BRT Apartments Corp. - Annual Report: 2011 (Form 10-K)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

Commission file number 001-07172

BRT REALTY TRUST
(Exact name of registrant as specified in its charter)

516-466-3100
Registrant's telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

NONE
(Title of Class)

         Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No ý

         Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No ý

         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 ý No o

         Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation 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 ý No o

         Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K 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 definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

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

         The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant was approximately $53.8 million based on the last sale price of the common equity on March 31, 2011, which is the last business day of the registrant's most recently completed second quarter.

         As of November 30, 2011, the registrant had 13,940,523 Shares of Beneficial Interest outstanding, excluding treasury shares.

DOCUMENTS INCORPORATED BY REFERENCE

         Portions of the proxy statement for the annual meeting of shareholders of BRT Realty Trust to be filed not later than January 28, 2012 are incorporated by reference into Part III of this Form 10-K.

TABLE OF CONTENTS

Form 10-K

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Forward-Looking Statements

        This Annual Report on Form 10-K, together with other statements and information publicly disseminated by us, contains certain forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We intend such forward-looking statements to be covered by the safe harbor provisions 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 relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends concerning matters that are not historical facts. Forward looking statements are generally identifiable by use of words such as "may," "will," "will likely result," "shall," "should," "could," "believe," "expect," "intend," "anticipate," "estimate," "project" or similar expressions or variations thereof.

        Forward-looking statements contained in this Annual Report on Form 10-K are based on our beliefs, assumptions and expectations of our future performance taking into account all information currently available to us. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us or within our control, and which could materially affect actual results, performance or achievements. Factors which may cause actual results to vary from our forward-looking statements include, but are not limited to:

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factors described in this Annual Report on Form 10-K, including those set forth under the captions "Risk Factors" and "Business"



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availability of mortgage origination opportunities acceptable to us;



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national and local economic and business conditions;



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general and local commercial real estate property conditions;



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defaults by borrowers in paying debt service on outstanding loans;



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limitation of credit by institutional lenders;



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impairment in the value of real estate property we own and real estate property securing our loans;



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changes in Federal government policies;



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changes in Federal, state and local governmental laws and regulations;



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increased competition from entities engaged in mortgage lending;



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changes in interest rates; and



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the availability of and costs associated with sources of liquidity.

        We caution you not to place undue reliance on forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. Except to the extent required by applicable law or regulation, we undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date of the filing of this Annual Report on Form 10-K or to reflect the occurrence of unanticipated events.

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PART I

Item l.    Business.

General

        Our primary business is to originate and hold for investment senior mortgage loans secured by commercial and multi-family real estate property in the United States. This includes originating loans to persons purchasing their own or third party mortgage debt, at a discount to the principal amount thereof. The loans we originate generally have relatively high yields and are short-term or bridge loans with a duration ranging from six months to one year. We receive an origination fee for the loans we originate. We conduct our operations to qualify as a real estate investment trust, or REIT, for federal income tax purposes.

        The unprecedented disruptions in the credit markets and the economic recession from the latter part of 2007 through 2010 caused significant declines in the value of real estate property assets and loss of liquidity, both long and short term, from the capital markets. These conditions had an adverse effect on our business, requiring us, from the latter part of fiscal 2008 through a substantial portion of fiscal 2010, to refocus our business activities from originating loans to servicing our loan portfolio. As we resolved a substantial portion of the problems in our loan portfolio, we began, in the second half of fiscal 2010 as the economy improved, to shift our emphasis back to our primary lending business. As a result, in fiscal 2011, we originated $131.3 million in loans, generated $17.9 million in revenue (of which $10.3 million was from interest on loans and loan fee income) and earned net income attributable to common shareholders of $6.4 million, compared to, in fiscal 2010, $17.4 million of loan originations, $8.1 million of revenues (of which $3.9 million was from interest on loans and loan fee income) and a net loss attributable to common shareholders of $8 million. In fiscal 2011, we also:

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entered into a revolving credit facility with availability of up to $25 million; and



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restructured our junior subordinated notes by repaying $5.0 million of the principal amount outstanding and obtaining an interest rate reduction. We estimate that this will reduce the interest costs associated with these notes by approximately $588,000 and $1.72 million in fiscal 2012 and 2013, respectively.

        We also own and operate various real estate assets. Information regarding our loan origination and real estate segments is included in Note 14 to our Consolidated Financial Statements and is incorporated herein by this reference.

        We were organized as a business trust under the laws of the Commonwealth of Massachusetts in June 1972. Our address is 60 Cutter Mill Road, Suite 303, Great Neck, New York 11021, telephone number 516-466-3100. Our website can be accessed at www.brtrealty.com, where copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on 8-K and other filings with the Securities and Exchange Commission ("SEC") can be obtained free of charge. These SEC filings are added to the website as soon as reasonably practicable.

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Our Loan Portfolio

        The following summarizes certain characteristics of our loan portfolio as of the dates indicated:

        In fiscal 2011, we originated $131.3 million of new loans and an aggregate of $66.1 million loans were repaid. We also sold $46.1 million in loans. Interest on our loans is payable to us monthly. Our loans frequently require that our borrowers pay us monthly escrow amounts that are adequate to pay, when due, real estate tax installments on the properties securing our loans. We may also require and hold funds in escrow for the payment of casualty insurance premiums. At September 30, 2011, our three largest loans outstanding of approximately $22.8 million (which was repaid in November 2011), $11.9 million and $9.5 million represented approximately 11.9%, 6.2% and 5.0%, respectively, of our total assets. There were no other loans in our portfolio that, at such date, represented more than 4.5% of our total assets.

        With respect to certain loans originated by us, the borrower funds an interest reserve out of the loan proceeds, from which all or a portion of the interest payments due to us are made for a specified period of time. It is our policy to lend at a floating rate of interest based on a spread over the prime rate, with a stated minimum interest rate, though we originate fixed rate loans as circumstances dictate. At September 30, 2011, approximately 82% of the principal amount of our outstanding loans had a floating rate of interest and the balance were fixed rate mortgages. At September 30, 2010, approximately 43% of the principal amount of our outstanding loans had a floating rate of interest and 57% were fixed rate mortgages. There was a higher percentage of fixed rate loans at September 30, 2010 because in fiscal 2009 we provided senior purchase money mortgages with a fixed rate of interest to facilitate the sale of properties acquired by us in foreclosure and, in certain loan work-out situations in fiscal 2009 and 2010, we converted existing floating interest rate loans to fixed rate loans to reduce the risk of borrower defaults.

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        The following table sets forth information regarding mortgage loans outstanding at September 30, 2011, all of which are earning interest (excluding loan held for sale):

Loan Default

        In the event of a default by a borrower on a loan, we will, in substantially all cases, foreclose on the loan or other collateral held by us and may seek to protect our investment by, among other things, enforcing our rights against any guarantor(s) of such loan or through negotiations with the borrower or other interested parties. Once a loan becomes non-performing, we generally do not receive interest payments, thereby reducing our revenues, cash flow, net income and taxable income. Foreclosure proceedings in certain jurisdictions can take considerable time, and may extend for as long as two years. In addition, if a borrower files for protection under the United States bankruptcy laws during the foreclosure process, the delays may be longer. In a foreclosure proceeding, we will typically seek to have a receiver appointed by the court or an independent third party property manager appointed with the borrower's consent in order to preserve the property's income stream and provide for the maintenance of the property. From time-to-time, we make cash advances to the borrower, a court appointed receiver or an independent third-party manager for emergency repair items and for real estate taxes. At the conclusion of the foreclosure or negotiated workout process, the rents collected by the receiver or the third party manager, as the case may be, less costs and expenses of operating the property and the receiver's or manager's fees are remitted to us.

Financing Arrangements

Joint Venture/Participation Arrangements

        In June 2011, our wholly-owned subsidiary entered into a joint venture with an affiliate of Torchlight Investors, LLC. The joint venture was organized to purchase loans we originated and through September 30, 2011, the venture had purchased $20.2 million of such loans. As of September 30, 2011, the joint venture held $15.4 million in principal amount of such loans, of which $3.1 million or 20% constituted our interest in the venture. In November 2011, the parties to the joint venture terminated our obligation to sell loans to this venture.

