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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC  20549

 

FORM 10-Q

 

x      Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended June 30, 2014

 

OR

 

o         Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

Commission File Number 001-07172

 

BRT REALTY TRUST

(Exact name of Registrant as specified in its charter)

 

Massachusetts

 

13-2755856

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

60 Cutter Mill Road, Great Neck, NY

 

11021

(Address of principal executive offices)

 

(Zip Code)

 

516-466-3100

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o

 

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

 

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

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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

 

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

 

14,303,237 Shares of Beneficial Interest,

$3 par value, outstanding on August 5, 2014

 

 

 



Table of Contents

 

BRT REALTY TRUST AND SUBSIDIARIES

Table of Contents

 

 

 

Page No.

Part I - Financial Information

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Consolidated Balance Sheets –
June 30, 2014 (unaudited) and September 30, 2013

1

 

 

 

 

Consolidated Statements of Operations –
Three and nine months ended June 30, 2014 and 2013 (unaudited)

2

 

 

 

 

Consolidated Statements of Comprehensive Loss –
Three and nine months ended June 30, 2014 and 2013 (unaudited)

3

 

 

 

 

Consolidated Statement of Equity –
Nine months ended June 30, 2014 (unaudited)

4

 

 

 

 

Consolidated Statements of Cash Flows –
Nine months ended June 30, 2014 and 2013 (unaudited)

5

 

 

 

 

Notes to Consolidated Financial Statements

6

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risks

31

 

 

 

Item 4.

Controls and Procedures

31

 

 

 

Part II — Other Information

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

32

 

 

 

Item 6.

Exhibits

32

 



Table of Contents

 

Part 1 - FINANCIAL INFORMATION

Item 1. Financial Statements

 

BRT REALTY TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share data)

 

 

 

June 30, 2014
(Unaudited)

 

September 
30, 2013

 

ASSETS

 

 

 

 

 

Real estate properties, net of accumulated depreciation and amortization of $22,227 and $11,862

 

$

610,969

 

$

402,896

 

 

 

 

 

 

 

Real estate loans, net, all earning interest

 

1,995

 

30,300

 

Cash and cash equivalents

 

29,439

 

56,905

 

Restricted cash — Newark

 

15,028

 

29,279

 

Restricted cash — multi-family

 

10,167

 

3,360

 

Deferred costs, net

 

13,557

 

12,833

 

Other assets

 

19,106

 

13,918

 

Total Assets

 

$

700,261

 

$

549,491

 

LIABILITIES AND EQUITY

 

 

 

 

 

Liabilities:

 

 

 

 

 

Mortgage payables

 

$

451,655

 

$

313,216

 

Junior subordinated notes

 

37,400

 

37,400

 

Accounts payable and accrued liabilities

 

12,650

 

7,769

 

Deferred income

 

25,850

 

25,848

 

Total Liabilities

 

527,555

 

384,233

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

BRT Realty Trust shareholders’ equity:

 

 

 

 

 

Preferred shares, $1 par value:

 

 

 

Authorized 10,000 shares, none issued

 

 

 

 

 

Shares of beneficial interest, $3 par value:

 

 

 

 

 

Authorized number of shares, unlimited, 13,655 and 13,535 issued

 

40,965

 

40,606

 

Additional paid-in capital

 

166,004

 

165,763

 

Accumulated other comprehensive loss

 

(16

)

(6

)

Accumulated deficit

 

(73,228

)

(67,572

)

Total BRT Realty Trust shareholders’ equity

 

133,725

 

138,791

 

Non-controlling interests

 

38,981

 

26,467

 

Total Equity

 

172,706

 

165,258

 

Total Liabilities and Equity

 

$

700,261

 

$

549,491

 

 

See accompanying notes to consolidated financial statements.

 

1



Table of Contents

 

BRT REALTY TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Dollars in thousands, except share data)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Revenues:

 

 

 

 

 

 

 

 

 

Rental and other revenue from real estate properties

 

$

17,449

 

$

8,250

 

$

46,133

 

$

20,756

 

Interest and fees on real estate loans

 

352

 

2,921

 

2,121

 

7,766

 

Other income

 

314

 

867

 

861

 

1,913

 

Total revenues

 

18,115

 

12,038

 

49,115

 

30,435

 

Expenses:

 

 

 

 

 

 

 

 

 

Operating expenses relating to real estate properties

 

10,042

 

4,595

 

26,071

 

11,158

 

Interest expense

 

5,469

 

3,127

 

15,247

 

8,734

 

Advisor’s fees, related party

 

517

 

497

 

1,447

 

1,314

 

Property acquisition costs

 

718

 

851

 

2,246

 

1,916

 

General and administrative—including $104 and $178 to related party for the three months ended and $451 and $580 for the nine months ended

 

1,579

 

1,859

 

5,006

 

5,416

 

Depreciation and amortization

 

3,801

 

1,832

 

10,375

 

4,737

 

Total expenses

 

22,126

 

12,761

 

60,392

 

33,275

 

Total revenues less total expenses

 

(4,011

)

(723

)

(11,277

)

(2,840

)

Equity in earnings of unconsolidated ventures

 

5

 

54

 

9

 

183

 

Gain on sale of available-for-sale securities

 

 

 

 

482

 

Gain on sale of real estate assets

 

3

 

509

 

3

 

509

 

Net loss

 

(4,003

)

(160

)

(11,265

)

(1,666

)

Plus: net loss attributable to non-controlling interests

 

3,672

 

681

 

5,609

 

1,893

 

Net (loss) income attributable to common shareholders

 

$

(331

)

$

521

 

$

(5,656

)

$

227

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted per share amounts attributable to common shareholders:

 

 

 

 

 

 

 

 

 

Basic and diluted (loss) earnings per share

 

$

(.02

)

$

.04

 

$

(.40

)

$

.02

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic and diluted

 

14,303,237

 

14,162,887

 

14,252,902

 

14,128,398

 

 

See accompanying notes to consolidated financial statements.

 

2



Table of Contents

 

BRT REALTY TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

(Dollars in thousands)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(4,003

)

$

(160

)

$

(11,265

)

$

(1,666

)

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

Net unrealized loss on available-for-sale securities

 

 

(15

)

 

(430

)

Unrealized (loss) gain on derivative instruments

 

(20

)

68

 

(10

)

97

 

Other comprehensive (loss) income

 

(20

)

53

 

(10

)

(333

)

Comprehensive loss

 

(4,023

)

(107

)

(11,275

)

(1,999

)

Plus: Comprehensive loss attributable to non-controlling interests

 

3,675

 

691

 

5,611

 

1,908

 

Comprehensive (loss) income attributable to common shareholders

 

$

(348

)

$

584

 

$

(5,664

)

$

(91

)

 

See accompanying notes to consolidated financial statements.

