated to be constructed or to fully lease at satisfactory rates the residential and commercial space at the six buildings contemplated to comprise Teachers Village), the Newark Joint Venture may be unable to meet its debt service obligation with respect to the Teachers Village properties and such properties would require additional capital from the members of the venture or may be foreclosed on by the lenders.
The Newark Joint Venture will be adversely effected if it is limited from using the Teachers Village facilities for purposes other than as contemplated by the applicable financing and tax credit transactions.
The terms and conditions of the financings and tax credits provided to the Newark Joint Venture limit the venture's ability to use the Teachers Village facilities in a manner other than as permitted to be used by the governing transaction documents. Among other things, the New Markets Tax Credits and related contractual obligations provide that if prior to the seven year recapture period, the facilities are used in a manner prohibited by such tax credit program, the credits may be disallowed. The qualified school construction bonds in principal amount of approximately $22.7 million at September 30, 2014 requires that the facilities (or certain portions thereof) be used for at least 19 years as public school facilities and the annual $1 million interest reimbursement provided by the US Treasury is subject to recapture if the facilities or portions thereof are not used for educational purposes for specified periods. The New Jersey Urban Transit Hub tax credits program requires that certain portions of the facilities must be used for residential purposes for at least ten years and that at least 20% of the residential units be allocated for lower/middle income housing. If as a result of market or other conditions, it is determined that the contemplated uses of the facilities are not financially viable, the Newark Joint Venture will be limited in its ability to use these facilities in an alternative manner which may adversely impact our financial condition and results of operations.
We have limited experience in developing and operating development sites.
The principal assets of our Newark Joint Venture are several development sites located in downtown Newark, NJ. Since we have limited experience in the real estate development business, we are subject to risks that differ from those to which we have been subject to historically. Although the principal of the managing member of the Newark Joint Venture (who is formerly the principal of our borrowers) is knowledgeable with respect to the local real estate market, he has limited experience in development projects. There can be no assurance that the Newark Joint Venture will be successful in developing and/or managing the redevelopment of the sites.
The success of our Newark Joint Venture depends, to a large extent, on the principal of the Newark Joint Venture's manager.
The principal of the manager of the Newark Joint Venture was responsible for acquiring all the properties owned by the Newark Joint Venture and is responsible for, among other things, overseeing the construction and leasing activities at Teachers Village and development activities with respect to Market Street and the other properties owned by the venture. We believe that the principal's continued involvement is important to the success of the Newark Joint Venture. The diminution or loss of his services due to disability, death or for any other reasons could have a material adverse effect on the Newark Joint Venture's business, which would result in a material adverse effect on our business.
The Newark Joint Venture carries key man life insurance on such principal in the amount of $40 million. There can be no assurance that the proceeds from such life insurance would be sufficient to compensate the Newark Joint Venture for the loss of his services, and these policies do not provide any benefits if he becomes disabled or is otherwise unable to render services to the Newark Joint Venture.
Our Newark Joint Venture is subject to risks particular to real estate development activities.
Our Newark Joint Venture is subject to the risks associated with development activities. These risks include:
• The inability to complete the Phases II or III of the Teachers Village project because the funds available from the financing and New Markets Tax Credits transactions, due to cost overruns or under estimating the funds needed, may be insufficient for such purpose.
• The failure to obtain governmental and other approvals on a timely basis;
• Construction, financing and other costs of developing the properties owned by the Newark Joint Venture and in particular, Teachers Village, may exceed original estimates, possibly making such activities unprofitable;
• The time required to complete the construction of Teachers Village or to lease up the completed project may be greater than originally anticipated, thereby adversely affecting the Newark Joint Venture's cash flow and liquidity;
• Occupancy rates and rents of a completed project may be insufficient to make such project profitable;
• The inability to acquire all the properties needed to develop the project to its full potential; and
• The inability to complete a development.
Failure of the Newark Joint Venture to comply with the requirements of the New Markets Tax Credit program may result in significant losses and impair our financial condition.
The Newark Joint Venture entered into various arrangements to obtain funding under the New Markets Tax Credit program for the Teachers Village project and in connection therewith received approximately $31 million of net tax credit proceeds. New Markets Tax Credits are subject to recapture for a period of seven years as provided in the Internal Revenue Code. The Newark Joint Venture is required to comply with various regulations and contractual provisions that apply to the these credits and has indemnified the beneficiaries thereof for any loss or recapture of the benefits of such credits until the obligation to deliver tax benefits is relieved. We estimate that such indemnity obligation would not exceed approximately $33 million (exclusive of interest and penalties) and is subject to reduction to the extent the credits are not disallowed. Non-compliance with applicable requirements could result in the tax benefits not being realized by the beneficiaries which would have an adverse effect on our financial position and results of operations.
Risks Related to our Industry
Compliance with REIT requirements may hinder our ability to maximize profits.
In order to qualify as a REIT for Federal income tax purposes, we must continually satisfy tests concerning among other things, our sources of income, the amounts we distribute to our shareholders and the ownership of securities. We may also be required to make distributions to shareholders at disadvantageous times or when we do not have funds readily available for distribution. Accordingly, compliance with REIT requirements may hinder our ability to operate solely on the basis of maximizing profits.
In order to qualify as a REIT, we must also ensure that at the end of each calendar quarter at least 75% of the value of our assets consists of cash, cash items, government securities and qualified REIT real estate assets. The remainder of our investment in securities cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of such issuer. In addition, no more than 5% of the value of our assets can consist of the securities of any one issuer, other than a qualified REIT security. If we fail to comply with these requirements, we must dispose of the portion of our assets in excess of such amounts within 30 days after the end of the calendar quarter in order to avoid losing our REIT status and suffering adverse tax consequences. This requirement could cause us to dispose of assets for consideration of less than their true value and could lead to a material adverse impact on our results of operations and financial condition.
Because Real Estate Investments Are Illiquid, We May Not Be Able to Sell Properties As Needed.
Real estate investments generally cannot be sold quickly. We may not be able to reconfigure our portfolio promptly in response to economic or other conditions. This inability to reallocate our capital promptly could adversely affect our financial condition and results of operations.
Item 1B.
Item 1B. Unresolved Staff Comments.
None.
Executive Officers of Registrant
Set forth below is a list of our executive officers whose terms will expire at our 2015 annual Board of Trustees' meeting. The business history of officers who are also Trustees will be provided in our proxy statement to be filed pursuant to Regulation 14A not later than January 28, 2015. References to a particular year for these biographies refer to the calendar year.
*Jeffrey A. Gould and Matthew J. Gould are sons of Fredric H. Gould, the former chairman of our board of trustees and currently, a trustee.
**Simeon Brinberg is the father-in-law of Mark H. Lundy.
***David W. Kalish is the father of Isaac Kalish.
Mitchell K. Gould (age 42), employed by us since 1998, has been a Vice President since 1999 and Executive Vice President since 2007.
Simeon Brinberg (age 80) served as our Secretary from 1983 through 2013, as a Senior Vice President from 1988 through 2013, and as Senior Counsel since 2006. Mr. Brinberg has been a Vice President of Georgetown Partners, Inc., the managing general partner of Gould Investors L.P., since 1988. Since 1989, Mr. Brinberg has been a Vice President, Senior Vice President or Senior Counsel of One Liberty Properties, Inc. Mr. Brinberg is a member of the New York Bar.
David W. Kalish (age 67), a certified public accountant, has been our Senior Vice President, Finance since 1998. Mr. Kalish was our Vice President and Chief Financial Officer from 1990 until 1998. He has been Chief Financial Officer of One Liberty Properties, Inc. and Georgetown Partners, Inc. since 1990.
Mark H. Lundy (age 52) has been our General Counsel since 2007, Senior Vice President since 2005 and from 1993 to 2005 he served as a Vice President. He served as a Vice President of One Liberty Properties from 2000 to 2006 and has been its Secretary and Senior Vice President since June 1993 and 2006, respectively. Since 2013, Mr. Lundy has served as President and Chief Operating Officer, and from 1990 through 2013 as a Vice President (including Senior Vice President), of Georgetown Partners, Inc. He is a member of the bars of New York and Washington, D.C.
George E. Zweier (age 50), a certified public accountant, has served as our Vice President and Chief Financial Officer since 1998.
Isaac Kalish (age 39), a certified public accountant, has been associated with us since 2004, served as Assistant Treasurer from 2007 through 2014 and as Vice President and Treasurer since 2013 and 2014, respectively. Mr. Kalish has served as Vice President and Assistant Treasurer of One Liberty Properties since 2013 and 2007, respectively, as Assistant Treasurer of Georgetown Partners, Inc. from 2012 through 2013, and as its Treasurer since 2013.
Item 2.
Item 2. Properties.
Our executive office is located at 60 Cutter Mill Road, Suite 303, Great Neck, New York. This office is located in a building owned by a subsidiary of Gould Investors L.P. In 2014, we paid $149,000 for the use of this space. We believe that such facilities are satisfactory for our current and projected needs.
The information set forth under "Item 1 - Business" is incorporated herein by this reference to the extent responsive to the information called for by this item.
Item 3.
Item 3. Legal Proceedings.
None.
Item 4.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common shares of beneficial interest, or Common Shares, are listed on the New York Stock Exchange, or the NYSE, under the symbol "BRT." The following table shows for the periods indicated, the high and low sales prices of the Common Shares as reported in the consolidated transaction reporting system.
On December 1, 2014, the high and low sales prices of our Common Shares was $7.21 and $7.16, respectively.
As of December 1, 2014, there were approximately 957 holders of record of our Common Shares.
We have not paid any cash dividends since 2010. Our tax loss carry forward at December 31, 2013, was approximately $54 million; therefore, we do not anticipate paying cash dividends in the near future.
Stock Performance Graph
This graph compares the performance of our shares with the Standard & Poor's 500 Stock Index, an index consisting of publicly traded mortgage REITs (i.e., FTSE NAREIT Mortgage REITs) and an index consisting of apartment REIT's (i.e., FTSE NAREIT Equity Apartments). The graph assumes $100 invested on September 30, 2009 and assumes the reinvestment of dividends.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among BRT Realty Trust, the S&P 500 Index,
the FTSE NAREIT Mortgage REITs Index, and the FTSE NAREIT Equity Apartments Index
*$100 invested on 9/30/09 in stock or index, including reinvestment of dividends. Fiscal year ending September 30.