        In December 2011, we entered into an arrangement with 512 Lending, LLC pursuant to which each of us, with specified exceptions, must present to the other the opportunity (but not the obligation) to participate in loans such party originates. The arrangement expires in December 2014, subject to earlier termination by either party on not less than 60 days' notice for any reason. It is generally anticipated that:

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512 Lending will fund between 50% to 80% of the principal amount of loans we originate and in which they elect to participate and we will fund up to 20% of the principal amount of loans they originate and in which we elect to participate.



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The originating lender will be entitled to retain an annual servicing fee of 0.5% of the principal amount of performing loans and 1.0% of the principal amount of non-performing loans.

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The originating lender takes the first half point of any origination fee and the balance of such fee is shared by the parties based on their percentage participation in the loan.



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Each of the originating lender and the non-originating lender shall receive on an applicable loan, distributions of monies on a pro-rata basis based upon their applicable participation percentages until such time as the non-originating lender receives an internal rate of return of 10% per year compounded quarterly, at which time the non-originating lender shall receive further distributions based upon 75% of its participation percentage and the originating lender will receive the balance of sums to be distributed with respect to such loan.

Credit Facility

        A subsidiary of ours is able to borrow funds to originate loans and for its general corporate purposes through a senior secured revolving credit facility with Capital One, National Association. The maximum amount that may be borrowed is the lesser of $25 million and the borrowing base. The borrowing base is generally equal to 40% to 65% (depending on, among other things, the type of property secured by the eligible mortgage receivables pledged to the lender and the operating income of the related property) of such receivables. Interest accrues on the outstanding balance at the greater of (i) 4% plus LIBOR and (ii) 5.50%. The facility matures in June 2014 and, subject to the satisfaction of specified conditions, the outstanding balance may be converted at our option into an 18 month term loan. We paid, and in each of June 2012 and 2013 will pay, an $82,500 fee to maintain this facility. We have guaranteed our subsidiary's obligations under this facility and at November 30, 2011, no amount was outstanding thereunder.

Our Real Estate Assets

        At September 30, 2011, we owned real estate properties having a book value of $59.3 million. These properties primarily represent assemblage sites and additional properties located in downtown Newark, NJ (vacant land, vacant buildings, retail, office and parking) owned by a consolidated joint venture in which we have a 50.1% interest. See "—Newark Joint Venture."

        Generally, our policy is to sell properties we acquire in foreclosure proceedings after completing necessary repairs and maintenance and engaging in leasing activities, if required. We may retain a property if we determine that holding it will result in a substantial increase in its market value. We may provide senior purchase money mortgage loans at competitive fixed interest rates, if necessary, in order to consummate a sale which we deem to be beneficial to us. In fiscal 2011 and 2010, we did not provide any senior purchase money mortgage financing. In fiscal 2009 and early fiscal 2012 we provided $17.8 million and $15 million of such financing, respectively.

        Although we experienced a significant increase in our origination activity in fiscal 2011, the recovery in the economy and commercial real estate activity has not resulted in our origination levels approaching the levels we experienced in fiscal 2007 and 2008. This has resulted in a significant increase in our cash availability to approximately $80.5 million at December 5, 2011. Accordingly, we are considering using a portion of our available cash to acquire, with joint venture partners, multi-family residential properties located throughout the United States or other real estate assets in the New York metropolitan area. We believe this activity will provide stable and acceptable yields. We have not acquired any such properties to date and there is no assurance that any such acquisition will positively affect our operations.

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Newark Joint Venture

Background

        Two of our wholly-owned subsidiaries are members of a joint venture (which we refer to as the Newark Joint Venture) with two members that are not affiliated with us. The Newark Joint Venture owns two assemblage sites (i.e., Market Street and Teachers Village) and additional properties located in downtown Newark, NJ. The assemblage sites are surrounded by a variety of governmental, educational, cultural and entertainment institutions and facilities. In close proximity to both assemblage sites is Rutgers University, the New Jersey Institute of Technology, University of Medicine and Dentistry of New Jersey, Essex County College, Seton Hall Law School, the New Jersey Performing Arts Center, the Prudential Arena (home of the National Hockey League New Jersey Devils and temporary home of the National Basketball Association New Jersey Nets), the Essex County Court Complex, Newark's City Hall and a Federal Courthouse. Both assemblage sites are within walking distance of Newark Penn Station, which provides access to Amtrak and New Jersey Transit trains and are accessible to local bus routes. The assemblage sites are served by various highways, including the Garden State Parkway, Interstate-95, Interstate-78 and Interstate-280.

        The Newark Joint Venture intends to redevelop all or a portion of the sites, particularly the assemblage sites, with personnel hired by the Newark Joint Venture or with development partners or sell some of its sites to developers or end users. The assets, liabilities and results of operations of the Newark Joint Venture are consolidated with our financial statements. Accordingly, the assets of the Newark Joint Venture are included in our real estate properties, and our two loans aggregating $27 million to the Newark Joint Venture (which are secured by substantially all of the real estate assets of the Newark Joint Venture), are eliminated in consolidation and are not included in our outstanding loans. The properties owned by the Newark Joint Venture have adequate insurance coverage for their current use.

        Immediately prior to the formation of the Newark Joint Venture, we held loans aggregating approximately $38 million, secured by substantially all of the properties conveyed to the Newark Joint Venture by our borrowers. We entered into loan work-out negotiations with our borrowers and, as a result of such negotiations, entered into the Newark Joint Venture. In connection with the work-out of our loans and the formation of the Newark Joint Venture, our loans were refinanced with a mortgage loan of $27 million (which we currently, as described below, hold as two separate mortgage loans), with the balance of our loans converted into a $6.9 million preferred capital account interest and a 50.1% membership interest in the Newark Joint Venture, providing us with a separate capital account of $3.9 million. The other members caused all the properties secured by our loans, and additional properties (unencumbered by our loans) and contract rights to acquire additional properties, all located in downtown Newark, NJ, to be contributed to the Newark Joint Venture for which the other members received a 49.9% membership interest in the Newark Joint Venture (with a separate capital account of $3.9 million). Our loans are the senior mortgage loans with respect to a majority of the properties owned by the Newark Joint Venture.

        In connection with an $8.6 million financing facility (of which $4.0 million is outstanding) provided by an institutional lender with respect to the Teachers Village project, our $27 million mortgage loan was bi-furcated into a $7.5 million loan secured by most of the Teachers Village properties and a $19.5 million loan secured by substantially all of the other properties owned by the Newark Joint Venture. The $7.5 million loan matured in September 2011 and is in the process of being extended until March 2012. The $19.5 million loan matures on June 3, 2014, with a two-year extension option. These loans provide for an interest rate of 11% per annum, of which 6% is paid currently and 5% accrues and is to be paid at maturity. See "—Information and Activities Relating to Assemblage Sites" for a summary of the material terms of the financing provided by an institutional lender.

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Current Property Information

        The following table sets forth, as of September 30, 2011, information regarding the properties owned in fee by the Newark Joint Venture:

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        The following table sets forth as of September 30, 2011, a schedule of the annual lease expirations of the Newark Joint Venture's real estate assets and the contributions to 2012 contractual rental income provided by such leases (assumes that none of the tenants exercise renewal or cancellation options, if any):

Information and Activities Relating to Assemblage Sites

        The Market Street assemblage is an approximately 68,000 square foot site, representing approximately 303,400 rentable square feet. The site is bounded by Market Street, Campbell Street, Washington Street and University Avenue in downtown Newark, New Jersey. Potential redevelopment opportunities with respect to this site include an office complex with a retail component, a medical office complex containing offices, research laboratories and other medical related services, a retail center, corporate headquarters, university offices, classrooms and/or dormitories, or a combination of one or more of these uses. The Newark Joint Venture may redevelop this site for its own account, but will only do so if it has entered into long-term lease transactions with credit worthy lessees and has obtained satisfactory assurances that it will obtain necessary construction financing. Alternatively, the Newark Joint Venture may enter into a joint venture with a development partner or sell all or portions of the site. Although the Newark Joint Venture has conducted discussions and responded to requests for bid proposals with various parties concerning the development of portions of the site, which have included build to suit construction for potential users on a sale/leaseback or long-term lease basis and the sale of portions of the property to end users and/or developers, the Newark Joint Venture has not entered into any understandings or agreements concerning the redevelopment of all or any portion of the site and there is no assurance that it will be able to conclude any such arrangement or obtain the financing necessary to proceed with any arrangement which it may conclude.