 

3



Table of Contents

 

BRT REALTY TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF EQUITY

Nine Months Ended June 30, 2014

(Unaudited)

(Dollars in thousands, except share data)

 

 

 

Shares of
Beneficial
Interest

 

Additional
Paid-In
Capital

 

Accumulated
Other
Comprehensive
Loss

 

Accumulated
Deficit

 

Non-
Controlling
Interests

 

Total
Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, September 30, 2013

 

$

40,606

 

$

165,763

 

$

(6

)

$

(67,572

)

$

26,467

 

$

165,258

 

Restricted stock vesting

 

359

 

(359

)

 

 

 

 

Compensation expense — restricted stock

 

 

600

 

 

 

 

600

 

Contributions from non-controlling interests

 

 

 

 

 

20,791

 

20,791

 

Distributions to non-controlling interests

 

 

 

 

 

(2,668

)

(2,668

)

Net loss

 

 

 

 

(5,656

)

(5,609

)

(11,265

)

Other comprehensive loss

 

 

 

(10

)

 

 

(10

)

Comprehensive loss

 

 

 

 

 

 

(11,275

)

Balances, June 30, 2014

 

$

40,965

 

$

166,004

 

$

(16

)

$

(73,228

)

$

38,981

 

$

172,706

 

 

See accompanying notes to consolidated financial statements.

 

4



Table of Contents

 

BRT REALTY TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in Thousands)

 

 

 

Nine Months Ended
June 30,

 

 

 

2014

 

2013

 

Cash flows from operating activities:

 

$

(11,265

)

$

(1,666

)

Net loss

 

 

 

 

 

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

Recovery of previously provided allowances

 

 

(1,022

)

Amortization and depreciation

 

11,865

 

5,991

 

Amortization of deferred fee income

 

(388

)

(1,317

)

Amortization of restricted stock

 

600

 

511

 

Gain on sale of real estate assets

 

(3

)

(509

)

Gain on sale of available-for-sale securities

 

 

(482

)

Equity in earnings of unconsolidated joint ventures

 

(9

)

(183

)

Distribution of earnings of unconsolidated joint ventures

 

14

 

150

 

Increases and decreases from changes in other assets and liabilities:

 

 

 

 

 

Change in straight-line rent

 

(430

)

11

 

Decrease (increase) in interest and dividends receivable

 

273

 

(148

)

Increase in prepaid expenses

 

(607

)

(444

)

Decrease in prepaid interest

 

462

 

2,018

 

Increase in accounts payable and accrued liabilities

 

4,881

 

704

 

Increase in deferred costs

 

 

(456

)

Increase in other assets

 

(4,913

)

(1,657

)

Other

 

6

 

119

 

Net cash provided by operating activities

 

486

 

1,620

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Collections from real estate loans

 

34,045

 

37,468

 

Additions to real estate loans

 

(5,532

)

(67,818

)

Loan loss recoveries

 

 

1,022

 

Additions to real estate properties

 

(189,920

)

(136,403

)

Net costs capitalized to real estate owned

 

(28,544

)

(26,601

)

Net change in restricted cash — Newark

 

14,251

 

18,827

 

Net change in restricted cash — multi-family

 

(6,807

)

(3,773

)

Collection of loan fees

 

180

 

1,420

 

Proceeds from the sale of real estate owned

 

27

 

573

 

Proceeds from the sale of available-for-sale securities

 

 

991

 

Net cash used in investing activities

 

(182,300

)

(174,294

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from mortgage financings

 

139,432

 

111,742

 

Mortgage principal payments

 

(993

)

(3,601

)

Increase in deferred borrowing costs

 

(2,214

)

(1,664

)

Capital contributions from non-controlling interests

 

20,791

 

9,621

 

Capital distribution to non-controlling interests

 

(2,668

)

(1,007

)

Net cash provided by financing activities

 

154,348

 

115,091

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

(27,466

)

(57,583

)

Cash and cash equivalents at beginning of period

 

56,905

 

78,245

 

Cash and cash equivalents at end of period

 

$

29,439

 

$

20,662

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Cash paid during the period for interest

 

$

15,773

 

$

7,558

 

Cash paid during the period for taxes

 

$

209

 

$

85

 

 

See accompanying notes to consolidated financial statements.

 

5



Table of Contents

 

BRT REALTY TRUST AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2014

 

Note 1 — 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) holds for investment senior mortgage loans secured by commercial and multi-family real estate properties.  All of the properties are located in the United States.

 

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.

 

Note 2 - Basis of Preparation

 

The accompanying interim unaudited consolidated financial statements as of June 30, 2014, and for the three and nine months ended June 30, 2014 and 2013, reflect all normal recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the results for such interim periods. The results of operations for the three and nine months ended June 30, 2014 are not necessarily indicative of the results for the full year.  The balance sheet as of September 30, 2013 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

 

Certain items on the consolidated financial statements for the preceding period have been reclassified to conform with the current period’s presentation, primarily to reclassify restricted cash multi-family from cash and cash equivalents.

 

The consolidated financial statements include the accounts and operations of BRT Realty Trust, its wholly owned subsidiaries, 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 the entity to finance its activities without additional subordinated financial support by its equity holders. The Trust was determined to be 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, with the exception of its Mountain Park joint venture, 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. The Trust was determined to be 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.

 

6



Table of Contents

 

Note 2 - Basis of Preparation (Continued)

 

The joint venture that owns the Mountain Park property is consolidated based on the Trust having 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.

 

The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements. Actual results could differ from those estimates.

 

Note 3 - Equity

 

Common Share Dividend Distribution

 

During the quarter ended June 30, 2014, the Trust did not declare a dividend on its shares.

 

Restricted Shares

 

The Trust’s 2012 Incentive Plan, approved by its shareholders in March 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 June 30, 2014, 272,025 shares were issued pursuant to this plan of which 50 shares have vested and 271,975 shares are outstanding and have not vested.  An aggregate of 376,300 shares of restricted stock are outstanding 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.  For the three months ended June 30, 2014 and 2013, the Trust recorded $206,000 and $181,000 of compensation expense, respectively, and for the nine months ended June 30, 2014 and 2013 recorded $600,000 and $511,000 of compensation expense, respectively.  At June 30, 2014, $2,284,000 has been deferred as unearned compensation and will be charged to expense over the remaining vesting periods.  The weighted average vesting period is 2.62 years.