Copyright© 2014 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.
Issuer Purchases of Equity Securities
In September 2013, we announced that our Board of Trustees had authorized a share buyback plan pursuant to which, through September 30, 2015, we may expend up to $2 million to repurchase our common shares. We did not repurchase any shares during the quarter ended September 30, 2014.
In December 2014, our Board of Trustees increased to $4 million the amount we can spend to repurchase our common shares and extended the program through September 30, 2017. On December 12, 2014, we agreed to purchase 345,081 of our common shares at a price of $7 per share or a total of $2,416,000. The transaction will settle on December 17, 2014.
Item 6.
Item 6. Selected Financial Data.
The following table, not covered by the report of the independent registered public accounting firm, sets forth selected historical financial data for each of the fiscal years indicated. This table should
be read in conjunction with the detailed information and financial statements appearing elsewhere herein.
(1)The increases from 2012 through 2014 are due primarily to the operations of our multi-family properties.
(2)The increases from 2012 through 2014 are due primarily to increased expenses (i.e., operating expense, interest expense and depreciation and amortization) related to our multi-family property activities. The increase in 2012 from 2011 is a result of, among other things, expenses associated with our multi-family property activities and interest expense associated with Phases I and II of the Newark Joint Venture financings.
(3)The increases from 2012 through 2014 are due to our multi-family property acquisitions and the increase in 2012 from 2011 is due primarily to such acquisitions and the proceeds from the Newark Joint Venture financings and New Markets Tax Credits transactions.
(4)The increases from 2012 through 2014 are due to our multi-family property acquisitions.
(5)Approximately $154.6 million of the increase from 2013 to 2014 and approximately $141.9 million of the increase from 2012 to 2013 is due to the mortgage debt incurred in the multi-family property acquisitions. Of the increase from 2011 to 2012, approximately $89.7 million and $72.8 million is due to the multi-family mortgage debt and the Newark Joint Venture's financing transactions, respectively.
Funds from Operations; Adjusted Funds from Operations.
In view of our multi- family property activities, we disclose below funds from operations ("FFO") and adjusted funds from operations ("AFFO") because we believe that such metrics are a widely recognized and appropriate measure of the performance of an equity REIT.
We compute FFO in accordance with the "White Paper on Funds From Operations" issued by the National Association of Real Estate Investment Trusts ("NAREIT") and NAREIT's related guidance. FFO is defined in the White Paper as net income (loss) (computed in accordance with generally accepting accounting principles), excluding gains (or losses) from sales of property, plus depreciation and amortization, plus impairment write-downs of depreciable real estate and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures will be calculated to reflect funds from operations on the same basis. In computing FFO, we do not add back to net income the amortization of costs in connection with our financing activities or depreciation of non-real estate assets. Since the NAREIT White Paper only provides guidelines for computing FFO, the computation of FFO may vary from one REIT to another. We compute AFFO by adjusting FFO for our straight-line rent accruals, restricted stock expense and deferred mortgage costs (including our share of our unconsolidated joint ventures).
We believe that FFO and AFFO are useful and standard supplemental measures of the operating performance for equity REITs and are used frequently by securities analysts, investors and other interested parties in evaluating equity REITs, many of which present FFO and AFFO when reporting their operating results. FFO and AFFO are intended to exclude GAAP historical cost depreciation and amortization of real estate assets, which assures that the value of real estate assets diminish predictability over time. In fact, real estate values have historically risen and fallen with market conditions. As a result, we believe that FFO and AFFO provide a performance measure that when compared year over year, should reflect the impact to operations from trends in occupancy rates, rental rates, operating costs, interest costs and other matters without the inclusion of depreciation and amortization, providing a perspective that may not be necessarily apparent from net income. We also consider FFO and AFFO to be useful to us in evaluating potential property acquisitions.
FFO and AFFO do not represent net income or cash flows from operations as defined by GAAP. FFO and AFFO should not be considered to be an alternative to net income as a reliable measure of our operating performance; nor should FFO and AFFO be considered an alternative to cash flows from operating, investing or financing activities (as defined by GAAP) as measures of liquidity.
FFO and AFFO do not measure whether cash flow is sufficient to fund all of our cash needs, including principal amortization and capital improvements. FFO and AFFO do not represent cash flows from operating, investing or financing activities as defined by GAAP.
Management recognizes that there are limitations in the use of FFO and AFFO. In evaluating our performance, management is careful to examine GAAP measures such as net income (loss) and cash flows from operating, investing and financing activities. Management also reviews the reconciliation of net income (loss) to FFO and AFFO.
The table below provides a reconciliation of net income (loss) determined in accordance with GAAP to FFO and AFFO for each of the indicated years (amounts in thousands):
The table below provides a reconciliation of net income (loss) per common share (on a diluted basis) determined in accordance with GAAP to FFO and AFFO.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Overview
We are a REIT that during the past three years engaged in three principal business activities: the ownership, operation and development of multi-family properties; the ownership, operation and development of commercial and mixed use real estate assets; and real estate lending. During this period, we commenced our multi-family property activities and de-emphasized our real estate lending activities. As of November 1, 2014, we are not engaged in real estate lending and the financial information (including our consolidated financial statements) included herein presents our real estate lending activities as discontinued operations.
Our multi-family activities derives revenue primarily from tenant rental payments. Generally, these activities involve our investment of 80% of the equity in a joint venture that acquires a multi-family property, with the balance of the equity contributed by our joint venture partner. We commenced these activities in 2012 and as of September 30, 2014, 2013 and 2012, we owned 27, 14 and five multi-family properties, respectively, with 7,609, 3,786 and 1,452 units, respectively.
Our ownership, operation and development of commercial, mixed use and other real estate assets is comprised principally of the activities of the Newark Joint Venture and to a lesser extent, the ownership and operations of various real estate assets located in New York and Florida. The Newark Joint Venture is engaged in the development of properties in downtown Newark, NJ. The properties are to be developed for educational, commercial, retail and residential use. The Newark Joint Venture is involved in a project known as "Teachers Village"-the project currently involves six buildings:
• two buildings were completed in the summer of 2013 (i.e., Phase I of the project) and are partially tenanted by three charter schools and a day care center;
• three buildings-one completed in August 2014, one completed in December 2014 and one anticipated to be completed by May 2015-when the third building is completed, these buildings will provide approximately 29,140 square feet of retail space and 123 residential units (i.e., Phase II of the project); and
• one building, which will provide approximately 10,000 square feet of retail space and 81 residential units-the construction of this building will be funded from a portion of the financing and New Markets Tax Credits proceeds in aggregate amount of $30.2 million obtained in September 2014 (i.e., Phase III of the project).
The venture, which contemplates developing certain of its other properties located in Newark (e.g., Market Street and some of the other land parcels at Teachers Village), is currently unprofitable and it is anticipated that the activities will continue to be unprofitable at least until the Teacher's Village project is constructed fully and reasonable occupancy levels achieved. The venture requires substantial third party funding (including tax credits and financing provided by governmental authorities) for its development activities-no assurance can be given that sufficient funding will be available for its development activities and even if sufficient funding is obtained and construction completed, that such activities will be profitable to us.
Our real estate lending activities involved originating and holding for investment short-term senior mortgage loans secured by commercial and multi-family real estate properties. Revenue was generated from interest income (i.e, the interest borrowers paid on our loans) and to a lesser extent, loan fee income generated on the origination and extension of loans and investment income from securities transactions. These activities decreased over the past three years and we are no longer engaged in real estate lending. Accordingly, these activities are presented as discontinued operations.
Net (loss) income attributable to common shareholders decreased by $14.5 million or 289% from $5 million in 2013 to $(9.5) million in 2014. Net loss increased due to the (i) $7.5 million decrease in income from discontinued operations due to our significantly reduced real estate lending activities and (ii) inclusion in 2013 of $5.1 million of net income attributable to our other real estate segment due primarily to the $5.5 million gain realized from sale of substantially all of our interest in a joint venture that owns a leasehold interest in midtown, New York City. Net (loss) income for 2014 was favorably impacted in our other real estate segment by a $2.6 million adjustment to non-controlling interest. This adjustment is due to the add back of the minority partner's share of interest expense due to a non-recurring deferred interest payment to us by the Newark Joint Venture on $19.5 million of debt (which is eliminated in consolidation). Net loss attributable to common shareholders from our multi-family activities increased in 2014 primarily due to increased real estate operating expenses, interest expense and depreciation and amortization expense related to the multi-family properties acquired in 2014 and the inclusion, for a full year, of such expenses related to the properties acquired in 2013.
2014 Developments
The following summarizes certain of our activities in 2014 and our financial condition at year-end:
• we acquired for an aggregate purchase price of $205.2 million (including aggregate mortgage debt of $144.7 million), 13 multi-family properties with an aggregate of 3,824 units and invested equity of approximately $66.0 million in multi-family properties (i.e., $62.3 million through joint ventures that acquired these properties and $3.7 million in an entity wholly-owned by us);
• we originated $5.5 million of mortgage loans in 2014 compared to $70.3 million in 2013-as of November 1, 2014, we are no longer engaged in real estate lending;
• the Newark Joint Venture completed one of the three buildings contemplated by Phase II of the Teachers Village project (the second building was completed in December 2014) and obtained an aggregate of $30.2 million in debt and New Markets Tax Credits proceeds to fund, among other things, Phase III of this project; and
• we have cash and cash equivalents of approximately $23.2 million and approximately $19.8 million, at September 30, 2014 and December 1, 2014, respectively;
Year Ended September 30, 2014 Compared to Year Ended September 30, 2013
Revenues
The following table compares our revenues for the years indicated:
Rental and other revenue from real estate properties. The components of the increase are: (i) approximately $20.6 million from 13 multi-family properties acquired in 2014; (ii) approximately $11.6 million due to the inclusion, for a full year, of nine properties that were owned for a portion of 2013; (iii) approximately $1.6 million primarily due to inclusion for a full year of rental income from the commercial tenants at Teachers Village; and (iv) $925,000 primarily due to rental rate increases at multi-family properties acquired prior to 2013.