        The Teachers Village assemblage encompasses an area bounded by Branford Street to the north, Treat Place to the east, Hill Street to the south and Washington Street to the west, and is adjacent to Halsey Street. The Teachers Village site aggregates approximately 228,000 square feet, of which approximately 179,500 square feet is comprised of existing parking lots and vacant buildings to be demolished or rehabilitated and the balance is comprised of existing structures under lease. The project

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contemplates a mix of residential, educational and retail facilitates and will include both the renovation of an existing nine story structure and the construction of approximately six additional buildings. Two of the buildings are being designed for occupancy by three charter schools and the remaining buildings are being designed to provide approximately 200 residential rental units. It is contemplated that the ground floor level of the charter school buildings and the residential buildings will provide for approximately 65,000 square feet of retail space. The project can be constructed and financed in stages.

        The cost of the entire Teachers Village project was, in September 2011, estimated by the Newark Joint Venture to be approximately $150 million. The Newark Joint Venture is proceeding with the project on the assumption that it will develop the site for its account, although it may in the future elect to partner with a developer or developers for all or a portion of the project. If it proceeds with the development on its own, the Newark Joint Venture contemplates that the project will be financed by a combination of public (federal, state and local) and private sources. Potential public financing sources include, without limitation, New Market Tax Credits, Urban Transit Hub Tax Credits and Economic Recovery Growth Grants. Private financing would be provided by conventional construction financing, if available. An institutional lender has agreed to provide the Newark Joint Venture with up to $8.6 million in financing secured by a pledge of 100% of the equity interests of the borrowing entity and a subordinate mortgage encumbering the Teachers Village properties. The loan bears interest at the rate of 17% per annum and matures in March 2012, subject to the right to extend to March 2012 upon satisfaction of specified conditions. The loan proceeds can only be used for the project's "soft costs" (including, without limitation, the cost of architects, engineers, specified consultants, permits and legal and accounting fees). Through September 30, 2011, the Newark Joint Venture has drawn down $4.0 million of the committed amount. The balance of the funds may be drawn in two tranches upon satisfaction of specified conditions applicable to the particular tranche, including without limitation, conditions relating to the Newark Joint Venture having obtained governmental approvals with respect to specified financing and grant arrangements, guaranties as to rental payments from tenants or prospective tenants (or their affiliates) of the contemplated structures and the receipt of term sheets and/or commitments with respect to construction financing for the project. The Trust and its joint venture partners each have severally guaranteed up to 25% of any amount drawn down under this facility and the amount drawn down under this facility is subordinate to the Trust's mortgage of $7.5 million applicable to the Teachers Village properties.

        No assurance can be given that sufficient financing will be obtained to complete the Teachers Village project or any portion thereof, that our $7.5 million loan with respect to the Teachers Village project will be repaid or that the Teachers Village will be profitable for us. In addition, since it is contemplated that a substantial portion of the financing required for the project will be debt financing, the profit which the joint venture partners receives, if any, will only be received after completion of the construction and repayment of all the debt, which will be a significant period of time from the present.

Terms of the Newark Joint Venture Operating Agreement

        The following is a summary of the material provisions of the amended and restated limited liability company operating agreement of the Newark Joint Venture:

        Membership Interests.    We own 50.1% of the membership interests in the Newark Joint Venture, and the other members (collectively, the "Other Member") own 49.9% of the membership interests in the Newark Joint Venture.

        Manager.    An affiliate of the other members is the manager of the Newark Joint Venture and is responsible for the day to day management activities of the Newark Joint Venture, but our consent is required for all major decisions affecting the Newark Joint Venture and its properties. We may remove the manager upon six months advance written notice or immediately upon the occurrence of certain significant events.

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        Fees to the Manager.    Until such time as the current manager is no longer the manager of the Newark Joint Venture, the Newark Joint Venture shall pay to the current manager an asset management fee and a property management fee aggregating $890,000 per annum, payable monthly in advance.

        Mandatory Capital Calls.    Members are required to make pro rata capital contributions to the Newark Joint Venture for any projected budget shortfalls.

        Buy-Sell.    Commencing on December 3, 2013 or, under specified circumstances, December 3, 2015, either member group may provide the other member group with written notice setting forth the amount they will pay to purchase all of the assets of the Newark Joint Venture. The member group which receives such notice has the option to (i) sell their membership interests in the Newark Joint Venture to the other members for their pro rata portion of the asset purchase price set forth in the written notice, or (ii) purchase the other members' membership interests in the Newark Joint Venture for their pro rata portion of the asset purchase price set forth in the written notice. If the acquirer is the Other Member, then the Other Member is required to, among other things, pay in full our mortgage and our preferred equity interest at closing.

        Right of First Refusal and Tag-along Rights.    At any time, either member group may provide the other member group with written notice setting forth the sale price at which it desires to sell all or a portion of its membership interests. The member group which received such notice may purchase the offered membership interests at the price set forth in the notice. If they do not elect to purchase the membership interest in accordance with the terms of the notice, the offering members may secure another person to purchase its offered membership interests within 180 days. The group of members which received the sale notice may tag-along in a sale to such other person and sell their pro rata portion of the membership interests.

        Distributions.    The Newark Joint Venture may not distribute any cash flow to its members until our $27 million loan (which has been eliminated in consolidation) has been fully repaid, including accrued interest. Once it has been fully repaid, the cash flow of the Newark Joint Venture will generally be distributed as follows: (i) first, to each member pro rata in an amount equal to their unreturned additional capital contributions, (ii) second, to our members until we receive a 10% return on our preferred capital contributions, (iii) third, to our members until we receive an amount equal to our preferred capital contributions, and (iv) fourth, to each member pro rata until such members receive a 10% return on their additional capital contributions, (v) fifth, to the members pro rata an amount equal to their common capital contributions, and (vi) the remainder shall be distributed as follows: (a) 10% to the managing member, and (b) 90% pro rata to the other members pro rata.

Manager of the Newark Joint Venture

        The manager of the Newark Joint Venture is RBH Group LLC; its managing member and President is Ron Beit-Halachmy. Mr. Beit-Halachmy, 39 years of age, has over 17 years of experience in the real estate industry and has been involved for more than ten years in acquiring sites in Newark, New Jersey. He was the managing member of the entities which acquired all of the real property currently owned by the Newark Joint Venture. Mr. Beit-Halachmy earned a BA in Economics from the University of Wisconsin and a law degree from New York Law School.

Our Investment Strategy

        Our long-term objective is to provide our shareholders with returns over time, including capital appreciation and cash distributions, by originating loans secured by a diversified portfolio of commercial and multi-family real property. Inasmuch as we had, at December 31, 2010, approximately

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$70 million in net loss operating carry forwards, we do not anticipate paying cash dividends until we have fully used these loss carry forwards.

        Our loan originations in fiscal 2011, 2010 and 2009 were $131.3 million, $17.4 million and, $12.7 million, respectively. Our originations in fiscal 2011 were higher than in fiscal 2010 and 2009 due to increased demand for our short term bridge loans which we believe was due to a more favorable economic climate in the most recent fiscal year. In light of the economic uncertainty and the decline in our loan originations in the last six months of fiscal 2011 from the prior six months, no assurance can be given that we will be able to maintain in the future the levels of loan originations we achieved in fiscal 2011.

        We pursue lending opportunities with purchasers and prospective purchasers of commercial and multi-family real estate properties and property owners who require short-term financing for renovation or repositioning of a real estate asset. We also originate loans to persons purchasing their own mortgage debt or purchasing third party mortgage debt, in each case at a discount to the principal amount thereof. The purchase of third party mortgage debt is generally structured as a repurchase agreement pursuant to which we purchase the mortgage and our counterparty is obligated to repurchase such mortgage within a specified period.

        Our investment policy emphasizes the origination of short-term real estate loans secured by senior liens on real property. As of September 30, 2011, other than one mezzanine loan in principal amount of $2 million, our loan portfolio only consisted of first mortgage loans or pari passu participations in first mortgage loans. Our lending activities focus on operating properties such as multi-family residential properties, residential properties being converted to condominium ownership, office buildings, retail, shopping centers, mixed use buildings, hotels/motels, and industrial buildings.

        We also will, on a limited basis, provide senior loans secured by unimproved land, but generally require that the unimproved land collateralizing our loan has proper entitlements and that zoning is in place for the intended purpose. We also originate and hold for investment loans secured by improved commercial or multi-family residential property which is vacant, pending renovation or repositioning and sale or leasing of the property. Pursuant to, among other things, our arrangement with 512 Lending, we may sell senior, junior or pari passu participation in loans we originate and acquire senior, junior or pari passu participations in loans originated by others. We also invest in the securities of other REITs.