 

Per Share Data

 

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

 

7



Table of Contents

 

Note 3 - Equity (Continued)

 

Basic and diluted shares outstanding for the three months ended June 30, 2014 and 2013, were 14,303,237 and 14,162,887, respectively, and for the nine months ended June 30, 2014 and 2013, were 14,252,902 and 14,128,398, respectively.

 

Note 4 — Restricted Cash

 

Restricted cash represents funds that have been segregated for specific purposes and are therefore not 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 three residential/retail buildings at the Newark Joint Venture; 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 5 - Real Estate Properties

 

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

 

 

 

September
30, 2013
Balance

 

Additions (a)

 

Capitalized
costs and
improvements

 

Depreciation,
amortization
and other
changes

 

June 30, 2014
Balance

 

Multi-family

 

$

299,792

 

$

189,920

 

$

13,347

 

$

(9,072

)

$

493,987

 

Commercial / mixed use (b)

 

92,354

 

 

15,176

 

(1,218

)

106,312

 

Vacant land

 

7,972

 

 

 

 

7,972

 

Retail/Shopping centers

 

2,645

 

 

 

(77

)

2,568

 

Coop/condo apartments

 

133

 

 

13

 

(16

)

130

 

Total real estate properties

 

$

402,896

 

$

189,920

 

$

28,536

 

$

(10,383

)

$

610,969

 

 


(a)         During the nine months ended June 30, 2014, the Trust purchased, through consolidated joint ventures in which the Trust has an 80% equity interest (except for the Columbus, Ohio property which is wholly owned and the Greenville, SC venture in which the Trust has a 74.4% equity interest), the following multi-family properties (dollars in thousands):

 

8



Table of Contents

 

Note 5 - Real Estate Properties (Continued)

 

Location

 

Purchase
Date

 

No of
Units

 

Contract
Purchase
Price

 

Acquisition
Mortgage
Debt

 

Initial
BRT
Equity

 

Property
Acquisition
Costs

 

Houston, TX

 

10/4/13

 

798

 

$

32,800

 

$

24,100

 

$

10,525

 

$

474

 

Pasadena, TX

 

10/15/13

 

144

 

5,420

 

4,065

 

1,687

 

125

 

Humble, TX

 

10/15/13

 

260

 

10,500

 

7,875

 

3,129

 

180

 

Humble, TX

 

10/15/13

 

160

 

6,700

 

5,025

 

1,908

 

129

 

Huntsville, AL

 

10/18/13

 

208

 

12,050

 

9,573

 

3,950

 

202

 

Columbus, OH

 

11/21/13

 

264

 

14,050

 

10,651

 

3,734

 

97

 

Greenville, SC (i)

 

1/14/14

 

N/A

 

7,000

 

 

6,400

 

 

Indianapolis, IN

 

1/21/14

 

400

 

18,800

 

14,500

 

5,300

 

191

 

Nashville, TN

 

4/2/14

 

300

 

26,750

 

17,300

 

8,420

 

296

 

Little Rock, AK

 

4/2/14

 

172

 

6,750

 

4,101

 

2,372

 

117

 

Witchita, KS

 

4/2/14

 

496

 

20,750

 

13,863

 

6,932

 

155

 

Atlanta, GA

 

6/26/14

 

350

 

28,350

 

22,165

 

5,944

 

189

 

Other

 

 

 

 

 

 

 

91

 

 

 

 

 

3,552

 

$

189,920

 

$

133,218

 

$

60,301

 

$

2,246

 

 


(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 funded its required additional capital contributions of $3,231,000 and as of June 30, 2014 had invested $9,631,000.   See Note 7 — Debt Obligations - Mortgages Payable.

 

(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 space, charter schools and surface parking totaling approximately 690,000 square feet, which includes 190,000 square feet currently under construction. Certain of these assets are subject to mortgages in the aggregate principal balance of $20,100,000 held by the Trust as mortgagee, which are eliminated in consolidation. Several of the assets are also encumbered by third party mortgages aggregating $80,425,000 at June 30, 2014. The Trust contributed $4,972,000 to this venture in the nine months ended June 30, 2014, representing its proportionate share of capital required to fund the operations of the venture for the venture’s current fiscal year, to obtain options on additional land parcels and to pay deferred interest on the outstanding mortgage loan that is held by BRT.  The Trust contributed capital of $1,729,000 to this venture in the year ended September 30, 2013, representing its proportionate share of capital required to fund the operations of the venture for the venture’s 2013 fiscal year and to purchase additional land parcels.

 

In July 2014, a consolidated joint venture in which the Trust has an 80% interest, acquired a multi-family property with 272 units located in Houston, TX.  The contract purchase price for this property was $15,300,000 and the purchase was financed with $11,500,000 of mortgage debt.  BRT contributed $5,100,000 of equity to this joint venture.

 

9



Table of Contents

 

Note 6 - Real Estate Loans

 

At June 30, 2014, the Trust had one loan outstanding with a principal balance of $2,000,000 and a book value, net of deferred fees, of $1,995,000.

 

Information relating to the Trust’s real estate loans at September 30, 2013, all of which are earning interest, is summarized as follows (dollars in thousands):

 

 

 

September 30, 2013

 

Property Type

 

Real Estate
Loans

 

Percent

 

Multi-family residential

 

$

16,772

 

55

%

Retail

 

3,100

 

10

%

Hotel

 

1,680

 

6

%

Land

 

8,000

 

26

%

Single family

 

961

 

3

%

 

 

30,513

 

100

%

Deferred fee income

 

(213

)

 

 

Real estate loans, net

 

$

30,300

 

 

 

 

Note 7 — Debt Obligations

 

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

 

 

 

June 30, 2014

 

September 30, 2013

 

Junior subordinated notes

 

$

37,400

 

$

37,400

 

Mortgages payable

 

451,655

 

313,216

 

Total debt obligations

 

$

489,055

 

$

350,616

 

 

Junior Subordinated Notes

 

At June 30, 2014 and September 30, 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 Period

 

Interest Rate

 

August 1, 2012 through April 29, 2016

 

4.90

%

April 30, 2016 through April 30, 2036

 

LIBOR + 2.00

%

 

Interest expense relating to the junior subordinated notes was $458,000, in each of the three months ended June 30, 2014 and 2013, and $1,374,000, for each of the nine months ended June 30, 2014 and 2013.  Amortization of the deferred costs, which is a component of interest expense, was $5,000 for each of the three months ended June 30, 2014 and 2013, and $15,000 for each of the nine months ended June 30, 2014 and 2013.