We anticipate that rental income will increase in 2015 as the 2014 operating results only includes multi-family and Newark Joint Venture rental income for a portion of such year due to the timing of the acquisitions of multi-family properties and the lease, for a full year, of commercial space at Teachers Village. Assuming, among other things, that rental and occupancy rates remain stable, and without giving effect to any further acquisitions, we estimate that rental income in 2015 from our 27 multi-family properties and our Newark Joint Venture will be approximately $76.5 million (i.e., $73.7 million from multi-family properties and $2.8 million from the Newark Joint Venture).
Expenses
The following table compares our expenses for the periods indicated:
Operating expenses related to real estate properties. The increase is due to (i) operating expenses of $10.7 million from 13 multi-family properties acquired in 2014, (ii) $6.8 million to the inclusion, for a full year, of operating expenses from nine multi-family properties acquired in 2013, and (iii) $1.9 million to an increase in operating expenses at the Newark Joint Venture. Approximately $1.1 million of the increase at the Newark Joint Venture is due to the commencement of operations at the two buildings completed in September 2013 and $801,000 is due to the resumption of regular management fees after a one-time reduction in 2013. Operating expenses will increase in 2015 because 2014 only includes such expense for a portion of such year, as a result of re-assessments with respect to the 13 multi-family properties acquired in 2014 and real estate taxes at the properties acquired in 2014 may also increase as a result of such acquisitions. Assuming that operating expenses remain stable at our 27 multi-family properties, we estimate that in 2015, operating expenses with respect to these properties will be approximately $38.4 million, including $16.9 million attributable to the 13 properties acquired in 2014.
Interest expense. The components of the increase are as follows: (i) $7.8 million is due to mortgage interest expense on our multi-family properties (of which $4.7 million is due to mortgages on the 13 multi-family properties acquired in 2014 and $3.1 million to the inclusion, for a full year, of the expense associated with nine multi- family properties acquired in 2013; and (ii) $645,000 due to the decrease in capitalized interest as a result of the completion of the Phase I buildings in September 2013. Interest expense will increase in 2015 primarily because 2014 only includes interest expense for a portion of 2014 with respect to the aggregate mortgage debt of $139 million incurred in connection with the 2014 acquisitions of multi-family properties, and does not include the interest expense associated with the Newark Joint Venture financing completed on September 30, 2014. We estimate that our aggregate 2015 interest expense will be approximately $23.1 million (i.e., $15.9 million, $5.4 million and $1.8 million attributable to our multi-family properties, the Newark Joint Venture's financing arrangements and the junior subordinated notes, respectively). Capitalized interest was $1.3 million and $2.3 million in 2014 and 2013, respectively.
Advisor's fee, related party. The fee, calculated based on invested assets, increased primarily due to the purchase of multi-family properties in 2014 and 2013. Approximately $215,000 and $831,000 of the fees paid to the advisor is recorded in discontinued operations for 2014 and 2013, respectively.
General and administrative expense. The increase is due primarily to increased time spent by our full-time personnel on multi-family properties activities and the recording, particularly for 2013, of the expense related to our real estate lending activities in discontinued operations. General and administrative expense is allocated between our two segments in 2014 and 2013 in proportion to the estimated time spent by such personnel on such segments.
Depreciation and amortization. The components of the increase are as follows: (i) $3.2 million is due to the 13 multi-family properties acquired in 2014, (ii) $4.4 million is due to the inclusion, for a full year, of nine multi-family properties acquired in 2013 and (iii) $781,000 is due to the commencement of depreciation with respect to the two Phase I buildings at Teachers Village completed in August/September 2013. We estimate that in 2015, depreciation and amortization relating to our 27 multi-family and Newark Joint Venture properties will be approximately $19 million.
Other revenue and expense items
The following table compares other revenue and expense items for the years indicated:
Equity in earnings of unconsolidated joint ventures. The decrease is primarily due to the inclusion in 2013 of the equity in earnings of a joint venture. We sold substantially all of our interest in this joint venture in 2013.
Gain on sale of available-for-sale securities. The decrease is due to the inclusion in the prior year of gains from the sales of securities. There were no sales in 2014.
Gain on sale of partnership interest. In July 2013, we sold substantially all of our interest in a joint venture that owns a leasehold interest in a property in Manhattan, NY, and recognized a gain of $5.5 million. There was no corresponding gain in 2014.
Discontinued Operations
Discontinued operations primarily reflects our real estate lending activities. Discontinued operations were $1.4 million in 2014 compared to approximately $9 million in 2013. The decrease is primarily due to significantly decreased real estate lending activities.
Year Ended September 30, 2013 Compared to Year Ended September 30, 2012
Revenues
The following table compares our revenues for the years indicated:
Rental and other revenue from real estate properties. The components of the increase are: (i) approximately $11.8 million from nine multi-family properties acquired in 2013; (ii) approximately $7.3 million due to the inclusion, for a full year, of three properties that were only owned for a portion of 2012; (iii) approximately $2.7 million from the consolidation of two properties that were unconsolidated until August 1, 2012; and (iv) approximately $430,000 due to inclusion, beginning in September 2013, of rental income from the tenants at Teachers Village. Partially offsetting the increase was a $365,000 decrease due to the loss of several commercial tenants at the Newark Joint Venture's Market Street and Broad Street properties. The Market Street property is a development site and accordingly, leasing space at this property, which leases are short-term in nature, is difficult.
Expenses
The following table compares our expenses for the periods indicated:
Operating expenses related to real estate properties. The increase is due to operating expenses of $5.9 million from nine multi-family properties acquired in 2013, $3.4 million is due to the inclusion, for a full year, of operating expenses from three multi-family properties acquired in 2012 and $1.6 million is due to the consolidation of two multi-family properties that were unconsolidated until August 2012. This was partially offset by a $538,000 reduction in operating expenses at the Newark Joint Venture primarily due to reduced management fees paid to its manager/developer as a result of a retroactive change, effective February 2012, in the management agreement.
Interest expense. The components of the increase are as follows: (i) $5.2 million is due to the mortgage interest expense on our multi- family properties (of which $2.7 million is due to mortgages on the nine multi-family properties acquired in 2013, $1.9 million is due to the inclusion, for a full year, of interest expense associated with three multi- family properties acquired in 2012, and $707,000 is due to the interest expense associated with two multi-family joint ventures that were unconsolidated until August 2012); (ii) $1.9 million is due to the inclusion, for a full year, of the interest expense related to
the Newark Joint Venture's 2012 financings; and (iii) $592,000 is due to the increase, in August 2012, of the annual interest rate on the junior subordinated notes from 3% to 4.9%. Capitalized interest was $2.3 million and $1.6 million in 2013 and 2012, respectively.
Advisor's fee, related party. The fee, calculated based on invested assets, increased primarily due to the purchase of 13 multi-family properties in 2013 and 2012. Approximately $831,000 and $684,000 of the fees paid to the advisor is recorded in discontinued operations for 2013 and 2012, respectively.
Property acquisition costs. These costs were incurred in connection with our purchase of multi-family properties. Such costs included acquisition fees (including fees paid to our joint venture partners for sourcing transactions), brokerage fees, and legal, due diligence and other transactional costs and expenses.
General and administrative expense. The change is due primarily to the manner in which this expense was allocated between our segments. For 2013, this expense is allocated among our two segments in proportion to the estimated time spent by our full-time personnel on such segments and in 2012 is allocated in proportion to the equity invested in each segment.
Depreciation and amortization. The components of the increase are as follows: (i) $2.6 million is due to the nine multi-family properties acquired in 2013; and (ii) $2.3 million is due to the inclusion, for a full year, of five multi-family properties acquired in 2012 (including two properties that were unconsolidated until August 2012).
Other revenue and expense items
The following table compares other revenue and expense items for the years indicated:
*Not meaningful.
Equity in earnings of unconsolidated joint ventures. The decrease is primarily due to the inclusion in 2012 of an $864,000 distribution from a joint venture in excess of its basis, resulting from the refinancing of a mortgage, which was recorded as income. We sold substantially all our interest in this joint venture in 2013.
Gain on sale of partnership interest. In July 2013, we sold substantially all of our interest in a joint venture that owns a leasehold interest in a property in Manhattan, NY, and recognized a gain of $5.5 million. There was no corresponding gain in 2012.
Discontinued operations
Discontinued operations were approximately $9 million in 2013 compared to approximately $7.5 million in 2012. The increase is primarily due to the recovery in 2013 of a $1 million of loan amounts written off in prior years.
Credit Facility
Our $25 million revolving credit facility expired in June 2014. We made limited use of this facility and its expiration did not and will not have a material adverse effect on us.
Disclosure of Contractual Obligations
The following table sets forth as of September 30, 2014 our known contractual obligations:
(1)Includes payments of principal (including amortization payments) and interest. Assumes that the (i) qualified school construction bonds ($22.7 million as of September 30, 2014) issued in connection with the Newark Joint Venture financing transactions will be refinanced in 2018 on the terms currently in effect and (ii) interest rate on the junior subordinated notes after April 30, 2016 will be 2.15% per annum. See note 7 to our consolidated financial statements. The following table sets forth as of September 30, 2014 information regarding the components of our long-term debt obligations:
(2)Assumes that $474,000 will be paid annually pursuant to the shared services agreement and $2,212,000 pursuant to the Advisory Agreement. Such sums reflect the amount paid in 2014 pursuant to such agreements. No amounts have been reflected as payable pursuant thereto after five years as such amounts are not determinable. See "Business-Our Structure."
(3)Assumes that approximately $2.8 million of property management fees will be paid annually to the managers of our multi-family properties. Such sum reflects the amount we anticipate paying in 2015 on the 27 multi-family properties we owned at September 30, 2014. These fees are typically charged based on a percentage of rental revenues from a property. No amount has been reflected as payable pursuant thereto after five years as such amount is not determinable.