        From time-to-time we originate junior commercial loans, invest in loans as a junior participant or sell senior participations in loans we originate. When we invest in junior loans or hold junior participations, the collateral securing our loan is subordinate to the liens of senior loans or senior participations. It is possible that the amount which may be recovered by us in cases in which we hold a junior position may be less, or significantly less, than our total investment.

        We have historically solicited loans secured by real estate property located within the continental United States. We may expand our lending activities to include loans secured by properties located in Canada and Puerto Rico.

Our Origination Process and Underwriting Criteria

        We originate loans in a number of ways. We primarily rely on relationships developed by our officers and loan originators with real estate investors, commercial real estate brokers, mortgage brokers and bankers. We also advertise, use the internet and attend trade shows in order to develop relationships with potential borrowers and real estate brokers, mortgage brokers and bankers.

        When underwriting a loan, the primary focus of our analysis is the value of a property, which we evaluate by considering a number of factors, including location, current use and potential for alternative use, current and potential net operating income, if any, the local market for condominium

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conversion, if conversion to condominium ownership is contemplated, comparable sales prices, existing zoning regulations and intended use, if the loan is to be secured by undeveloped land, and local demographics. We also examine the experience of our potential borrower's principals in real estate ownership and management and, if applicable, real estate development.

        Loan approvals are based on a review of property information as well as other due diligence activities undertaken by us. Those activities may include a site visit to the property, an in-house property valuation, a review of the results of operations of the property (historical and projected, if any) or, in the case of an acquisition of the property by our prospective borrower, a review of projected results of operations for the property, and a review of the financial condition and a credit report and background check of the principals of the prospective borrower. We do not obtain independent property appraisals, but instead rely on our in-house activities described above. If management determines that an environmental assessment of the underlying property is necessary, then such an assessment is conducted by an experienced third-party service provider. Before a loan commitment is issued, the loan must be reviewed and approved by our loan committee. Loan approval occurs after the assent of not less than four of the seven members of our loan committee, all of whom are executive officers of ours. We generally obtain a non-refundable cash deposit for legal, travel, and other expenses from a prospective borrower prior to or at the time of issuing a loan commitment, and our loan commitments are generally issued subject to receipt by us of title documentation and title insurance, in a form satisfactory to us, for the underlying property. The approval of our board of trustees is required for each loan which exceeds $20,000,000 in principal amount, and the approval of our board of trustees is also required where loans by us to one borrower exceed $50,000,000, in the aggregate.

        We require either a personal guarantee or a "walk-away guarantee" from the principal or principals of the borrower, in substantially all of the loans originated by us. A "walk-away guarantee" generally provides that the full guarantee of the principal or principals of the borrower terminates if the borrower conveys title to the property to us within a negotiated period of time after a loan default if the payment of mortgage interest to us, real estate taxes and other operating expenses are current. The "walk-away guarantee" is intended to provide an incentive to the principals of a borrower, in a situation where our borrower has defaulted, to have the collateral deeded to us in lieu of foreclosure, thereby reducing the cost of foreclosure proceedings. By complying with the terms of the "walk-away guarantee," the principals of the borrower can avoid the risk of being personally responsible for any difference between the amount owed to us and the amount we recover in a foreclosure proceeding. If we make more than one loan to a borrower, we may require that all or some of the outstanding loans to that borrower be cross-collateralized. In our judgment, the "walk-away guarantees" we have secured upon the origination of certain loans have provided us with leverage in negotiating loan paydowns from "walk away guarantors" and assisted in expediting the foreclosure process.

Junior Subordinated Notes

        On March 15, 2011, we entered into certain arrangements with respect to our junior subordinated notes due 2036, pursuant to which we, among other things, redeemed $5,000,000 of the outstanding notes at 100% of their principal amount and reduced the interest rate thereon as set forth below:

        As of September 30, 2011, $37.4 million in principal amount of these notes were outstanding. These notes are redeemable at any time at our option.

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        Pursuant to the governing agreements, at all times prior to August 1, 2012, we will be permitted to make distributions to our shareholders for taxable years after 2009 to the extent necessary to satisfy REIT requirements or pay capital gains, if any, provided such distributions are paid in the form of common shares to the maximum extent permissible under the IRS regulations in effect at the time of such distributions, with the balance payable in cash.

Competition

        With respect to our real estate lending activities, we compete, in the current economic environment, for first mortgage loans with other entities, including other mortgage REITs, specialty finance companies, public and private lending companies, investment funds and others. Many of our competitors possess greater financial and other resources than we possess. Mortgage lending has been historically competitive, but in the current economic environment it is difficult to determine our direct and indirect competitors or the extent of the competition.

        Competitive variables in our lending activities include market visibility, size of loans offered, rate, fees, term and underwriting standards. To the extent a competitor offers a lower rate, is willing to risk more capital in a particular transaction, and/or employs more liberal underwriting standards, our origination volume and profit margins would be adversely impacted. We compete by offering rapid response time in terms of approval and closing and by offering "no prepayment penalty" loans. In order to supplement our marketing activities, we engage in a national advertising program.

        With respect to the purchase or sale by us of real estate assets, we compete with any entity seeking to acquire or dispose of similar properties, including other REITs, banks, pension funds, hedge funds, real estate developers and private real estate investors. Competition is primarily dependent on price and the ability to secure financing. Other competitive factors which a potential competitor may take into account are location and physical condition of the property.

Our Structure

        We share facilities, personnel and other resources with several affiliated entities including, among others, Gould Investors L.P., a master limited partnership involved in the ownership and operation of a diversified portfolio of real estate, and One Liberty Properties, Inc., a publicly-traded equity REIT. Jeffrey A. Gould, our President and Chief Executive Officer, George Zweier, our Vice President and Chief Financial Officer, two other officers engaged in loan origination, underwriting and servicing activities, and four others engaged in underwriting and servicing activities devote substantially all of their business time to us, while our other personnel (including several officers) share their services on a part-time basis with us and other affiliated entities that share our executive offices. The allocation of expenses for the shared facilities, personnel and other resources is computed in accordance with a shared services agreement by and among us and the affiliated entities. The allocation is based on the estimated time devoted by executive, administrative and clerical personnel to the affairs of each entity that is a party to the Shared Services Agreement.

        In addition, we are party to an Advisory Agreement, between us and REIT Management Corp., our advisor. REIT Management is wholly owned by the chairman of our Board of Trustees and he and certain of our executive officers, including our President and Chief Executive Officer, receive compensation from REIT Management Corp. Pursuant to this agreement, REIT Management furnishes advisory and administrative services with respect to our business, including, without limitation, arranging and negotiating credit facilities, participating in our loan analysis and approvals, providing investment advice, providing assistance with building inspections and litigation strategy and support. In addition, in connection with non-performing loans, REIT Management, among other activities, engages in negotiations with borrowers, guarantors, and their advisors related to workouts, participates in

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strategic decisions relating to workouts and foreclosures and may interface with receivers, managing agents and court appointed trustees with respect to specific collateral securing our loans.

        Through December 31, 2011, for the services performed by REIT Management pursuant to the Advisory Agreement, it receives an asset management fee equal to 0.6% of our invested assets and an incentive fee from borrowers of 0.5% of the total commitment amount, payable upon funding a loan commitment, provided that we have received at least a loan commitment fee of 1% from the borrower in any such transaction and any loan commitment fee in excess of 1.5% of the total commitment amount is retained by us.

        The parties entered into an amendment to the Advisory Agreement effective as of January 1, 2012, pursuant to which (i) the stated termination date was extended until June 30, 2014, (ii) the minimum and maximum fees payable in a fiscal year to REIT Management were set at $750,000 and $4 million, respectively, subject to adjustment for any fiscal year of less than twelve months, and (iii) we are to pay REIT Management the following annual fees, which are to be paid on a quarterly basis:

•

1.0% of the average principal amount of earning loans;



•

0.35% of the average amount of the fair market value of non-earning loans;



•

0.45% of the average book value of all real estate properties, excluding depreciation;



•

0. 25% of the average amount of the fair market value of marketable securities;



•

0.15% of the average amount of cash and cash equivalents; and



•

to the extent loans or real estate are held by joint ventures or other arrangements in which we have an interest, fees varying based on, among other things, the nature of the asset (i.e. real estate or loans), the nature of our involvement (i.e. active or passive) and the extent of our equity interests in such arrangement.