 

Mortgages Payable

 

During the nine months ended June 30, 2014, the Trust purchased the following properties and incurred the following debt (dollars in thousands):

 

10



Table of Contents

 

Note 7 — Debt Obligations (Continued)

 

Location

 

Purchase
Date

 

Acquisition
Mortgage
Debt

 

Interest
Rate

 

Interest Only
Period

 

Maturity Date

 

Houston, TX

 

10/4/13

 

$

24,100

 

4.85

%

12 months

 

October 2018

 

Pasadena, TX

 

10/15/13

 

4,065

 

4.90

%

12 months

 

November 2018

 

Humble, TX

 

10/15/13

 

7,875

 

4.90

%

12 months

 

November 2018

 

Humble, TX

 

10/15/13

 

5,025

 

4.90

%

12 months

 

November 2018

 

Huntsville, AL

 

10/18/13

 

9,573

 

4.99

%

24 months

 

November 2023

 

Columbus, OH

 

11/21/13

 

10,651

 

4.35

%

 

February 2045

 

Indianapolis, IN

 

1/21/14

 

14,500

 

4.77

%

36 months

 

February 2024

 

Nashville, TN

 

4/2/14

 

17,300

 

3.63

%

8 months

 

November 2022

 

Little Rock, AK

 

4/2/14

 

4,101

 

3.93

%

 

March 2019

 

Witchita, KS

 

4/2/14

 

10,452

 

5.91

%

 

April 2020

 

Witchita, KS

 

4/2/14

 

3,411

 

4.06

%

 

May 2020

 

Atlanta, GA

 

6/26/14

 

22,165

 

3.87

%

24 months

 

July 2021

 

 

 

 

 

$

133,218

 

 

 

 

 

 

 

 

The joint venture that acquired the Greenville, SC development property has obtained access to construction financing of up to $38,600,000.  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, bears an annual interest rate of one month LIBOR + 1.95%, is interest only until July 2017 and matures in January 2019.  At June 30, 2014 and July 31, 2014, $1,158,000 and $2,209,000, respectively, was outstanding on this loan.  This loan is non-recourse to the Trust and the Trust’s subsidiary owning the interest in the joint venture, subject to customary carveouts.

 

In the quarter ended June 30, 2014, the Trust also obtained supplemental mortgage financing on two multi-family properties on the following terms (dollars in thousands):

 

Location

 

Amount

 

Interest Rate

 

Maturity Date

 

Lawrenceville, GA

 

$

1,613

 

5.46

%

March 2022

 

Decatur, GA

 

2,489

 

5.74

%

December 2022

 

 

 

$

4,102

 

 

 

 

 

 

In connection with the July purchase of a multi-family property in Houston, Texas (see note 5 — Real Estate Properties) a joint venture incurred $11,500,000 in mortgage debt.  This debt bears interest at 4.07% and matures in August 2021.

 

Note 8 — Deferred Income (New Markets Tax Credit Transaction)

 

On September 11, 2012 and February 3, 2012, special purpose subsidiaries of the Newark Joint Venture entered into transactions with affiliates of Goldman Sachs (“Goldman”) related to the Teacher’s Village project and received proceeds related to New Market Tax Credits (“NMTC”) program for which the project qualified. 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.

 

11



Table of Contents

 

Note 8 — Deferred Income (New Markets Tax Credit Transaction) (Continued)

 

Goldman contributed $16,400,000 and $11,200,000 to the projects through special-purpose entities created to effect the financing transaction and is entitled to receive tax credits against its qualified investment in the project over the next seven years. At the end of the seven years, the Newark Joint Venture subsidiaries have the option to acquire the special purpose entities for a nominal fee.

 

Deferred income on the Trust’s consolidated balance sheets at June 30, 2014 and September 30, 2013 represents the Goldman contribution, which is net of fees. This amount will be recognized into income when the obligation 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. Risks of non-compliance include recapture (i.e. reversal of the benefit of the tax credit and the related indemnity obligation of the Newark Joint Venture). The tax credits are subject to recapture for a seven year period as provided in the Code.

 

Costs incurred in structuring these transactions are deferred and will be recognized as interest expense based on the maturities of the various mortgage financings related to the NMTC transaction.  At June 30, 2014 and September 30, 2013 these costs totaled $8.9 million and $9.6 million, respectively, and are included in deferred costs, net on the consolidated balance sheets.

 

The Trust determined that these special purpose entities are VIEs. The VIEs 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 VIEs.

 

Management considered the obligation to deliver tax benefits and provide guarantees to Goldman and the Trust’s obligations to absorb the losses of the VIE. Management also considered Goldman’s lack of a material interest in the underlying economics of the project. Management concluded that the Trust is the primary beneficiary and has therefore consolidated the VIEs.

 

Note 9 - Segment Reporting

 

Management has determined that the Trust operates in three reportable segments: a multi-family property segment which includes the ownership, operation and development of multi-family properties; an other real estate segment which includes the ownership, operation and development of the Trust’s other real estate assets and, in particular, the Newark Joint Venture; and a loan and investment segment which includes the origination and servicing of the Trust’s loan portfolio and its investments.

 

12



Table of Contents

 

Note 9 -Segment Reporting (Continued)

 

The following table summarizes the Trust’s segment reporting for the period indicated (dollars in thousands):

 

 

 

Three Months Ended June 30, 2014

 

 

 

Multi-
Family
Real Estate

 

Other
Real Estate

 

Loan and
Investment

 

Total

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

Rental and other revenues from real estate properties

 

$

16,201

 

$

1,248

 

 

$

17,449

 

Interest and fees on real estate loans

 

 

 

$

352

 

352

 

Other income

 

 

263

 

51

 

314

 

Total revenues

 

16,201

 

1,511

 

403

 

18,115

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

Operating expenses relating to real estate properties

 

8,759

 

1,283

 

 

10,042

 

Interest expense

 

4,311

 

1,101

 

57

 

5,469

 

Advisor’s fee, related party

 

391

 

84

 

42

 

517

 

Property acquisition costs

 

718

 

 

 

718

 

General and administrative

 

1,409

 

102

 

68

 

1,579

 

Depreciation and amortization

 

3,363

 

438

 

 

3,801

 

Total expenses

 

18,951

 

3,008

 

167

 

22,126

 

Total revenues less total expenses

 

(2,750

)

(1,497

)

236

 

(4,011

)

Equity in earnings of unconsolidated joint ventures

 

 

5

 

 

5

 

Gain on sale of real estate assets

 

3

 

 

 

3

 

Net (loss) income

 