(4)Excludes the purchase obligations of the Newark Joint Venture relating to the construction and related costs of completing Phases II and III of the Teachers Village project. It is anticipated that such costs will be covered by the application of the $22.8 million reflected on our consolidated balance sheet as restricted cash-Newark. See also "-Liquidity and Capital Resources-Newark Joint Venture."
Liquidity and Capital Resources
We require funds to acquire properties (including investments in joint ventures that acquire properties), repay borrowings and pay operating expenses. In 2014, our primary sources of capital and liquidity were our available cash (including restricted cash) and mortgage debt financing (an aggregate of $170.8 million, of which $153.7 million was used to acquire multi-family properties). Our available liquidity at September 30, 2014 and December 1, 2014, was approximately $23.2 million and $19.8 million, respectively.
Multi-Family Properties
We anticipate that the operating expenses will be funded from cash generated from the operations of these properties and that the $46.8 million of debt service (including $15.3 million of principal payments) payable from 2015 through 2016 will be funded from the cash generated from operations of these properties and the refinancing of the mortgage debt which mature during this period. The mortgage debt with respect to these properties generally is non-recourse to us and our subsidiary holding our interest in the applicable joint venture. At September 30, 2014, approximately $9.6 million of restricted cash is available to fund improvements to these properties.
We anticipate that the construction and other costs associated with the Greenville, South Carolina development project will be funded by capital previously contributed by our joint venture and us and in-place construction financing of up to $38.6 million. See note 7 of the consolidated financial statements.
Newark Joint Venture
The Newark Joint's Venture's capital resource and liquidity requirements through September 30, 2016 (excluding development activities, if any, with respect to Market Street or the other Newark Joint Venture properties) are primarily operating expenses in excess of rental revenue, debt service associated with Phases I-III of the Teachers Village project and the construction and related costs associated with Phases II and III of this project.
The approximate $43.8 million required as of September 30, 2014 to complete Phases II and III of the Teachers Village project will be funded by approximately $22.1 million of the $22.8 million reflected as restricted cash-Newark on our consolidated balance sheet, and by approximately $21.7 million of committed but unfunded loans and tax credits, which are not reflected on our consolidated balance sheet. The foregoing sums are to be released or funded, from time to time upon satisfaction of specified construction and permitting related conditions. Though we believe that the Newark Joint Venture has sufficient funds to complete Phases II and III of the Teachers Village project, no assurance can be given in this regard.
We also anticipate that approximate $17.7 million of debt service payable from 2015 through 2016 and the estimated aggregate operating expenses of $1.8 million for such years for the Teachers Village project will be funded as follows:
• $1.2 million from an interest reserve,
• $2.3 million from the US Treasury interest subsidy on the qualified school construction bonds,
• $8.1 million from New Jersey tax credits, and
• the $8.9 million balance from funds generated from the operations of such properties (i.e., rental revenues).
After giving effect to the approximately $1.45 million of annual rental payments to be generated from the leases with the three charter schools and a day-care center, the Newark Joint Venture
estimates that it will require at least an additional $6.0 million in rental payments from commercial and residential tenants at the Teachers Village buildings to cover debt service and operating expenses for each of 2015 and 2016. While the Newark Joint Venture believes that the tenants of the leased retail space at the four completed buildings will, subject to the satisfaction of certain requirements, be rent paying by mid-2015, there is no assurance that such conditions will be satisfied, that the venture will be able to lease the balance of the space at such buildings or the two remaining buildings under construction and to be constructed and that if fully leased, the rental payments therefrom and from rental revenues from the residential units will be sufficient to cover debt service and operating expenses. We may make additional capital contributions to the Newark Joint Venture to cover the shortfall, if any.
In December 2014 our board of trustees increased to $4 million the amount we can spend to repurchase our common shares and extended the program through September 30, 2017. On December 12, 2014, we agreed to purchase 345,081 of our common shares at a price of $7 per share or a total of $2,416,000. This transaction will settle on December 17, 2014.
We believe we have sufficient funds to meet our operating expenses in 2015 and 2016 and to fund any capital contributions required by the general operations of Newark Joint Venture. Our ability to acquire and/or improve multi-family properties is limited by our available cash and the availability of mortgage debt.
Off Balance Sheet Arrangements
Not applicable.
Significant Accounting Estimates and Critical Accounting Policies
Our significant accounting policies are more fully described in Note 1 to our consolidated financial statements. The preparation of financial statements and related disclosure in conformity with accounting principles generally accepted in the United States requires management to make certain judgments and estimates that affect the amounts reported in the consolidated financial statements and accompanying notes. Certain of our accounting policies are particularly important to understand our financial position and results of operations and require the application of significant judgments and estimates by our management; as a result they are subject to a degree of uncertainty. These significant accounting policies include the following:
Principles of Consolidation
We have entered into, and may continue to enter into, various joint venture agreements with unrelated third parties to hold or develop real estate assets. We must determine for each of these joint ventures whether to consolidate the entity or account for our investment under the equity or cost basis of accounting. Investments acquired or created are continually evaluated based on the accounting guidance relating to variable interest entities ("VIEs"), which requires the consolidation of VIEs in which we are considered to be the primary beneficiary. If the investment is determined not to be a VIE, then the investment is evaluated for consolidation (primarily using a voting interest model) under the remaining consolidation guidance relating to real estate entities. If we are the manager of a limited liability company, we also consider the consolidation guidance relating to the rights of non-managing members to assess whether any rights held by such members overcome the presumption of control by us. We evaluate our accounting for investments on a quarterly basis or when a reconsideration event (as defined in GAAP) with respect to our investments occurs. The analysis required to identify VIEs and primary beneficiaries is complex and requires substantial management judgment.
Carrying Value of Real Estate Portfolio
We conduct a quarterly review of each real estate asset owned by us and our joint ventures. This review is conducted in order to determine if indicators of impairment are present on the real estate.
In reviewing the value of the real estate assets owned, whether by us or our joint ventures, if there is an indicator of impairment, we seek to arrive at the fair value of each real estate asset by using one or more valuation techniques, such as comparable sales, discounted cash flow analysis or replacement cost analysis. Our real estate assets and our joint ventures' real estate assets are evaluated for indicators of impairment. If the analysis suggests that the undiscounted cash flows to be generated by the property will be insufficient to recover the investment made by us or any joint venture, as the case may be, an impairment provision will be calculated based upon the excess of the carrying amount of the property over its fair value using a discounted cash flow model. Real estate assets are valued at the lower of the recorded cost or estimated fair value. Any impairment taken with respect to our real estate assets reduces our net income, assets and shareholders' equity to the extent of the amount of the allowance, but it will not affect our cash flow until such time as the property is sold. No such charges were taken in the past three years.
Revenue Recognition
We recognize rental income on an accrual basis, unless we make a judgment that impairment of real estate owned renders doubtful collection of rent in accordance with the applicable lease. In making a judgment as to the collectability of rent, we consider, among other factors, the status of the property, the tenant's financial condition, payment history and anticipated events in the future. Accordingly, management must make a significant judgment as to whether to treat real estate owned as impaired. If we make a decision to treat a "problem" or real estate asset as not impaired and therefore continue to recognize the rent as income on an accrual basis, we could overstate income by recognizing income that will not be collected and the uncollectible amount will ultimately have to be written off. The period in which the uncollectible amount is written off could adversely affect taxable income for a specific year.
Purchase Price Allocations
We allocate the purchase price of properties to net tangible and identified intangible assets acquired based on their fair values. In making estimates of fair values for purposes of allocating purchase price, we use a number of sources, including independent appraisals that may be obtained in connection with the acquisition or financing of the respective property, our own analysis of recently acquired and existing comparable properties in our portfolio and other market data. We also consider information obtained about each property as a result of its pre-acquisition due diligence, marketing and leasing activities in estimating the fair value of the tangible and intangible assets acquired.
Cash Distribution Policy
We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, since our organization. To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we distribute currently (within the time frames prescribed by the Code and the applicable regulations) to our shareholders at least 90% of our adjusted ordinary taxable income. It is the current intention of our management to maintain our REIT status. As a REIT, we generally will not be subject to corporate Federal income tax on taxable income we distribute currently in accordance with the Code and applicable regulations to shareholders. If we fail to qualify as a REIT in any taxable year, we will be subject to Federal income taxes at regular corporate rates and may not be able to qualify as a REIT for four subsequent tax years. Even if we qualify for Federal taxation as a REIT, we may be subject to certain state and local taxes on our income and to Federal
income and excise taxes on undistributed taxable income, i.e., taxable income not distributed in the amounts and in the time frames prescribed by the Code and applicable regulations thereunder.
We have not paid cash dividends since 2010. At December 31, 2013, we had a net operating loss carry-forward of approximately $54 million. Since we can offset our future taxable income, if any, against our tax loss carry-forward until the earlier of 2028 or the tax loss carry- forward has been fully used, we do not expect to pay a dividend in calendar 2015 and it is unlikely that we will be required to pay a dividend for several years thereafter to maintain our REIT status. We do not expect to pay dividends in the near future.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Our junior subordinated notes bear interest at a fixed rate through April 2016 and accordingly, the effect of changes in interest rates would not currently impact the amount of interest expense that we incur under such indebtedness.
With the exception of four mortgages (one which is subject to an interest rate swap agreement), all of our mortgage debt is fixed rate. For the variable rate debt, an increase of 100 basis points in the interest rate would have a negative annual effect of approximately $298,000 and a decrease of 100 basis points in the interest rate would have a $69,000 positive effect on income before taxes.
As of September 30, 2014, we had one interest rate swap agreement outstanding. The fair value of our interest rate swap is dependent upon existing market interest rates and swap spreads, which change over time. At September 30, 2014, if there had been an increase of 100 basis points in forward interest rates, the fair market value of the interest rate swap and net unrealized loss on derivative instrument would have increased by approximately $78,000. If there had been a decrease of 100 basis points in forward interest rates, the fair market value of the interest rate swap and net unrealized loss on derivative instrument would have decreased by approximately $104,000. These changes would not have any impact on our net income or cash.
Item 8.
Item 8. Financial Statements and Supplementary Data.
The information required by this item 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.
Not applicable.
Item 9A.
Item 9A. Controls and Procedures.