        We believe that the Shared Services Agreement and the Advisory Agreement allow us to benefit from access to, and from the services of, a group of senior executives with significant real estate knowledge and experience.

        We also engage affiliated entities in management activities with respect to some of the properties acquired by us in foreclosure proceedings and some of the properties owned by joint ventures in which we are an equity participant. These management activities include, among other things, rent billing and collection, property repair, maintenance and improvement, contractor negotiation, construction management and sales and leasing activities. In management's judgment, the fees paid by us to these affiliated entities are competitive with fees that would be charged for comparable services by unrelated entities.

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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

The continuing economic uncertainty may result in decreased loan originations adversely affecting our business.

        In the current uncertain economic environment, the demand for our bridge loans has fluctuated. As a result, we originated $88.8 million and $42.5 million in loans in the first and second half of fiscal 2011, respectively. Until there are sustained positive changes in the economy (including the credit and real estate markets) and an increased demand for bridge loans, our loan originations may be at a reduced level which would negatively affect our revenues, net income and cash flow.

Defaults on our loans may cause declines in revenues and net income.

        Continuing uncertainty in the credit markets and an uncertain economic environment may result in defaults by our borrowers in the future. Loan defaults result in a decrease in interest income and may require the establishment of, or an increase in, loan loss reserves. The decrease in interest income resulting from loan defaults may be for a prolonged period of time as we seek to recover, primarily through legal proceedings, the outstanding principal balance and accrued interest due on a defaulted loan, plus the legal costs incurred in pursuing our legal remedies. Legal proceedings, which may include foreclosure actions and bankruptcy proceedings, are expensive and time consuming. The decrease in interest income, and the costs involved in pursuing our legal remedies will reduce the amount of cash available to meet our expenses. In addition, the decrease in interest income, the costs incurred by us in a defaulted loan situation and increases in loan loss reserves will have an adverse impact on our net income, taxable income and cash flow.

Our loan origination activities may be limited by the funds available to us.

        At December 5, 2011, we had approximately $80.5 million of cash and cash equivalents available for originations and operations. If demand for our bridge loan increases significantly, as to which no assurance can be given, our ability to originate loans may be limited by the funds available to us. Further, our credit facility requires us to maintain certain financial ratios, including net worth, debt service coverage ratios, and limits our ability to incur debt. These factors may limit the amount of mortgage loans we can originate, which will limit our revenues and operating results.

We may incur loan loss provisions and impairment charges in fiscal 2012.

        We evaluate on a quarterly basis our loan and real estate portfolios for indicators of impairment. Loan loss provisions and impairment charges reflect management's judgment of the probability and severity of loan losses and the decline in the value of real estate property assets. The valuation process, which is inherently difficult, is particularly difficult during a recessionary period in which the availability of credit is limited and commercial real estate transactions have significantly decreased.

        Loan loss provisions and impairment charges may be required in the future as a result of factors beyond our control, including, among other things, the continuation or downward acceleration of the economic environment and changes in market conditions affecting the value of loan collateral and real

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property assets. If our loan loss provisions or impairment charges prove inadequate to cover actual losses, we could suffer additional losses.

        If we are required to take loan loss provisions or impairment charges in the future, our results of operations would be adversely impacted.

It is highly unlikely that we will declare any dividends in the next few years.

        In December 2008, our board of trustees suspended the payment of regular quarterly dividends and we have not declared or paid any dividends since fiscal 2010.

        In order to qualify as a REIT, we are required to distribute 90% of our taxable income. At December 31, 2010, we had a tax loss carry-forward of $70.5 million. Under current tax laws, we can offset our future taxable income against our tax loss carry-forward for twenty years 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 calendar 2012 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.

The increased risk of loans secured by unimproved land may harm our results of operations.

        From time-to-time, we provide loans that are secured by unimproved land. Land loans are subject to a higher risk of default because such properties are not income producing properties. In addition, the market value of such properties is volatile. Although we only make loans on undeveloped land if entitlements and zoning is in place for the intended use, there is always the risk that entitlements and zoning may be changed or lapse. Consequently, in the event of a default and foreclosure, we may not be able to sell undeveloped land for an amount equal to our investment and we may lose a significant portion of our investment. In the event of our acquisition of undeveloped land in foreclosure proceedings, we may elect to hold the property until the market becomes more favorable. In such case during the holding period, which could be for a number of years, we will not receive any income from this property and we will be required to pay the costs of carrying the property, primarily real estate taxes and insurance, which could adversely affect our net income and shareholders' equity.

Risks Related to the Newark Joint Venture and Real Estate Operations.

The Newark Joint Venture may have an operating loss for the foreseeable future.

        Our real estate assets include the properties owned by the Newark Joint Venture, which properties had, at September 30, 2011, an aggregate book value of $48.1 million. At September 30, 2011, the Newark Joint Venture properties represented 81.2% and 25.1%, respectively, of our real property assets and total assets. We anticipate that the Newark Joint Venture will operate at a loss in fiscal 2012 and for several years thereafter. If the Newark Joint Venture operates at a loss, we and our Newark Joint Venture partners will be required to fund the losses by making additional capital contributions, on a pro rata basis. Although it is possible that the need to make additional contributions will be mitigated by the sale of some of the Newark Joint Venture properties or financing secured by the Newark Joint Venture for the operation and/or development of its properties, currently, there is no assurance that we will be able to sell any of such properties on satisfactory terms or that we will obtain the financing (other than the soft-cost financing of up to $8.6 million which is already committed) to fund development and construction activities. The operations of the Newark Joint Venture could have an adverse effect on our results of operations, financial condition and liquidity for several years.

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We have limited experience in developing and operating assemblage sites.

        The principal assets of our Newark Joint Venture are two assemblage sites and two additional properties located in downtown Newark, NJ. Since we have not previously engaged 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 and has experience in the development of gut rehabilitation properties, this experience may not necessarily be relevant to a particular redevelopment project. As a result, to redevelop the assemblage sites, the Newark Joint Venture will have to hire personnel knowledgeable in real estate development to assist in its development, become involved with a development partner, or sell some or all of the sites to developers or potential users. There can be no assurance that the Newark Joint Venture will be successful in hiring experienced personnel, finding a development partner with skills needed to develop and/or manage the redevelopment of the sites, or that we will be able to sell some or all of the properties to developers or potential users.

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. 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 the principal of the manager of the Newark Joint Venture in the amount of $20 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 obtain the $150 million or more needed to fund the Teachers Village development project.



•

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 not be obtained or if obtained may exceed original estimates, possibly making such activities unprofitable;



•

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 our cash flow and liquidity;



•

Occupancy rates and rents of a completed project may not be sufficient to make such project profitable; and



•

Acquire all the properties needed to develop the project to its full potential.

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We may be unable to renew leases or relet space and are exposed to the risks of defaults by tenants.

        In fiscal 2011, approximately 62.1% of our rental income was generated from properties at the Newark Joint Venture. The leases at the properties owned by the Newark Joint Venture are generally short-term in nature. If our tenants decide not to renew their leases upon their expiration, we may not be able to relet the space. Even if our tenants do renew or we are able to relet the space, the terms of renewal or reletting may be less favorable than current lease terms. If we are unable to promptly renew the leases or relet the space, or if the rental rates upon such renewal or reletting are significantly lower than current rates, our income would be adversely affected.

        Friends of Team Academy, a charter school located at the Teacher's Village assemblage, Petco Animal Supplies, Inc. and Calidad Furniture Corp. VII accounted for approximately 23%, 14% and 14%, respectively, of our rental income in fiscal 2011. The default, financial distress or bankruptcy of any of these tenants could cause interruptions in the receipt of, or the loss of, a significant amount of rental revenue and we could incur substantial costs in enforcing our rights as landlord. Our rental income could be adversely affected if these tenants become unable to meet their obligations to us.

Unfavorable changes in market and economic conditions could adversely affect occupancy, rental rates, operating expenses, and the overall market value of real estate assets we may acquire.

        Conditions in markets in which we may acquire multi-family real estate assets 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.

Risks Related to our Industry

The geographic concentration of our assets may make our revenues and the value of our assets vulnerable to adverse changes in economic conditions in the New York metropolitan area.