(2,747

)

(1,492

)

236

 

(4,003

)

Plus: net loss attributable to non- controlling interests

 

150

 

3,522

 

 

3,672

 

Net (loss) income attributable to common shareholders

 

$

(2,597

)

$

2,030

 

$

236

 

$

(331

)

Segment assets at June 30, 2014

 

$

545,676

 

$

151,557

 

$

3,028

 

$

700,261

 

 

13



Table of Contents

 

Note 9 -Segment Reporting (Continued)

 

The following table summarizes the Trust’s segment reporting for the period indicated (dollars in thousands):

 

 

 

Nine Months Ended June 30, 2014

 

 

 

Multi-
Family
Real Estate

 

Other
Real Estate

 

Loan and
Investment

 

Total

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

Rental and other revenues from real estate properties

 

$

42,526

 

$

3,607

 

 

$

46,133

 

Interest and fees on real estate loans

 

 

 

$

2,121

 

2,121

 

Other income

 

 

798

 

63

 

861

 

Total revenues

 

42,526

 

4,405

 

2,184

 

49,115

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

Operating expenses relating to real estate properties

 

22,655

 

3,416

 

 

26,071

 

Interest expense

 

11,555

 

3,490

 

202

 

15,247

 

Advisor’s fee, related party

 

1,010

 

241

 

196

 

1,447

 

Property acquisition costs

 

2,246

 

 

 

2,246

 

General and administrative

 

4,351

 

330

 

325

 

5,006

 

Depreciation and amortization

 

9,069

 

1,306

 

 

10,375

 

Total expenses

 

50,886

 

8,783

 

723

 

60,392

 

Total revenues less total expenses

 

(8,360

)

(4,378

)

1,461

 

(11,277

)

Equity in earnings of unconsolidated joint ventures

 

 

9

 

 

9

 

Gain on the sale of real estate

 

3

 

 

 

3

 

Net (loss) income

 

(8,357

)

(4,369

)

1,461

 

(11,265

)

Plus: net loss attributable to non- controlling interests

 

418

 

5,191

 

 

5,609

 

Net (loss) income attributable to common shareholders

 

$

(7,939

)

$

822

 

$

1,461

 

$

(5,656

)

Segment assets at June 30, 2014

 

$

545,676

 

$

151,557

 

$

3,028

 

$

700,261

 

 

14



Table of Contents

 

Note 9 -Segment Reporting (Continued)

 

The following table summarizes the Trust’s segment reporting for the period indicated (dollars in thousands):

 

 

 

Three Months Ended June 30, 2013

 

 

 

Multi-Family
Real Estate

 

Other
Real Estate

 

Loan and
Investment

 

Total

 

 

 

 

 

 

 

 

 

 

 

Rental and other revenue from real estate properties

 

$

7,515

 

$

735

 

 

$

8,250

 

Interest and fees on real estate loans

 

 

 

$

2,921

 

2,921

 

Other income

 

 

235

 

632

 

867

 

Total revenues

 

7,515

 

970

 

3,553

 

12,038

 

Operating expenses relating to real estate properties

 

3,942

 

653

 

 

4,595

 

Interest expense

 

1,970

 

836

 

321

 

3,127

 

Advisor’s fees, related party

 

202

 

64

 

231

 

497

 

General and administrative

 

499

 

197

 

1,163

 

1,859

 

Property acquisition costs

 

851

 

 

 

851

 

Depreciation and amortization

 

1,648

 

184

 

 

1,832

 

Total expenses

 

9,112

 

1,934

 

1,715

 

12,761

 

 

 

 

 

 

 

 

 

 

 

Total revenues less total expenses

 

(1,597

)

(964

)

1,838

 

(723

)

 

 

 

 

 

 

 

 

 

 

Equity in earnings of unconsolidated ventures

 

 

54

 

 

54

 

Gain on sale of real estate assets

 

 

509

 

 

509

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

(1,597

)

(401

)

1,838

 

(160

)

Plus: net loss attributable to non-controlling interests

 

137

 

544

 

 

681

 

Net income (loss) attributable to common shareholders

 

$

(1,460

)

$

143

 

$

1,838

 

$

521

 

 

 

 

 

 

 

 

 

 

 

Segment assets at June 30, 2013

 

$

262,662

 

$

150,878

 

$

88,290

 

$

501,830

 

 

15



Table of Contents

 

Note 9 -Segment Reporting (Continued)

 

The following table summarizes the Trust’s segment reporting for the period indicated (dollars in thousands):

 

 

 

Nine Months Ended June 30, 2013

 

 

 

Multi-Family
Real Estate

 

Other
Real Estate

 

Loan and
Investment

 

Total

 

 

 

 

 

 

 

 

 

 

 

Rental and other revenue from real estate properties

 

$

18,580

 

$

2,176

 

 

$

20,756

 

Interest and loan fees

 

 

 

$

7,766

 

7,766

 

Other income

 

 

808

 

1,105

 

1,913

 

Total revenues

 

18,580

 

2,984

 

8,871

 

30,435

 

Operating expenses relating to real estate properties

 

9,234

 

1,924

 

 

11,158

 

Interest expense

 

5,033

 

2,671

 

1,030

 

8,734

 

Advisor’s fees, related party

 

502

 

155

 

657

 

1,314

 

Property acquisition costs

 

1,916

 

 

 

1,916

 

General and administrative

 

1,254

 

547

 

3,615

 

5,416

 

Depreciation and amortization

 

4,186

 

551

 

 

4,737

 

Total expenses

 

22,125

 

5,848

 

5,302

 

33,275

 

 

 

 

 

 

 

 

 

 

 

Total revenues less total expenses

 

(3,545

)

(2,864

)

3,569

 

(2,840

)

 

 

 

 

 

 

 

 

 

 

Equity in earnings of unconsolidated ventures

 

 

183

 

 

183

 

Gain on sale of available- for-sale securities

 

 

 

482

 

482

 

Gain on sale of real estate assets

 

 

509

 

 

509

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

(3,545

)

(2,172

)

4,051

 

(1,666

)

Plus: net loss attributable to non-controlling interests

 

227

 

1,666

 

 

1,893

 

Net income (loss) attributable to common shareholders

 

$

(3,318

)

$

(506

)

$

4,051

 

$

227

 

 

 

 

 

 

 

 

 

 

 

Segment assets at June 30, 2013

 

$

262,662

 

$

150,878

 

$

88,290

 

$

501,830

 

 

16



Table of Contents

 

Note 10 — Fair Value of Financial Instruments

 

Financial Instruments Not Measured at Fair Value

 

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

 

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

 

Real estate loan:  The remaining earning mortgage loan of the Trust has a fixed rate and an estimated fair value which is equal to its carrying value assuming a market interest rate of 10%, which the Trust believes reflects current institutional lender yield requirements.