A review and evaluation was performed by our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Based on that review and evaluation, the CEO and CFO have concluded that our current disclosure controls and procedures, as designed and implemented, were effective. There have been no significant changes in our internal controls or in other factors that could significantly affect our internal controls subsequent to the date of their evaluation. There were no material weaknesses identified in the course of such review and evaluation and, therefore, we took no corrective measures.
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of 1934, as amended, as a process designed by, or
under the supervision of, a company's principal executive and principal financial officers and effected by a company's board, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that:
• pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of a company;
• provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of a company are being made only in accordance with authorizations of management and directors of a company; and
• provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of a company's assets that could have a material effect on the financial transactions.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of September 30, 2014. In making this assessment, our management used criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (1992).
Based on its assessment, our management believes that, as of September 30, 2014, our internal control over financial reporting was effective based on those criteria.
Our independent auditors, BDO USA, LLP, have issued an audit report on the effectiveness of internal control over financial reporting. This report appears on page of this Annual Report on Form 10-K.
Item 9B.
Item 9B. Other Information.
See "Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities-Issuer Purchases of Equity Securities."
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance.
Apart from certain information concerning our executive officers which is set forth in Part I of this report, the other information required by Item 10 is incorporated herein by reference to the applicable information to be in the proxy statement to be filed for our 2015 Annual Meeting of Shareholders.
Item 11.
Item 11. Executive Compensation.
The information concerning our executive compensation required by Item 11 will be included in the proxy statement to be filed relating to our 2015 Annual Meeting of Shareholders and is incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Except as set forth below, the information required by Item 12 will be included in the proxy statement to be filed relating to our 2015 Annual Meeting of Shareholders and is incorporated herein by reference.
Equity Compensation Plan Information
The table below provides information as of September 30, 2014 with respect to our Common Shares that may be issued upon exercise of outstanding options, warrants and rights:
(1)Excludes 271,925 outstanding shares of restricted stock issued to officers, directors, employees and consultants. These restricted shares generally vest five years from the effective date of the award, subject to acceleration as provided in the agreement and incentive plan governing same.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information concerning relationships and certain transactions required by Item 13 will be included in the proxy statement to be filed relating to our 2015 Annual Meeting of Shareholders and is incorporated herein by reference.
Item 14.
Item 14. Principal Accounting Fees and Services.
The information concerning our principal accounting fees required by Item 14 will be included in the proxy statement to be filed relating to our 2015 Annual Meeting of Shareholders and is incorporated herein by reference.
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules.
(a)
1.All 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:
In reviewing the agreements included as exhibits to this Annual Report on Form10-K, please remember they are included to provide you with information regarding their terms and are not
intended to provide any other factual or disclosure information about us or the other parties to the agreements. The agreements contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the other parties to the applicable agreement and:
• should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate;
• have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement;
• may apply standards of materiality in a way that is different from what may be viewed as material to you or other investors; and
• were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments. Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time.
*Indicates management contract or compensatory plan or arrangement.
(b) Exhibits.
See Item 15(a)(3) above. Except as otherwise indicated with respect to a specific exhibit, the file number for all of the exhibits incorporated by reference is: 001-07172.
(c) Financial Statements.
See Item 15(a)(2) above.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
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 capacity and on the dates indicated.
Item 8, Item 15(a)(1) and (2)
Index to Consolidated Financial Statements and Consolidated Financial Statement Schedules
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.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Trustees and Shareholders
BRT Realty Trust and Subsidiaries
Great Neck, New York
We have audited the accompanying consolidated balance sheets of BRT Realty Trust and Subsidiaries (the "Trust") as of September 30, 2014 and 2013 and the related consolidated statements of operations, comprehensive (loss) income, shareholders' equity, and cash flows for each of the three years in the period ended September 30, 2014. In connection with our audits of the financial statements, we have also audited the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedules are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedules. We believe that our audits provides 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 and Subsidiaries at September 30, 2014, and 2013 and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2014, in conformity with accounting principles generally accepted in the United States of America.
Also, in our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), BRT Realty Trust and Subsidiaries' internal control over financial reporting as of September 30, 2014, based on criteria established in Internal Control-Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") and our report dated December 12, 2014 expressed an unqualified opinion thereon.
/s/ BDO USA LLP
New York, New York
December 12, 2014
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Trustees and Shareholders
BRT Realty Trust and Subsidiaries
Great Neck, New York
We have audited BRT Realty Trust and Subsidiaries' (the "Trust") internal control over financial reporting as of September 30, 2014, based on criteria established in Internal Control-Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the "COSO criteria"). BRT Realty Trust and Subsidiaries management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Item 9A. Controls and Procedures-Management Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Trust's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, BRT Realty Trust and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as of September 30, 2014, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of BRT Realty Trust and Subsidiaries as of September 30, 2014 and 2013, and the related consolidated statements of operations, comprehensive (loss) income, shareholders' equity, and cash flows for each of the three years in the period ended September 30, 2014 and our report dated December 12, 2014 expressed an unqualified opinion thereon.
/s/ BDO USA LLP
New York, New York
December 12, 2014
BRT REALTY TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except per share data)
See accompanying notes to consolidated financial statements.
BRT REALTY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share data)
See accompanying notes to consolidated financial statements.
BRT REALTY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Dollars in thousands)
See accompanying notes to consolidated financial statements.
BRT REALTY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended September 30, 2014, 2013 and 2012
(Dollars in thousands, except share data)
See accompanying notes to consolidated financial statements.
BRT REALTY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
See accompanying notes to consolidated financial statements.
BRT REALTY TRUST AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2014
NOTE 1-ORGANIZATION, BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Background
BRT Realty Trust ("BRT" or the "Trust") is a business trust organized in Massachusetts. BRT (i) owns, operates and develops multi-family properties, (ii) owns, operates and develops commercial and mixed use real estate assets and (iii) through October 31, 2014, originated and held for investment, senior mortgage loans secured by commercial and multi-family real estate properties.
The multi-family properties are generally acquired with venture partners in transactions in which the Trust contributes 50% to 90% of the equity.
BRT conducts its operations to qualify as a real estate investment trust, or REIT, for Federal income tax purposes.
Principles of Consolidation
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 the Trust is determined to be the primary beneficiary. Material intercompany balances and transactions have been eliminated.
RBH-TRB Newark Holdings LLC, referred to herein as the Newark Joint Venture, 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. It was determined that the Trust is the primary beneficiary of this joint venture because it has a controlling interest in that it has the power to direct the activities of the VIE that most significantly impact the entity's economic performance and it has the obligation to absorb losses of the entity and the right to receive benefits from the entity that could potentially be significant to the VIE.
The Trust's consolidated joint ventures that own multi-family properties, other than the joint venture which owns a multi-family property in Kennesaw, GA, were determined to be VIE's because the voting rights of some equity investors are not proportional to their obligations to absorb the expected losses of the entity and their right to receive the expected residual returns. In addition, substantially all of the entity's activities either involve or are conducted on behalf of the investor that has disproportionately fewer voting rights. It was determined that the Trust is the primary beneficiary of these joint ventures because it has a controlling interest in that it has the power to direct the activities of the VIE that most significantly impact the entity's economic performance and it has the obligation to absorb losses of the entity and the right to receive benefits from the entity that could potentially be significant to the VIE.
The joint venture that owns the Kennesaw, GA property was determined not to be a VIE but is consolidated because the Trust has substantive participating rights in the entity giving it a controlling financial interest in the entity.
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 VIE's, the Trust has determined that such joint ventures should be accounted for under the equity method of accounting for financial statement purposes.
BRT REALTY TRUST AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
September 30, 2014
NOTE 1-ORGANIZATION, BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Certain items on the consolidated financial statements for the prior years have been reclassified to conform with the current year's presentation including the reclassification of certain expenses from general and administration to property acquisition costs and the reclassification of the Trust's loan segment operations and assets related to discontinued operations.
Income Tax Status
The Trust qualifies as a real estate investment trust under sections 856-860 of the Internal Revenue Code of 1986, as amended. The Trustees may, at their option, elect to operate the Trust as a business trust not qualifying as a real estate investment trust.
In accordance with ASC Topic 740, the Trust believes that it has appropriate support for the income tax positions taken and, as such, does not have any uncertain tax positions that, if successfully challenged, could result in a material impact on the Trust's financial position or results of operations. The Trust's income tax returns for the previous six years are subject to review by the Internal Revenue Service.
Revenue Recognition
Rental revenue from residential properties is recorded when due from residents and is recognized monthly as it is earned. Rental payments are due in advance. Leases on residential properties are generally for terms that do not exceed one year.
Rental revenue from commercial properties including the base rent that each tenant is required to pay in accordance with the terms of their respective leases, net of any rent concessions and lease incentives is reported on a straight-line basis over the non-cancellable term of the lease.
Real Estate Properties
Real estate properties are stated at cost, net of accumulated depreciation, and include real property acquired through acquisition, development or foreclosure.
The Trust assesses the fair value of real estate acquired (including land, buildings and improvements, and identified intangibles such as above and below market leases and acquired in-place leases, if any) and acquired liabilities and allocates the acquisition price based on these assessments. Fixed-rate renewal options have been included in the calculation of the fair value of acquired leases where applicable. Depreciation is computed on a straight-line basis over the estimated useful lives of the tangible assets. Intangible assets (and liabilities) are amortized over the remaining life of the related lease at the time of acquisition. There were no unamortized value of in-place leases at September 30, 2014. Expenditures for maintenance and repairs are charged to operations as incurred.
Real estate is classified as held for sale when management has determined that it has met the appropriate criteria. Real estate assets and loans that are expected to be disposed of are valued at the lower of their carrying amount or their fair value less costs to sell on an individual asset basis.
BRT REALTY TRUST AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
September 30, 2014
NOTE 1-ORGANIZATION, BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Trust accounts for the sale of real estate when title passes to the buyer, sufficient equity payments have been received, there is no continuing involvement by the Trust and there is reasonable assurance that the remaining receivable, if any, will be collected.