        At September 30, 2011, 71.2% of our outstanding loans are secured by properties located in the New York metropolitan area and 81.2% of our real estate assets are located in Newark, NJ. A lack of geographical diversification makes our mortgage portfolio and real estate property holdings more sensitive to local or regional economic conditions. A significant decline in the economy of the New York metropolitan area (including Newark, NJ), could result in a greater risk of default under our loans compared with the default rate for loans secured by properties in other geographic locations and a greater risk of a decrease in the value of our real estate assets compared with a decrease in value of properties located in other geographic locations. This could result in a reduction of our revenues and provision for loan loss allowances and impairment charges, which might not be as acute if our portfolio were more geographically diverse.

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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 to these properties.

        Some of the properties we acquire, including properties acquired through foreclosure proceedings, may face competition from newer, more updated properties. In order to remain competitive and increase occupancy at these properties and/or make them attractive to potential 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 performance and our liquidity.

Financing with high loan-to-value ratios involves increased risk of loss and may adversely affect us.

        Our primary source of recovery in the event of a loan default is the real estate underlying a defaulted loan. Therefore, the value of our loan depends upon the value of the underlying real estate. The value of the underlying property is dependent on numerous factors outside of our control, including national, regional and local business and economic conditions, inflation, government economic policies and the availability of credit. A loan-to-value ratio is the ratio of the amount of our loan to the estimated market value of the property underlying a loan, as determined by our internal valuation process. The higher the loan to value ratio, the greater the risk that the amount obtainable from sale of a property will be insufficient to repay the loan in full upon default.

We are subject to the risks associated with loan participations, such as lack of full control rights.

        Some of our investments are participating interests in loans in which we share the rights, obligations and benefits of the loan with participating lenders pursuant to a participation agreement. We may need the consent of these parties to exercise our rights under such loans, including rights with respect to amendment of loan documentation, the institution of, and control over, foreclosure actions, entering into forbearance agreements with borrowers, and sale of the underlying property upon acquisition in foreclosure. Our participant may have interests and goals that are different from ours and may desire an action or position which we oppose. As a result, we could become engaged in a dispute with a participant which may affect our ability to take action with respect to defaulted loan or disposition of the property, to our detriment.

We may have less control of our investment when we invest in joint ventures.

        From time-to-time, we have entered into joint venture agreements. Our co-venturers may have different interests or goals than we do and our co-venturers may not be able or willing to take an action that is desired by us. A disagreement with respect to the activities of the joint venture could result in a substantial diversion of time and effort by our management and could result in our exercise, or the exercise by our co-venturer, of the buy/sell provision often contained in our joint venture organizational documents. In addition, there is no limitation under our charter documents as to the amount of funds that we may invest in joint ventures. Accordingly, we could invest a substantial amount of our funds in joint ventures which ultimately may not be profitable as a result of disagreements with and among our co-venturers.

Liability relating to environmental matters may impact the value of properties that we may acquire or the properties securing our loans.

        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

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impose liability without regard to whether the owner or operator knew of, or was responsible for, the release of such hazardous substances.

        The presence of hazardous substances may adversely affect an owner's ability to sell real estate or borrow using real estate as collateral. To the extent that an owner of a property underlying one of our loans becomes liable for removal costs, the ability of the owner to make payments to us may be reduced, which in turn may adversely affect the value of the relevant mortgage asset held by us.

        If we acquire properties, including properties acquired through foreclosure proceedings, the presence of hazardous substances on a property may adversely affect our ability to 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.

We operate in a highly competitive market.

        We compete with many third parties engaged in finance and real estate investment activities, including other REITs, specialty finance companies, public and private lending companies, investment funds and other entities. Some of these competitors have substantially greater financial resources than we do and generally may be able to accept more risk. As such, they have the ability to make larger loans and to reduce the risk of loss from any one loan by having a more diversified loan portfolio. They may also enjoy significant competitive advantages that result from, among other things, enhanced operating efficiencies. An increase in the availability of funds to lenders, or a decrease in the amount of borrowing activity, may increase competition for making loans and may reduce obtainable yields or increase the credit risk inherent in the available loans.

Our revenues and the value of our portfolio may be negatively affected by casualty events occurring on properties securing our loans.

        We require our borrowers to obtain, for our benefit, comprehensive insurance covering the property and any improvements to the property collateralizing our loan in an amount intended to be sufficient to provide for the cost of replacement in the event of casualty. In addition, joint ventures in which we are an equity participant carry comprehensive 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 not be sufficient 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 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 insurable. Changes in zoning, building codes and ordinances, environmental considerations and other factors may make it impossible for our borrower, 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 and/or to repay in full the amount due on all loans collateralized by such property. As a result, our returns and the value of our investment may be reduced.

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 Fredric H. Gould, chairman of our board of trustees, Jeffrey A. Gould, our president and chief executive officer, and other members of senior management to carry

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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 three other executive officers, Mitchell Gould, our executive vice president, Lonnie Halpern, a vice president, and George Zweier, our vice president and 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, accounting and computer 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.

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.

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.

Item 1B.    Unresolved Staff Comments.

        None.

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Executive Officers of Registrant

        Set forth below is a list of our executive officers whose terms will expire at our 2012 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, 2012.

        Mitchell K. Gould (age 39), employed by us since May 1998, has been a Vice President since March 1999 and Executive Vice President since March 2007. From January 1998 until May 1998, Mr. Gould was employed by Bear Stearns Companies, Inc. where he was engaged in originating and underwriting commercial real estate loans for securitization.

        Simeon Brinberg (age 77) has been our Secretary since 1983, a Senior Vice President since 1988, and Senior Counsel since March 2006. Mr. Brinberg has been a Vice President of Georgetown Partners, Inc., the managing general partner of Gould Investors L.P., since October 1988. Gould Investors L.P. is primarily engaged in the ownership and operation of real estate properties held for investment. Since June 1989, Mr. Brinberg has been a Vice President of One Liberty Properties, Inc. (currently a Senior Vice President), a REIT engaged in the ownership of income producing real properties leased to tenants under long term leases. Mr. Brinberg is a member of the New York Bar and was engaged in the private practice of law for approximately 30 years prior to 1988.

        David W. Kalish (age 64) has been our Senior Vice President, Finance since August 1998. Mr. Kalish was our Vice President and Chief Financial Officer from June 1990 until August 1998. He has been Chief Financial Officer of One Liberty Properties, Inc. and Georgetown Partners, Inc. since June 1990. For more than five years prior to June 1990, Mr. Kalish, a certified public accountant, was a partner of Buchbinder Tunick & Company LLP and its predecessors.

        Israel Rosenzweig (age 64) has been a Senior Vice President since April 1998. Mr. Rosenzweig has been a Vice President of Georgetown Partners, Inc. since May 1997 and from 2000 to March 2009 was President of GP Partners, Inc., an affiliate of Gould Investors L.P. which provided advisory services in the real estate and financial services industries to an investment advisor. He also has been a Senior Vice President of One Liberty Properties, Inc. since May 1997.

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        Mark H. Lundy (age 49) has been our General Counsel since March 2007 and a Senior Vice President since March 2005. From 1993 to March 2005 he was a Vice President. He has been the Secretary of One Liberty Properties, Inc. since June 1993 and he also serves as a Senior Vice President of One Liberty Properties, Inc. Mr. Lundy has been a Vice President of Georgetown Partners, Inc. (currently Senior Vice President) since July 1990. He is a member of the bars of New York and Washington, D.C.

        George E. Zweier (age 47) has been employed by us since June 1998 and was elected Vice President, Chief Financial Officer in August 1998. For approximately five years prior to joining us, Mr. Zweier, a certified public accountant, was an accounting officer with the Bank of Tokyo-Mitsubishi Limited in its New York office.

        Lonnie Halpern (age 36) has been employed by us since August 2005 and was elected a Vice President in March 2007. Mr. Halpern is a member of the bars of New York and Massachusetts, and was an associate at Goodwin Procter LLP, New York, N.Y. from September 2001 to March 2004 and Hogan & Hartson LLP, New York, N.Y. from April 2004 to July 2005.

Item 2.    Properties.

        Our executive offices are located at 60 Cutter Mill Road, Great Neck, New York, where we currently occupy approximately 12,000 square feet with Gould Investors L.P., REIT Management Corp., One Liberty Properties, Inc. and other related entities. The building in which our executive offices are located is owned by a subsidiary of Gould Investors L.P. For fiscal 2011, we contributed $87,000 to the annual rent of $473,000 paid by Gould Investors L.P., REIT Management Corp., One Liberty Properties, Inc., and related entities. We also lease, under a direct lease with the Gould Investors L.P. subsidiary, an additional 1,800 square feet directly adjacent to the 12,000 square feet at an annual rental of $61,000.