 

Junior subordinated notes: At June 30, 2014, the estimated fair value of the Trust’s junior subordinated notes is lower than their carrying value by approximately $21.8 million based on a market interest rate of 6.57%.

 

Mortgage payables:  At June 30, 2014, the estimated fair value of the Trust’s mortgage payables is lower than their carrying value by approximately $8.7 million assuming market interest rates between 2.13% and 9.38%.  Market interest rates were determined using rates which the Trust believes reflects current institutional lender yields requirements.

 

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

 

Financial Instruments Measured at Fair Value

 

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

 

17



Table of Contents

 

Note 10 — Fair Value of Financial Instruments (Continued)

 

Set forth below is information regarding the Trust’s financial assets measured at fair value as of June 30, 2014 (dollars in thousands):

 

 

 

Carrying and

 

Fair Value Measurements
Using Fair Value Hierarchy

 

 

 

Fair Value

 

Level 1

 

Level 2

 

Financial Assets:

 

 

 

 

 

 

 

Interest rate swap

 

$

(16

)

 

 

$

(16

)

 

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, foreign exchange rates, and implied volatilities.  At June 30, 2014, this derivative is included in other assets on the consolidated balance sheet.

 

Although the Trust has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with it utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparty.  As of June 30, 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 11 — 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 these objectives, the Trust primarily uses interest rate swaps as part of its interest rate risk management strategy.  Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Trust making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

 

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income (loss) on the Trust’s consolidated balance sheets and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings.

 

As of June 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):

 

Interest Rate Derivative

 

Notional

 

Rate

 

Maturity

 

Interest rate swap

 

$

1,791

 

5.25

%

April 1, 2022

 

 

18



Table of Contents

 

Note 11 — Derivative Financial Instruments (Continued)

 

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 gain of $0 and $1,200 for the three months ended June 30, 2014 and June 30, 2013, respectively, and a loss of $550 and $4,500 for the nine months ended June 30, 2014 and 2013, respectively. As of June 30, 2014, the Trust had the following outstanding derivatives that were not designated as hedges in qualifying hedging relationships (dollars in thousands):

 

 

 

Notional

 

 

 

 

 

Interest Rate Derivative

 

Amount

 

Rate

 

Maturity

 

 

 

 

 

 

 

 

 

Interest Rate Caps

 

$

24,700

 

1.0

%

October 1, 2014

 

 

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 (dollars in thousands):

 

Derivatives as of:

 

June 30, 2014

 

September 30, 2013

 

Balance Sheet Location

 

Fair Value

 

Balance Sheet Location

 

Fair Value

 

Other assets

 

$

 

Other assets

 

$

1

 

Accounts payable and accrued liabilities

 

$

17

 

Accounts payable and accrued liabilities

 

$

6

 

 

The following table presents the effect of the Trust’s derivative financial instrument on the consolidated statements of comprehensive loss for the periods indicated (dollars in thousands):

 

 

 

Three Months Ended
June 30,

 

Nine Months Ended
June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Amount of gain (loss) recognized on derivative in Other Comprehensive (Loss) income

 

$

(29

)

$

59

 

$

(36

)

$

69

 

Amount of loss reclassified from Accumulated Other Comprehensive (Loss) income into Interest Expense

 

(9

)

(9

)

(26

)

(28

)

 

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 three and nine months ended June 30, 2014 and June 30, 2013.  During the twelve months ending June 30, 2015, the Trust estimates an additional $34,000 will be reclassified from accumulated other comprehensive income (loss) as an increase to interest expense.

 

Credit-risk-related Contingent Features

 

The Trust has an agreement with one of its derivative counterparties that contains a provision whereby 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 obligations.  As of June 30, 2014, the Company had $17,000 derivatives in a liability position.

 

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Note 12 — New Accounting Pronouncement

 

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.

 

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 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 13 - Subsequent Events

 

Subsequent events have been evaluated and any significant events, relative to our consolidated financial statements as of June 30, 2014 that warrant additional disclosure, have been included in the notes to the consolidated financial statements.

 

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Table of Contents

 

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

 

Forward-Looking Statements

 

With the exception of historical information, this report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended.  We intend such forward-looking statements to be covered by the safe harbor provision for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and include this statement for purposes of complying with these safe harbor provisions.  Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words “may”, “will”, “believe”, “expect”, “intend”, “anticipate”, “estimate”, “project”, or similar expressions or variations thereof.  Forward-looking statements involve known and unknown risks, uncertainties and other factors which are, in some cases, beyond our control and which could materially affect actual results, performance or achievements.  Investors are cautioned not to place undue reliance on any forward-looking statements and are urged to read “Item 1A Risk Factors” in our Annual Report on Form 10-K for the year ended September 30, 2013.

 

Unless otherwise indicated or the context otherwise requires, all references to a year (e.g., 2014,) refer to the applicable fiscal year ended September 30th.

 

Overview

 

We are a real estate investment trust, also known as a REIT, 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 activities.

 

Our multi-family activities derive 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 June 30, 2014, we own 25 multi-family properties with 7,338 units (excluding the Greenville, South Carolina multi-family development property which will contain 360 residential units and approximately 10,000 square feet of retail space, and which we anticipate will be completed in 2016).

 

Our ownership, operation and development of commercial, mixed use and other real estate assets is comprised substantially 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 developing properties in downtown Newark, NJ. The properties are being developed for educational, commercial, retail and residential use. The Newark Joint Venture is involved in a development project known as “Teachers Village” — the project involves six buildings: (i) 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; (ii) three buildings are under construction, which we anticipate will be completed from August 2014 through February 2015, and will provide approximately 29,140 square feet of retail space and 123 residential units (i.e., Phase II of the project); and (iii) subject to obtaining the necessary financing, the construction of one building which will provide approximately 10,000 square feet of retail space and 81 residential units (i.e., Phase III of the project).  The venture is currently unprofitable and it is anticipated that the activities will continue to be unprofitable at least until the Teachers Village project is constructed fully and reasonable occupancy levels are achieved. The venture, which contemplates developing certain of its other properties located in Newark, requires substantial third-party funding (including tax credits and financing provided by governmental agencies) for its development activities—no assurance can be given that sufficient funding will be available for Phase III or the venture’s other Newark based development activities, and even if sufficient funding is obtained and construction completed, that such activities will be profitable to us.