Real Estate Asset Impairments
The Trust reviews each real estate asset owned, including investments in real estate ventures, to determine if there are indicators of impairment. If such indicators are present, the Trust determines whether the carrying amount of the asset can be recovered. Recognition of impairment is required if the undiscounted cash flows estimated to be generated by the asset is less than the asset's carrying amount and that amount exceeds the estimated fair value of the asset. In evaluating a property for impairment, various factors are considered, including estimated 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 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. If future evaluations result in a decrease in the value of the property below its carrying value, the reduction will be recognized as an impairment charge. The fair values related to the impaired real estate are considered to be a level 3 valuation within the fair value hierarchy. There were no indicators of impairments identified during the years ended September 30, 2014 and 2013.
Fixed Asset Capitalization
A variety of costs may be incurred in the development of the Trust's properties. After a determination is made to capitalize a cost, it is allocated to the specific project that is benefited. The costs of land and building under development include specifically identifiable costs. The capitalized costs include pre-construction costs essential to the development of the property, development costs, construction costs, interest costs, real estate taxes, and other costs incurred during the period of development. A construction project is considered substantially completed when it is available for occupancy, but no later than one year from cessation of major construction activity. The Trust ceases capitalization when the project is available for occupancy.
Equity Based Compensation
Compensation expense for restricted stock awards is amortized over the vesting period of such awards, based upon the estimated fair value of such restricted stock at the grant date. For accounting purposes, the restricted shares are not included in the outstanding shares shown on the consolidated balance sheets until they vest; however, they are included in the calculation of both basic and diluted earnings per share as they participate in the earnings of the Trust.
Derivatives and Hedging Activities
The Trust's objective in using derivative financial instruments is to manage interest rate risk. The Trust does not use derivatives for trading or speculative purposes. The Trust records all derivatives on
BRT REALTY TRUST AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
September 30, 2014
NOTE 1-ORGANIZATION, BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Trust has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows are considered cash flow hedges. For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in accumulated other comprehensive income (loss) and subsequently reclassified to earnings in the period in which the hedge transaction affects earnings. The ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. For derivatives not designated as cash flow hedges, changes in the fair value of the derivative are recognized directly in earnings in the period in which they occur.
Per Share Data
Basic earnings (loss) per share was determined by dividing net income (loss) applicable to common shareholders for the applicable year by the weighted average number of shares of beneficial interest outstanding during such year. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue shares of beneficial interest were exercised or converted into shares of beneficial interest or resulted in the issuance of shares of beneficial interest that share in the earnings of the Trust. Diluted earnings (loss) per share was determined by dividing net income (loss) applicable to common shareholders for the applicable year by the total of the weighted average number of shares of beneficial interest outstanding plus the dilutive effect of the Trust's unvested restricted stock using the treasury stock method.
Cash Equivalents
Cash equivalents consist of highly liquid investments, primarily direct United States treasury obligations with maturities of three months or less when purchased.
Restricted Cash
Restricted cash-Newark and restricted cash-multi-family consist principally of cash held for construction costs and property improvements at specific properties as required by certain loan agreements.
Deferred Costs
Fees and costs incurred in connection with obtaining financing and structuring the New Markets Tax Credits related to the Newark Joint Venture (Note 9) are deferred and amortized over the term of the related debt obligations. Fees and costs paid related to the successful negotiation of leases are deferred and amortized on a straight-line basis over the terms of the respective leases.
BRT REALTY TRUST AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
September 30, 2014
NOTE 1-ORGANIZATION, BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Use of Estimates
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 and accompanying notes. Actual results could differ from those estimates.
Segment Reporting
Management has determined that it operates in two reportable segments as of September 30, 2014: a multi-family real estate segment and an other real estate segment. The multi-family real estate segment includes the ownership, operation and development of the Trust's multi-family properties and the other real estate segment includes all activities related to the development, operation and disposition of the Trust's other real estate assets. In the years ended September 30, 2013 and 2012, the Trust operated in a third segment, the loan and investment segment, which includes all activities related to the origination and servicing of the Trusts loan portfolio and other investments. The operations and assets related to this segment are reported as part of discontinued operations as the Trust no longer operates in this segment.
New Pronouncements
In August 2014 the FASB issued ASU 2014-15, "Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties About an Entity's Ability to Continue as a Going Concern." ASU 2014-15 requires management to evaluate whether there are conditions or events that raise substantial doubt about the entity's ability to continue as a going concern and to provide certain disclosures when it is probable that an entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued. ASU 2014-15 is effective for the annual period ended December 31, 2016 and for annual periods and interim periods thereafter with early adoption permitted. ASU 2014-15 is not expected to have a material impact on the Trust's consolidated financial statements.
In June 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-12, "Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period." ASU 2014-12 provides explicit guidance on how to account for share-based payments that require a specific performance target to be achieved which may be achieved after an employee completes the requisite service period. ASU 2014-12 is effective for periods beginning after December 15, 2015 and may be applied either prospectively or retrospectively. ASU 2014-12 is not expected to have a material impact on the Trust's consolidated financial statements.
BRT REALTY TRUST AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
September 30, 2014
NOTE 1-ORGANIZATION, BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers", which supersedes nearly all existing revenue recognition guidance under GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing GAAP. The standard is effective for annual periods beginning after December 15, 2016, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). The Trust is currently evaluating the impact of its pending adoption of ASU 2014-09 on its consolidated financial statements and has not yet determined the method by which the standard will be adopted in 2017.
In April 2014, the FASB issued updated guidance that changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. Under the new guidance, a discontinued operation is defined as a disposal of a component or group of components that is disposed of or is classified as held for sale and represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results. The guidance is effective prospectively as of the first quarter of calendar 2015, with early adoption permitted for new disposals or new classifications as held-for-sale. The Trust early adopted this new guidance in the second quarter of fiscal 2014 and it did not have any effect on the Trust's consolidated financial statements.
NOTE 2-REAL ESTATE PROPERTIES
A summary of activity in real estate properties (by type) for the year ended September 30, 2014, is as follows (dollars in thousands):
(a)Set forth below is information for the year ended September 30, 2014 regarding the Trust's purchases of multi-family properties through joint ventures. The Trust has an 80% equity interest
BRT REALTY TRUST AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
September 30, 2014
NOTE 2-REAL ESTATE PROPERTIES (Continued)
in each venture, except for the Columbus, OH property which is wholly owned, and the Greenville, SC property, in which it has a 74% interest (dollars in thousands):
(i)The Greenville, SC joint venture is developing a 360-unit multi-family property with ground floor retail of approximately 10,000 square feet. The Trust has funded its required capital contribution and as of September 30, 2014 had invested $9,631,000.
(b)Represents the real estate assets of RBH-TRB Newark Holdings LLC, a consolidated VIE which owns operating and development properties in Newark, New Jersey. These properties contain a mix of office, retail, residential, charter schools and surface parking aggregating approximately 565,000 square feet of commercial space and 61 residential apartment units (another 16,000 square feet of commercial space and 62 residential apartment units are currently under construction). Certain of these assets are subject to mortgages in the aggregate principal balance of $20,100,000 held by the Trust, which are eliminated in consolidation. Several of the assets are also encumbered by other mortgages which are discussed in Note 7-Debt Obligations-Mortgages Payable. The Trust made net capital contributions of $4,972,000 and $1,729,000 to this venture in the years ended September 30, 2014 and 2013, respectively, representing its proportionate share of capital required to fund the operations of the venture for its next fiscal year and to purchase additional land parcels. The 2014 contribution includes $2,489,000 for the payment of deferred interest on the loan held by the Trust.
(c)Represents an 8.9 acre development parcel located in Daytona Beach, Florida acquired in foreclosure.
(d)The Trust owns, with a minority partner, a leasehold interest in a portion of a retail shopping center located in Yonkers, New York. The leasehold interest is for approximately 28,500 square
BRT REALTY TRUST AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
September 30, 2014
NOTE 2-REAL ESTATE PROPERTIES (Continued)
feet and, including all option periods, expires in 2045. The Trust has an 85% interest in this joint venture.
The 2014 acquisitions have been accounted for as business combinations. The purchase prices were allocated to the acquired assets and assumed liabilities based on management's estimate of fair value of these acquired assets and assumed liabilities at the dates of acquisition. The preliminary measurements of fair value reflected below are subject to change. The Trust expects to finalize the valuations and complete the purchase price allocations within one year from the dates of acquisition.
The following table summarizes the preliminary allocations of the purchase prices of assets acquired and liabilities assumed during the year ended September 30, 2014 (dollars in thousands):
The following table summarizes the preliminary allocations of the purchase price of properties as recorded as of September 30, 2013, and the finalized allocation of the purchase price, as adjusted, as of September 30, 2014 (dollars in thousands):
BRT REALTY TRUST AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
September 30, 2014
NOTE 2-REAL ESTATE PROPERTIES (Continued)
A summary of the Trust's multi-family properties by state as at and for the year ended September 30, 2014, is as follows (dollars in thousands):
Future minimum rentals to be received by the Trust pursuant to non-cancellable operating leases with terms in excess of one year, from commercial properties owned by the Trust at September 30, 2014, are as follows (dollars in thousands):
Leases at the Trust's multi-family properties are generally for a term of one year or less and are not reflected in the above table.
NOTE 3-IMPAIRMENT CHARGES
The Trust reviews each real estate asset, including those held through investments in unconsolidated joint ventures, for impairment when there is an event or a change in circumstances indicating that the carrying amount may not be recoverable. The Trust measures and records impairment losses, and reduces the carrying value of properties, when indicators of impairment are present and the expected undiscounted cash flows related to those properties are less than their carrying amounts. In cases where the Trust does not expect to recover its carrying costs on properties held for use, the Trust reduces its carrying costs to fair value, and for properties held for sale, the Trust reduces its carrying value to the fair value less costs to sell. During the years ended September 30,
BRT REALTY TRUST AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
September 30, 2014
NOTE 3-IMPAIRMENT CHARGES (Continued)
2014, 2013, and 2012, no impairment charges were recorded. Management does not believe that the values of any properties are impaired as of September 30, 2014.