        At September 30, 2011, we owned four real estate properties, with an aggregate book value of $59.3 million, of which two properties with a book value of $8 million were acquired in foreclosure proceedings. The properties owned by our Newark Joint Venture, with a book value of $48.1 million as of September 30, 2011, represent 25.1% of our total assets as of September 30, 2011. No other real estate property owned by us represents 5% of our total assets as of September 30, 2011. See "Item 1. Business—Our Real Estate Assets" and "Item 1. Business—Newark Joint Venture" for a schedule of the real property assets acquired by us in foreclosure proceedings and owned at September 30, 2011 and information relating to the Newark Joint Venture.

Item 3.    Legal Proceedings.

        None.

Item 4.    [Removed and Reserved]

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PART II

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 November 30, 2011, the high and low sales prices of our Common Shares on the NYSE was $6.28 and $6.20, respectively.

        As of November 30, 2011, there were approximately 1,109 holders of record of our Common Shares.

        We did not pay any cash dividends in fiscal 2011 or 2010. Our tax loss carry forward at December 31, 2010, was approximately $70 million; therefore, we do not anticipate paying cash dividends in the near future.

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Stock Performance Graph

        This graph compares the performance of our shares with the Standard & Poor's 500 Stock Index and a peer group index consisting of publicly traded mortgage REITs. The graph assumes $100 invested on September 30, 2006 and assumes the reinvestment of dividends.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among BRT Realty Trust, the S&P 500 Index
and the FTSE NAREIT Mortgage REITs Index

*

$100 invested on 9/30/06 in stock or index, including reinvestment of dividends. Fiscal year ending September 30.

Copyright© 2011 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.

Issuer Purchases of Equity Securities

        In September 2011, we announced that our Board of Trustees had authorized a share buyback plan pursuant to which we may, through September 30, 2013, expend up to $2 million to repurchase our common shares. The following table provides information about the purchases we made in the indicated period (no purchases were effected in July and August 2011):

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Item 6.    Selected Financial Information.

        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.

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Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations.

Overview

        We are a real estate investment trust, also known as a REIT. Our primary business is to originate and hold for investment senior mortgage loans secured by commercial and multi-family real estate property in the United States. We also originate loans to persons purchasing their own or third party mortgage debt, at a discount to the principal amount thereof. Our primary source of revenue has generally been interest income, which is the interest our borrowers pay on our loans, and to a lesser extent, loan fee income generated on the origination and extension of loans, rental revenue from real properties and investment income.

        The following highlights our results of operations for fiscal 2011 and our financial condition at fiscal year-end:

•

we originated $131.3 million of mortgage loans in fiscal 2011 ($28.3 million, $60.5 million, $23.6 million and $18.9 million in the first, second, third and fourth fiscal quarters, respectively) compared to $17.9 million in fiscal 2010 and $12.7 million in fiscal 2009;



•

we have cash and cash equivalents and available-for-sale securities of approximately $46.8 million and $84.3 million, at September 30, 2011 and December 5, 2011, respectively;



•

our performing loan portfolio increased 290% from $17.3 million at September 30, 2010 to $67.3 million at September 30, 2011;



•

our non-performing loan portfolio decreased from $35.1 million at September 30, 2010 to zero at September 30, 2011;



•

interest and fee income in fiscal 2011 increased $6.5 million or 166% from fiscal 2010;



•

in fiscal 2011, we entered into a revolving credit facility to provide additional liquidity and lending capacity; and



•

we restructured our junior subordinated notes in March 2011 by repaying at par $5.0 million of the principal amount outstanding and obtaining an interest rate reduction; and as a result we estimate a reduction in our interest costs associated with these notes by approximately $588,000 and $1.72 million in fiscal 2012 and 2013, respectively.

        We cannot predict with any certainty the potential impact the current economic uncertainty will have on our future financial performance. Until there is consistent and considerable improvement in the overall economy, we could experience (i) limited origination activity, (ii) borrower defaults, (iii) loan loss provisions and impairment charges, (iv) foreclosure actions (with an increase in expenses incurred in pursuing such actions), (v) the acquisition of additional properties in foreclosure proceedings, (vi) significant expenses for stabilizing, repairing and operating properties acquired in foreclosure proceedings, and (vii) reduced access to capital and increased cost of financing, all of which could result in a decline in our revenues and generate operating losses.

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Year Ended September 30, 2011 Compared to Year Ended September 30, 2010

Revenues

        The following table compares our revenues for the periods indicated:

        Interest on real estate loans.    The increase is primarily due to a $48.3 million increase in the average balance of earning loans outstanding attributable to additional loan originations, which we believe is the result of improved economic conditions. The weighted average interest rate on performing loans was 12.17% in both fiscal 2011 and 2010. Continuing economic uncertainty in fiscal 2012 may result in reduced loan originations and reduced interest on real estate loans and loan fee income.

        Interest on purchase money mortgages.    The decrease is attributable to a reduction in the average balance of these outstanding mortgages as loans with an aggregate principal balance of $5.34 million were paid off since the fourth quarter of fiscal 2010. We had originated purchase money mortgages in fiscal 2009 to facilitate the sale of properties we acquired in foreclosure.

        Loan fee income.    The increase is due to the amortization of loan fees received on the increase in loans originated during fiscal 2011.

        Recovery of previously provided allowance.    The increase reflects the reversal of a previously provided loan loss allowance of $2.5 million allocated to a non-performing loan that was sold in the quarter ended March 31, 2011 and the recovery of $1 million on a loan charged off in a prior year.

Expenses

        The following table compares our expenses for the periods indicated:

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        Interest on borrowed funds.    Approximately $508,000 of the decrease is attributable to the restructuring of the junior subordinated notes in March 2011 (of which $433,000 is due to the reduction of the interest rate and $75,000 is due to the decrease in the principal amount outstanding) and approximately $449,000 is due to the capitalization of interest with respect to a Newark, NJ assemblage site currently under development. The decrease was partially offset by a $448,000 increase in mortgage interest due to the aggregate net increase of $1.86 million in mortgage debt outstanding. This debt increased due to the borrowing with respect to the $8.6 million financing facility for the Newark Joint Venture. The $4 million outstanding at September 30, 2011 under this facility bears interest at the rate of 17% per year.

        Advisor's fee, related party.    The fee is calculated based on invested assets and increased because of the increase in our portfolio of loans and real estate assets due to increased originations in fiscal 2011.

        Provision for loan losses.    In fiscal 2010, we recorded $3,165,000 of loan loss provisions. There were no such provisions in fiscal 2011.

        Impairment Charges.    In fiscal 2010, we recorded $2,625,000 of impairment charges. There were no such charges in fiscal 2011.

        Foreclosure related professional fees.    Fees decreased primarily due to the resolution in fiscal 2011 of substantially all of the bankruptcy, foreclosure and related proceedings in which we were involved.

        General and administrative expense.    This increase is attributable primarily to an increase of $440,000 in payroll related costs reflecting higher salaries, commissions, pension and medical expenses, partially offset by an aggregate approximately $412,000 decline in professional fees, travel related, public company and various miscellaneous expenses.

        Operating expenses related to real estate owned.    This increase is attributable primarily to increases in maintenance, insurance and professional fees on our Newark property partially offset by a $134,000 decline in real estate tax expense on a land parcel we own in Daytona, FL.

Other revenue and expense items

        The following table compares other revenue and expense items for the years indicated:

        Equity in earnings of unconsolidated ventures.    The increase is attributable to $99,000 of income generated with respect to the activities of the Torchlight joint venture and $54,000 attributable to increased rental income at one of our other ventures properties.

        Gain on sale of available-for-sale securities.    During fiscal 2011, we sold available-for-sale securities with a cost basis of $6.3 million for $7.6 million, recognizing a gain of $1.3 million. During fiscal 2010, we sold available-for-sale securities with a cost basis of $1.8 million for $3.4 million recognizing a gain of $1.6 million.

        Loss on extinguishment of debt.    In March 2011, we restructured our outstanding junior subordinated notes. Pursuant to the restructuring, we repaid $5.0 million of the notes at par and reduced the interest rate on the remaining outstanding notes through the April 2036 maturity date. For accounting purposes this restructuring was treated as an extinguishment of debt, and accordingly, we recognized a loss of $2.1 million which represented the unaccreted principal balance of the notes and the related unamortized costs.