 

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Table of Contents

 

Our real estate lending activities involve originating and holding for investment short-term senior mortgage loans which are generally secured by commercial and multi-family real estate property in the United States. Revenue is generated from interest income (i.e., the interest borrowers pay on our loans) and to a lesser extent, loan fee income generated on the origination and extension of loans. Our lending activities have decreased significantly (i.e., in the three months ended June 30, 2014, we did not originate any loans) and will continue to decrease due to our increased emphasis on our multi-family activities, increased competition and reduced demand for our loans.

 

The following tables set forth (i) the impact of these lines of business on our total revenues and net (loss) income attributable to common shareholders for the periods indicated and (ii) our total assets applicable to each segment for the periods indicated (dollars in thousands):

 

 

 

Nine Months Ended June 30,

 

 

 

2014

 

2013

 

 

 

Total
Revenues

 

Net (Loss)
Income
Attributable
to Common
Shareholders

 

Total
Revenues

 

Net (Loss)
Income
Attributable
to Common
Shareholders

 

 

 

 

 

 

 

 

 

 

 

Multi-family real estate

 

$

42,526

 

$

(7,939

)

$

18,580

 

$

(3,318

)

Other real estate

 

4,405

 

822

 

2,984

 

(506

)

Loan and investment

 

2,184

 

1,461

 

8,871

 

4,051

 

 

 

$

49,115

 

$

(5,656

)

$

30,435

 

$

227

 

 

 

 

Segment Assets at

 

 

 

June 30,

 

 

 

2014

 

2013

 

Multi-family real estate

 

$

545,676

 

$

262,662

 

Other real estate

 

151,557

 

150,878

 

Loan and investment

 

3,028

 

88,290

 

 

 

$

700,261

 

$

501,830

 

 

The change in net (loss) income attributable to common shareholders for the nine months ended June 30, 2014 from the corresponding prior year period is primarily due to a $4.6 million increase in the loss sustained in multi-family property activities and a $2.6 million decrease in income from real estate lending activities. These changes are explained below.  Net (loss) income attributable to common shareholders for the nine months ended June 30, 2014 was favorably impacted by a $2.6 million adjustment to non-controlling interest.  The adjustment for the 2014 period 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).  A similar type of adjustment favorably impacted net (loss) income attributable to common shareholders for the three months ended June 30, 2014.

 

Historically, our primary source of revenue and income had been derived from our real estate lending activities. As a result of the commencement in 2012 of our multi- family property activities, our primary source of revenues in 2014 is generated by multi-family activities. We anticipate that we will continue to generate more revenue from multi-family activities and less revenue and income from real estate lending activities.

 

The following highlights our activities during the nine months ended June 30, 2014 and our financial condition as of such date:

 

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Table of Contents

 

·                  We acquired eleven multi-family properties with an aggregate of 3,552 units for an aggregate purchase price of $182.9 million (including an aggregate of $133.2 million of mortgage debt and excluding acquisition costs of $2.1 million) and the Greenville, South Carolina development property for an aggregate purchase price of $7.0 million.

 

·                  We originated loans of $5.5 million in the nine months ended June 30, 2014 compared to $67.8 million in the corresponding prior year period.

 

·                  At June 30, 2014, our multi-family portfolio totaled 25 properties (excluding the South Carolina development property), containing 7,338 residential units with a book value of $478.4 million;

 

·                  At June 30, 2014 we had cash and cash equivalents of $29.4 million.

 

In July 2014, we purchased, through a joint venture in which we have an 80% equity interest, a multi-family property with an aggregate of 272 units for a contract purchase price of approximately $15.3 million (including approximately $11.5 million of mortgage debt).

 

Results of Operations

 

In describing the changes in results of operations, we use the following terms: (i) “new properties” refers to multi-family properties acquired after June 30, 2013- the impact of the ownership of such properties is reflected in the applicable  2014 periods and has no effect on the corresponding 2013 periods; (ii) “partial period properties” refers to multi-family properties acquired in the three months or nine months ended June 30, 2013, as the case may be  —as partial period properties were only owned for a portion of the applicable 2013 periods, the results of operations for such period only reflect the ownership of the property for a portion of such period-not the entire period; and (iii) “previously acquired properties” refers to multi-family properties acquired prior to July 1, 2013-as these properties were owned by us for the entire three and nine months ended June 30, 2014 and 2013, changes to  results of operations with respect to these properties is the result of changes in occupancy rates, rental rates or such other factors as are described herein.

 

Three months ended June 30, 2014 compared to the three months ended June 30, 2013.

 

Revenues

 

The following table compares our revenues for the periods indicated:

 

 

 

Three Months Ended
June 30,

 

Increase

 

%

 

(Dollars in thousands):

 

2014

 

2013

 

(Decrease)

 

Change

 

Rental and other revenue from real estate properties

 

$

17,449

 

$

8,250

 

$

9,199

 

111.5

%

Interest and fees on real estate loans

 

352

 

2,921

 

(2,569

)

(88.0

)

Other income

 

314

 

867

 

(553

)

(63.8

)

Total revenues

 

$

18,115

 

$

12,038

 

$

6,077

 

50.5

%

 

Rental and other revenue from real estate properties.  The increase is due to $7.4 million of rental revenue from new properties, $964,000 of rental revenue from partial period properties, $511,000 from leasing space at the buildings completed in Phase I of the Newark Joint Venture and $347,000 primarily due to rental rate increases at previously acquired properties.  The average occupancy rate at the previously acquired properties was 95% for each of the quarters ended June 30, 2014 and 2013.

 

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Table of Contents

 

Interest and fees on real estate loans.  The decrease is due to the reduction in outstanding loans and decreased loan origination activities.  These components of revenues will continue to decrease due to our emphasis on multi-family property activities and decreased emphasis on loan origination activities.

 

Other income.  The decrease is due to the inclusion in the 2013 period of a $600,000 recovery relating to a loan that was charged off in a prior period.