NOTE 4-INVESTMENT IN UNCONSOLIDATED VENTURES
The Trust is a partner in unconsolidated ventures which own and operate two properties. The Trust's share of earnings in its unconsolidated joint ventures, was $19,000, $198,000 and $829,000 for the years ended September 30, 2014, 2013 and 2012, respectively. The 2012 earnings include a distribution of $846,000 that was in excess of the book basis. Included in 2012 are the results of two previously unconsolidated joint ventures that, effective August 1, 2012, are treated as consolidated subsidiaries of the Trust due to amendments to the operating agreements of the ventures that provided the Trust control of these entities.
In the year ended September 30, 2013, the Trust sold substantially all of its interest in a joint venture that owns a leasehold interest on a property in New York City. The Trust recognized a gain of $5,481,000 on the sale.
NOTE 5-RESTRICTED CASH
Restricted cash represents funds that are being held for specific purposes and are therefore not generally available for general corporate purposes. As reflected on the consolidated balance sheet: (i) "Restricted cash-Newark" represents funds that are held by lenders for the construction of residential/commercial buildings at the Newark Joint Venture, Teachers Village Project; and (ii) "Restricted cash-multi-family" represents funds that are held by or on behalf of the Trust specifically for capital improvements at multi-family properties.
NOTE 6-AVAILABLE-FOR-SALE SECURITIES
The Trust did not hold any available-for-sale securities at September 30, 2014 or 2013. Information regarding the sales of available-for-sale debt and equity securities is presented in the table below (dollars in thousands):
There were no sales of available-for-sale securities during the year ended September 30, 2014.
BRT REALTY TRUST AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
September 30, 2014
NOTE 7-DEBT OBLIGATIONS
Debt obligations consist of the following (dollars in thousands):
Mortgages Payable
The Trust has the following debt obligations outstanding as of the dates indicated all of which are secured by the underlying properties (dollars in thousands):
BRT REALTY TRUST AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
September 30, 2014
NOTE 7-DEBT OBLIGATIONS (Continued)
(1)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 interest rate is 5.5% per year; however, the United States Treasury Department is reimbursing the interest at the rate of 4.99% per year under the Qualified School Construction Bond program and accordingly, the effective rate of interest thereon until 2018 is 0.51% per year
(2)This debt is to be serviced in full by annual payment-in-lieu of taxes ("PILOT"). These obligations are not secured by real property.
(3)The joint venture that acquired and is developing the Greenville, SC development property has access to construction financing of up to $38,623,000 which management anticipates will be adequate to cover the entire cost of the project. The construction loan, which is to be funded as and when customary construction financing conditions are met, is secured by a first mortgage on the property.
BRT REALTY TRUST AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
September 30, 2014
NOTE 7-DEBT OBLIGATIONS (Continued)
Junior Subordinated Notes
At September 30, 2014 and 2013, 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, which includes amortization of deferred costs relating to the junior subordinated notes for the years ended September 30, 2014, 2013 and 2012, was $1,853,000, $1,853,000 and $1,260,000, respectively.
The junior subordinated notes require interest only payments through the maturity date, at which time repayment of all outstanding principal and interest are due.
NOTE 8-DEFERRED INCOME (NEW MARKETS TAX CREDIT TRANSACTION)
In connection with the Teachers Village project, on September 30, 2014, affiliates of JP Morgan Chase ("Chase") contributed $5,100,000, and on September 12, 2012 and February 3, 2012, affiliates of Goldman Sachs (" Goldman") contributed $16,400,000 and $11,200,000, respectively, to special purpose subsidiaries of the Newark Joint Venture and these subsidiaries received the proceeds from the sale of New Markets Tax Credits ("NMTC") for which the project qualified. Chase and Goldman are entitled to receive tax credits against their qualified investments in the project over the seven years commencing as of the dates of their respective contributions. At the end of the seven years, the Newark Joint Venture subsidiaries have the option to acquire the special purpose entities for a nominal fee.
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.
Included in deferred income on the Trust's consolidated balance sheet at September 30, 2014 are $30,990,000 of the Chase and Goldman contributions, which are net of fees of the NMTC transactions and Newark Joint Venture financing transactions. These amounts will be recognized into income when the obligations to comply with the requirements of the NMTC program as set forth in the applicable provisions of the Internal Revenue Code of 1986, as amended (the "Code"), is eliminated. The failure of the Newark Joint Venture to comply with the requirements of the NMTC program may result in the reversal of the tax credit benefits and the related obligation of the Newark Joint Venture to indemnify the beneficiaries of such credits. The tax credits are subject to recapture for a seven year period as provided in the Code.
Costs incurred in structuring these transactions are deferred and will be recognized as an expense based on the maturities of the various mortgage financings, including the debt financing obtained by the Newark Joint Venture contemporaneously with the NMTC transactions. At September 30, 2014 and 2013, these costs totaled $8.7 million and $9.6 million and are included in deferred costs on the consolidated balance sheets.
BRT REALTY TRUST AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
September 30, 2014
NOTE 8-DEFERRED INCOME (NEW MARKETS TAX CREDIT TRANSACTION) (Continued)
The Trust determined that the special purpose subsidiaries are VIE's. The VIE's ongoing activities, which include collecting and remitting interest and fees and NMTC compliance, were all considered in the design of the special purpose entities and are not anticipated to affect the economic performance during the life of the VIE's.
Management considered the obligation to deliver tax benefits, provide guarantees to Chase and Goldman and the Trust's obligation to absorb the losses of the VIE. Management also considered Chase's and 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's.
NOTE 9-INCOME TAXES
The Trust elected to be taxed as a real estate investment trust ("REIT"), as defined under the Internal Revenue Code of 1986, as amended. As a REIT, the Trust will generally not be subject to Federal income taxes at the corporate level if it distributes 100% of its REIT taxable income, as defined, to its shareholders. To maintain its REIT status, the Trust must distribute at least 90% of its taxable income; however if it does not distribute 100% of its taxable income, it will be taxed on undistributed income. There are a number of organizational and operational requirements the Trust must meet to remain a REIT. If the Trust fails to qualify as a REIT in any taxable year, its taxable income will be subject to Federal income tax at regular corporate tax rates and it may not be able to qualify as a REIT for four subsequent tax years. Even if it is qualified as a REIT, the Trust is subject to certain state and local income taxes and to Federal income and excise taxes on the undistributed taxable income. For income tax purposes, the Trust reports on a calendar year.
During the years ended September 30, 2014, 2013 and 2012, the Trust recorded $155,000, $102,000 and $16,000, respectively, of state franchise tax expense, net of refunds, relating to the 2013, 2012 and 2011 tax years.
During the year ended September 30, 2014 and 2013, the Trust also paid $13,000 and $182,000, respectively in alternative minimum tax which resulted from the use of net operating loss carryforwards in tax years 2013 and 2012.
Earnings and profits, which determine the taxability of dividends to shareholders, differs from net income reported for financial statement purposes due to various items including timing differences related to loan loss provisions, impairment charges, depreciation methods and carrying values.
The financial statement income is not expected to be materially different from income for tax purposes for calendar 2014.
At December 31, 2013, the Trust had a net operating loss carry forward of $53,385,000. These net operating losses can be used in future years to reduce taxable income when it is generated. These tax loss carry forwards begin to expire in 2029.
NOTE 10-SHAREHOLDERS' EQUITY
Distributions
During the year ended September 30, 2014, the Trust did not declare or pay any dividends.
BRT REALTY TRUST AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
September 30, 2014
NOTE 10-SHAREHOLDERS' EQUITY (Continued)
Restricted Shares
The Trust's 2012 Incentive Plan, approved by its shareholders in January 2012, permits the Trust to grant stock options, restricted stock, restricted stock units, performance shares awards and any one or more of the foregoing, up to a maximum of 600,000 shares. As of September 30, 2014, 271,975 shares were issued pursuant to this plan. An aggregate of 384,840 shares of restricted stock were granted pursuant to the Trust's 2009 equity incentive plan (the "Prior Plan") and have not yet vested. No additional awards may be granted under the Prior Plan. The restricted shares that have been granted under the 2012 Incentive Plan and the Prior Plan vest five years from the date of grant and under specified circumstances, including a change in control, may vest earlier. For accounting purposes, the restricted shares are not included in the outstanding shares shown on the consolidated balance sheets until they vest, but are included in the earnings per share computation.
During the years ended September 30, 2014, 2013 and 2012 the Trust issued 140,600, 131,525 and 136,650 restricted shares, respectively, under the Trust's equity incentive plans. The estimated fair value of restricted stock at the date of grant is amortized ratably into expense over the applicable vesting period. For the years ended September 30, 2014, 2013 and 2012, the Trust recognized $805,000, $691,000 and $758,000 of compensation expense, respectively. At September 30, 2014, $2,078,000 has been deferred as unearned compensation and will be charged to expense over the remaining vesting periods. The weighted average vesting period is 2.47 years.
Changes in number of shares outstanding under the Trust's equity incentive plans are shown below:
BRT REALTY TRUST AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
September 30, 2014
NOTE 10-SHAREHOLDERS' EQUITY (Continued)
Earnings (Loss) Per Share
The following table sets forth the computation of basic and diluted earnings (loss) per share (dollars in thousands):
Share Buyback and Treasury Shares
In September 2013, the Board of Trustees approved a share repurchase program authorizing the Trust to spend up to $2,000,000 through September 2015 to repurchase its shares of beneficial interest. As of September 30, 2014, no shares have been purchased under this program.
In December 2014, our Board of Trustees increased to $4 million the amount the Trust can spend to repurchase our shares of beneficial interest and extended the program through September 30, 2017. On December 12, 2014, the trust agreed to purchase 345,081 of our shares of beneficial interest at a price of $7 per share, or a total of $2,416,000. The transaction will settle on December 17, 2014.
During the year ended September 30, 2012, 40,925 treasury shares, respectively, were issued in connection with the vesting of restricted stock under the Trust's incentive plans. In fiscal 2012, the Trust cancelled, and restored to the status of authorized and unissued shares, its remaining 1,380,978 treasury shares.
NOTE 11-ADVISOR'S COMPENSATION AND RELATED PARTY TRANSACTIONS
Certain of the Trust's officers and trustees are also officers and directors of REIT Management Corp. ("REIT Management") to which the Trust, pursuant to an amended and restated advisory agreement, as amended, paid advisory fees for administrative services and investment advice. Fredric H. Gould, a trustee and former Chairman of the Board of the Trust, is the sole shareholder of REIT Management. Through December 31, 2011, advisory fees were charged to operations at a rate of 0.6% on invested assets which consist primarily of real estate loans, real estate assets and investment securities.
Effective January 1, 2012, the parties entered into an amendment to the amended and restated advisory agreement pursuant to which (i) the stated expiration date was extended to June 30, 2014, (ii) the minimum and maximum fees payable in a twelve month period to REIT Management were set at $750,000 and $4 million, respectively, subject to adjustment for any period of less than twelve
BRT REALTY TRUST AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
September 30, 2014
NOTE 11-ADVISOR'S COMPENSATION AND RELATED PARTY TRANSACTIONS (Continued)
months and (iii) the Trust is to pay REIT Management the following annual fees which are to be paid on a quarterly basis:
• .45% of the average book value of all real estate properties, excluding depreciation;
• .25% of the average amount of the fair market value of marketable securities;
• .15% of the average amount of cash and cash equivalents;
• 1.0% of the average principal amount of earning loans; and
• .35% of the average amount of the fair market value of non-earning loans;
To the extent loans or real estate are held by joint ventures or other arrangements in which the Trust has an interest, fees vary based on, among other things, the nature of the asset (i.e., real estate or loans), the nature of the Trust's involvement (i.e., active or passive) and the extent of the Trust's equity interests in such arrangements.
Advisory fees amounted to $2,016,000, $1,802,000 and $1,104,000 for the years ended September 30, 2014, 2013 and 2012, respectively, of which $215,000 $831,000 and $684,000, respectively is reported as a component of discontinued operations.
Through December 31, 2012, the Trust's borrowers also paid fees directly to REIT Management based on loan originations, which generally were one-time fees payable upon funding of a loan, in the amount of .5% of the total loan.
Management of certain properties owned by the Trust and certain joint venture properties is provided by Majestic Property Management Corp., a corporation in which Fredric H. Gould is the sole shareholder, under renewable year-to-year agreements. Certain of the Trust's officers and Trustees are also officers and directors of Majestic Property Management Corp. Majestic Property Management Corp. provides real property management, real estate brokerage and construction supervision services to these properties. For the years ended September 30, 2014, 2013 and 2012, fees for these services aggregated $28,000, $81,000, and $74,000, respectively.
Fredric H. Gould is also vice chairman of the board of One Liberty Properties, Inc., a related party, and certain of the Trust's officers and Trustees are also officers and directors of One Liberty Properties, Inc. In addition, Mr. Gould is an executive officer and sole shareholder of Georgetown Partners, Inc., the managing general partner of Gould Investors L.P. and the sole member of Gould General LLC, a general partner of Gould Investors L.P., a related party. Certain of the Trust's officers and Trustees are also officers and directors of Georgetown Partners, Inc. The allocation of expenses for the shared facilities, personnel and other resources is computed in accordance with a shared services agreement by and among the Trust and the affiliated entities and is included in general and administrative expense on the statements of operations. During the years ended September 30, 2014, 2013 and 2012, allocated general and administrative expenses reimbursed by the Trust to Gould Investors L.P. pursuant to the shared services agreement, aggregated $474,000, $633,000 and $705,000, respectively.
NOTE 12-DISCONTINUED OPERATIONS
Effective November 1, 2014 the Trust no longer had any loans in its portfolio and has ceased originating new loans. The loan origination and servicing activities have been reclassified to discontinued operations on the consolidated statements of operations and balances related to this activity have been reclassified as "Assets related to discontinued operations" on the consolidated balance sheets.
BRT REALTY TRUST AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
September 30, 2014
NOTE 13-SEGMENT REPORTING
For the year ended September 30, 2014, management determined that the Trust now operates in two reportable segments: a multi-family real estate segment which includes the ownership and operation of its multi-family properties, and an other real estate segment, which includes the ownership, operation and development of its other real estate assets; in particular, the Newark Joint Venture. In the years ended September 30, 2013 and 2012 the Trust operated in a third segment which included the origination and servicing of the Trust's loan portfolio. The Trust no longer operates in this segment and the operations of this segment are reported as discontinued operations.
The following table summarizes the Trust's segment reporting for the year ended September 30, 2014 (dollars in thousands):
BRT REALTY TRUST AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
September 30, 2014
NOTE 13-SEGMENT REPORTING (Continued)
The following table summarizes the Trust's segment reporting for the year ended September 30, 2013 (dollars in thousands):
BRT REALTY TRUST AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
September 30, 2014
NOTE 13-SEGMENT REPORTING (Continued)
The following table summarizes the Trust's segment reporting for the year ended September 30, 2012 (dollars in thousands):
BRT REALTY TRUST AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
September 30, 2014
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 reported at fair value on the consolidated balance sheets:
Cash and cash equivalents, restricted cash, accounts receivable (included in other assets), accounts payable and accrued liabilities: The carrying amounts reported in the balance sheets for these instruments approximate their fair value due to the short term nature of these accounts.
Real estate loans: At September 30, 2014 the estimated fair value of the Trust's remaining loan which carried a fixed rate of interest is equal to its carrying value assuming a market rate of interest of 10%. At September 30, 2013, the earning mortgage loans of the Trust which had variable rate provisions based upon a spread over prime rate, have an estimated fair value equal to their carrying value, assuming market rates of interest of between 12 and 13%. The Trust's fixed rate earning mortgage loans at September 30, 2013, have an estimated fair value approximately $11,000 greater than their carrying value assuming a market rate of interest of 11% which reflects institutional lender yield requirements.
Junior subordinated notes: At September 30, 2014 and 2013, the estimated fair value of the Trust's junior subordinated notes is less than their carrying value by approximately $22,527,000, and $24,096,000, respectively based on market interest rates of 6.71% and 7.49%, respectively.
Mortgages payable: At September 30, 2014 and 2013,the estimated fair value of the Trust's mortgages payable is lower than their carrying value by approximately $9,451,000 and $10,615,000, respectively, assuming market interest rates between 2.22% and 9.37% and 2.02% and 9.49% respectively. Market interest 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. The fair values of the real estate loans and debt obligations are considered to be Level 2 valuations within the fair value hierarchy.
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 markets 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
BRT REALTY TRUST AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
September 30, 2014
NOTE 14-FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
instruments that are classified as Level 3. Set forth below is information regarding the Trust's financial assets and liabilities measured at fair value as of September 30, 2014 (dollars in thousands):
Derivative financial instruments: 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, and implied volatilities. At September 30, 2014, these derivatives are 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 September 30, 2014, 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.
NOTE 15-COMMITMENT
The Trust maintains a non-contributory defined contribution 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 salary as defined therein. Pension expense approximated $322,000, $310,000 and $338,000 during the years ended September 30, 2014, 2013 and 2012, respectively. At September 30, 2014 and 2013, $48,000 and $80,000, respectively, remains unpaid and is included in accounts payable and accrued liabilities on the consolidated balance sheet.
NOTE 16-DERIVATIVE FINANCIAL INSTRUMENTS
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.
BRT REALTY TRUST AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
September 30, 2014
NOTE 16-DERIVATIVE FINANCIAL INSTRUMENTS (Continued)
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 (loss) on our consolidated balance sheets 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.
Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments are made on the Trust's variable-rate debt.
As of September 30, 2014, the Trust had the following outstanding interest rate derivative that was designated as a cash flow hedge of interest rate risk (dollars in thousands):
Non-designated Hedges
Derivatives not designated as hedges are not speculative and are used to manage the Trust's exposure to interest rate movements and other identified risks but do not meet the hedge accounting requirements. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings and were equal to a loss $550 and $9,375 for the years ended September 30, 2014 and 2013, respectively. As of September 30, 2014, the Trust had the following outstanding derivatives that were not designated as hedges in qualifying hedging relationships (dollars in thousands):
The table below presents the fair value of the Trust's derivative financial instrument as well as its classification on the consolidated balance sheets as of the dates indicated (amounts in thousands):
BRT REALTY TRUST AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
September 30, 2014
NOTE 16-DERIVATIVE FINANCIAL INSTRUMENTS (Continued)
The following table presents the effect of the Trust's derivative financial instrument on the consolidated statements of comprehensive income (loss) for the years ended September 30, 2014 and 2013 (dollars in thousands):
No gain or loss was recognized related to hedge ineffectiveness or to amounts excluded from effectiveness testing on the Trust's cash flow hedges during the years ended September 30, 2014 or 2013. During the twelve months ending September 30, 2015, the Trust estimates an additional $32,000 will be reclassified from other comprehensive income as an increase to interest expense.
Credit-risk-related Contingent Features
The agreement between the Trust and its derivatives counterparty provides that if the Trust defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, the Trust could be declared in default on its derivative obligation.
As of September 30, 2014, the fair value of the derivative in a net liability position, which includes accrued interest, but excludes any adjustment for nonperformance risk related to this agreement, was $11,000. As of September 30, 2014, the Trust has not posted any collateral related to this agreement. If the Trust had been in breach of this agreement at September 30, 2014, it could have been required to settle it obligations thereunder at its termination value of $11,000.
BRT REALTY TRUST AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
September 30, 2014
NOTE 17-QUARTERLY FINANCIAL DATA (Unaudited)
BRT REALTY TRUST AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
September 30, 2014
NOTE 17-QUARTERLY FINANCIAL DATA (Unaudited) (Continued)
NOTE 18-SUBSEQUENT EVENTS
Subsequent events have been evaluated and any significant events, relative to our consolidated financial statements as of September 30, 2014 that warrant additional disclosure have been included in the notes to the consolidated financial statements.
BRT REALTY TRUST AND SUBSIDIARIES
SCHEDULE III-REAL ESTATE PROPERTIES AND ACCUMULATED DEPRECIATION
SEPTEMBER 30, 2014
(Dollars in thousands)
(1)Represents loans which are reported as real estate because they do not qualify for sale treatment under current accounting guidance.
Notes to the schedule:
A reconciliation of real estate properties is as follows:
The aggregate cost of investments in real estate assets for Federal income tax purposes is approximately $2,625 higher than book value.