 

Expenses

 

The following table compares our expenses for the periods indicated:

 

 

 

Three Months Ended
June 30,

 

Increase

 

 

 

(Dollars in thousands)

 

2014

 

2013

 

(Decrease)

 

% Change

 

Operating expenses relating to real estate properties

 

$

10,042

 

$

4,595

 

$

5,447

 

118.5

%

Interest expense

 

5,469

 

3,127

 

2,342

 

74.9

 

Advisor’s fees, related party

 

517

 

497

 

20

 

4.0

 

Property acquisition costs

 

718

 

851

 

(133

)

(15.6

)

General and administrative

 

1,579

 

1,859

 

(280

)

(15.1

)

Depreciation and amortization

 

3,801

 

1,832

 

1,969

 

107.5

 

Total expenses

 

$

22,126

 

$

12,761

 

$

9,365

 

73.4

%

 

Operating expenses relating to real estate properties.  The increase is comprised primarily of $3.8 million of operating expenses from new properties, $689,000 from partial period properties, $281,000 primarily from increased real estate taxes at previously acquired properties and $654,000 from our Newark Joint Venture.  The increase at the Newark Joint Venture includes a $245,000 increase in the asset management fee paid to the manager/developer, a $105,000 increase in real estate taxes (due to re-assessments) and an aggregate increase of $199,000 in repairs and maintenance, security and insurance (primarily due to the commencement of operations at the Phase I buildings).  The asset management fee increased because the 2013 period reflected an agreed upon one-time reduction in fees that was effected in the three months ended June 30, 2013.

 

Interest expense. The increase is comprised primarily of $1.8 million from the mortgages on the new properties, $230,000 from the mortgages on the partial period properties and $282,000 from the Newark Joint Venture. Interest expense associated with the Newark Joint Venture increased because capitalized interest in the current period is $324,000 less than capitalized interest in the three months ended June 30, 2013.  The change in capitalized interest is due to the completion of Phase I.  Capitalized interest was $350,000 and $674,000 for the three months ended June 30, 2014 and 2013, respectively.

 

Advisor’s fees, related party.  The fee is calculated based on invested assets which increased primarily due to the purchase, since July 1, 2013, of multi-family properties.

 

Property acquisition costs. The costs are primarily associated with the purchase of multi-family properties in the quarter ended June 30, 2014. Such costs included acquisition fees to our joint venture partners, brokerage fees, and legal, due diligence and other transactional costs and expenses.

 

General and administrative.  The decrease is primarily attributable to the inclusion, in the three months ended June 30, 2013, of professional fees of approximately $267,000, including legal fees of $196,000 which related to the recovery of funds on a loan that was charged off in an earlier fiscal year.  General and administrative expense is allocated among our three segments in proportion to the estimated time spent by our full time personnel on such segment.

 

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Table of Contents

 

Depreciation and amortization. The increase is comprised of $1.4 million from the new properties, $251,000 from the partial period  properties, and $259,000 from the commencement of depreciation as a result of the completion of Phase I of Teachers Village.

 

Other revenue and expense items

 

Gain on sale of real estate assets.  The decrease from $509,000 for the three and nine months ended June 30, 2013 to $3,000 for the corresponding 2014 periods is due to the inclusion, in the 2013 periods, of a $509,000 gain on the sale of a vacant cooperative apartment in New York City.

 

Nine months ended June 30, 2014 compared to the nine months ended June 30, 2013.

 

Revenues

 

The following table compares our revenues for the periods indicated:

 

 

 

Nine Months Ended
June 30,

 

Increase

 

%

 

(Dollars in thousands):

 

2014

 

2013

 

(Decrease)

 

Change

 

Rental and other revenue from real estate properties

 

$

46,133

 

$

20,756

 

$

25,377

 

122.3

%

Interest and fees on real estate loans

 

2,121

 

7,766

 

(5,645

)

(72.7

)

Other income

 

861

 

1,913

 

(1,052

)

(55.0

)

Total revenues

 

$

49,115

 

$

30,435

 

$

18,680

 

61.4

%

 

Rental and other revenue from real estate properties.  The increase is due to $16.5 million from new properties, $6.8 million from partial period properties, $1.4 million primarily from leasing space at the buildings completed in Phase I of Teachers Village and $729,000 is primarily due to rental rate increases from previously acquired  properties and, to a lesser extent, increases in occupancy.  The average occupancy rate at the previously acquired properties was 95.1% and 94.3% at June 30, 2014 and 2013, respectively.

 

Interest and fees on real estate loans.  The change is due to the reduction in outstanding loans and the decrease in loan origination activities.  These components of revenues have and will continue to decrease due to our emphasis on multi-family property activities and decreased emphasis on loan origination activities.

 

Other income. The decrease is due to the inclusion in the nine months ended June 30, 2013 of aggregate recoveries of $1 million on two loans that were previously charged off.

 

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Table of Contents

 

Expenses

 

The following table compares our expenses for the periods indicated:

 

 

 

Nine Months Ended
June 30,

 

Increase

 

%

 

(Dollars in thousands)

 

2014

 

2013

 

(Decrease)

 

Change

 

Operating expenses relating to real estate properties

 

$

26,071

 

$

11,158

 

$

14,913

 

133.7

%

Interest expense

 

15,247

 

8,734

 

6,513

 

74.6

%

Advisor’s fees, related party

 

1,447

 

1,314

 

133

 

10.4

%

Property acquisition costs

 

2,246

 

1,916

 

330

 

17.2

%

General and administrative

 

5,006

 

5,416

 

(410

)

(7.6

)%

Depreciation and amortization

 

10,375

 

4,737

 

5,638

 

119

%

Total expenses

 

$

60,392

 

$

33,275

 

$

27,117

 

81.5

%

 

Operating expenses relating to real estate properties.  The increase is comprised primarily of       $8.5 million from new properties, $4.2 million from partial period properties, $680,000 from previously acquired properties primarily from increased real estate taxes (due to re-assessments) and $1.5 million from the Newark Joint Venture.  The increase at the Newark Joint Venture includes a $ 588,000 increase in the asset management fee paid to the manager/developer, a $369,000 increase in real estate taxes ( due to re-assessments), and increases of $ 373,000 in security, insurance and utilities ( primarily due to the commencement of operations at Phase I Teachers Village).  The asset management fee increased because the 2013 period reflected an agreed upon one time reduction in fees that was effected in the nine  months ended June 30, 2013.

 

Interest expense. The increase is comprised primarily of $4.1 million from the mortgages on the          new properties, $1.6 million from mortgages on partial period properties, and $865,000 from the mortgages on the Newark Joint Venture properties.  Interest expense associated with the Newark Joint Venture increased because the capitalized interest in the current nine months is $1.2 million less than the capitalized interest in the corresponding prior year period.  The change in capitalized interest is due to the completion of Phase I of Teachers Village.  Capitalized interest was $863,000 and $2.1 million for the nine months ended June 30, 2014 and 2013, respectively.

 

General and administrative. The decrease is primarily attributable to the inclusion, in the nine months ended June 30, 2013, of professional fees of approximately $347,000, including legal fees of    $196,000 relating to the recovery of funds on a loan that was charged off in an earlier year.