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Discontinued operations

        In fiscal 2011, we had income from discontinued operations of $1.3 million due to the sale of two cooperative apartment units in New York and the payoff of a loan which was classified as real estate for accounting purposes. In fiscal 2010, discontinued operations represented the loss from operations of $602,000 primarily from two multi-family garden apartment properties and a hotel property, an impairment charge of $745,000 which related to a multi-family garden apartment property and gains of $1,937,000 from the sale of two multi-family properties, a hotel property and coop and condominium units.

Year Ended September 30, 2010 Compared to Year Ended September 30, 2009

Revenues

        The following table compares our revenues for the periods indicated:

        Interest on real estate loans.    The decrease is primarily due to the $57.6 million decrease from fiscal 2009 in the average balance of earning loans outstanding. The decrease in such balance is attributable to the increase in non-performing loans (which increased because two loans in the aggregate principal amount of $34.6 million became non-performing in the first quarter of fiscal 2010) and payoffs and sales of $39.3 million of outstanding loans. Partially offsetting this decrease was an increase of approximately $449,000 of interest income attributable to the increase from 11.48% to 12.17% in the interest rate earned on the performing loans and interest income of $486,000, of which $359,000 is attributable to payments received in connection with the settlement of a lawsuit relating to a series of loans to one borrower and $90,000 is attributable to the receipt of interest on non-performing loans.

        Interest on purchase money mortgages.    The increase is attributable to the inclusion for a full fiscal year of interest on such mortgages. We began to originate such loans in the third quarter of fiscal 2009 to facilitate the sale of our owned real estate.

        Rental revenue from real estate properties.    The increase is due to the inclusion for a full fiscal year of rental revenues earned from the properties owned by our Newark Joint Venture, including $465,000 derived from a lease entered into in the first quarter of fiscal 2010. We entered into the Newark Joint Venture in the fourth quarter of fiscal 2009 and accordingly, rental revenues for fiscal 2009 only includes revenues from such venture for the fourth quarter.

        Recovery of previously provided allowance.    In fiscal 2010, we recognized a $365,000 recovery in previously provided loan loss allowances from two loans that were previously impaired and were paid off for amounts greater than their net carrying value. There was no comparable revenue in fiscal 2009.

        Other, primarily investment income.    The net decrease is attributable to the decrease in dividend income due to the sale of dividend paying securities and to a lesser extent to lower rates earned on short-term investments.

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Expenses

        The following table compares expenses for the periods indicated:

        Interest on borrowed funds.    The components of the decrease are as follows: (a) $1.09 million is due to the restructuring effected in fiscal 2009 of our junior subordinated notes; (b) $787,000 is attributable to the $15.5 million decrease in the average outstanding balance of our junior subordinated notes which decrease in turn is attributable to our partial repayment of these notes at the end of the fourth quarter of fiscal 2009; (c) $146,000 is due to the reduction of amounts borrowed due to our termination of the credit facility in the third quarter of fiscal 2009; (d) $311,000 is attributable to the reduction in amortization of deferred borrowing costs resulting primarily from our termination of the credit facility; (e) $527,000 is attributable to increased balances of mortgages outstanding on our Newark properties; and (f) $328,000 is due to the capitalization of interest expense allocated to the development of one of the Newark, NJ Assemblages.

        Advisor's fee, related party.    The fee is calculated based on invested assets and decreased because of the decrease in our portfolio of loans and real estate assets. These assets decreased because of our foreclosure of defaulted mortgage loans and the subsequent sale of the underlying real estate.

        Provision for loan losses.    In fiscal 2010 we took loan loss provisions against two loans with an aggregate outstanding balance of $26.7 million. In fiscal 2009, the loan loss provision was taken against 22 loans with an aggregate principal balance $65.8 million.

        Impairment charges.    The impairments in fiscal 2010 were taken against two properties, of which $2.5 million relates to a parcel of unimproved land located in South Daytona Beach, Florida and the $125,000 balance was taken against six individual condominium units located in Apopka, Florida. In fiscal 2009, we took an impairment charge against one property in our real estate portfolio located in Manhattan, New York.

        Foreclosure related professional fees.    Fees decreased due to the decrease in foreclosure actions and workout activity as many of the foreclosure actions pending in fiscal 2009 were concluded in fiscal 2009 or early fiscal 2010.

        Debt restructuring charges.    This represents legal expenses and third party costs incurred in fiscal 2009 in connection with the restructuring of our trust preferred securities. There was no comparable expense in fiscal 2010.

        General and administrative expense.    The decrease is attributable primarily to net decreases of $595,000 in professional fees and $367,000 in salary, benefits and expenses allocated pursuant to our shared services agreement. Professional fees decreased primarily because fiscal 2009 included expenses incurred in connection with the workout and the resulting joint venture agreement that was entered into in the fourth quarter of fiscal 2009 with respect to the Newark Joint Venture. There was no

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comparable expense in fiscal 2010. Professional fees also decreased because fiscal 2009 includes additional audit and internal control fees incurred in connection with workout and foreclosure activity. Salary, benefits and allocated expenses decreased on a net basis primarily due to reduced bonuses and the reduction in our level of workout and foreclosure activity. There were also decreases in taxes and travel and entertainment expenses which were partially offset by increases in advertising/promotional fees and exchange listing and other public company expenses.

        Operating expenses related to real estate properties.    The increase is attributable to the inclusion, for a full fiscal year, of the operating expenses related to our Newark Joint Venture properties. In fiscal 2009, such expenses were only incurred in the fourth fiscal quarter.

        Amortization and depreciation.    The decrease is attributable to reclassification of real estate to real estate held for sale as depreciation is not recorded on properties held for sale.

Other revenue and expense items

        Equity in earnings (loss) of unconsolidated ventures.    In fiscal 2010, we had a gain of $196,000 compared to a loss of $2.8 million in fiscal 2009. The change is attributable primarily to the inclusion in fiscal 2009 of a $2.8 million loss reflecting our proportionate share of the loss sustained by our joint venture with the CIT Capital USA, Inc. and the write off of the balance of the unamortized fee we paid to an investment banker for obtaining capital from CIT Capital USA. The principal reason for the loss recorded by the joint venture was a loan loss provision taken to reflect a decrease in the value of the real estate underlying a non-performing loan.

        Gain on early extinguishment of debt.    In fiscal 2009, we retired $15.9 million face value of junior subordinated notes for $7.95 million. We incurred legal and other fees of $365,000 related to the transaction. The carrying value at the time of the redemption was $14.8 million, which included $329,000 of deferred fees. We recorded a gain of $6.44 million on the transaction. There was no comparable gain in fiscal 2010.

Discontinued operations

        The following table compares the components of our discontinued operations for the periods indicated:

        Loss from operations.    The decrease is attributable to the sale in late fiscal 2009 and early fiscal 2010 of real estate assets that we acquired through foreclosures in fiscal 2009 that were classified in fiscal 2009 as held for sale.

        Impairment charges.    These charges decreased as we sold most of the properties acquired by foreclosure in fiscal 2009 and the beginning of fiscal 2010. In fiscal 2010, the impairment charges were taken against two properties and in fiscal 2009 were taken against thirteen properties.

        Gain on sale of real estate assets.    We recorded gains on the sale of five properties in fiscal 2010 and on the sale of six properties in fiscal 2009.

Liquidity and Capital Resources

        Liquidity is a measurement of our ability to meet cash requirements, including to fund loan originations, pay operating expenses, repay borrowings, and other general business needs. We require

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capital to fund loan originations, acquire properties and pay operating expenses. Our current sources of capital and liquidity primarily consist of our cash, marketable securities, revolving credit facility and effective November 2012, our participation arrangement with 512 Lending. Our total available liquidity at September 30, 2011 and December 5, 2011, without giving effect to this participation arrangement, was approximately $60.3 million and $84.3 million, respectively.

        We believe we have sufficient capital to meet our operating expenses in fiscal 2012, and to fund any capital contributions required by the Newark Joint Venture. We also have funds available to engage in our primary lending business and to make property acquisitions.

        The Newark Joint Venture may borrow up to $8.6 million (of which $4.0 million had been borrowed at September 30, 2011) to fund specified development activities with respect to the Teachers Village project. While it is currently seeking up to $150 million in financing from public and private sources to fund the further development and construction of this project, no assurance can be given that the Newark Joint Venture will obtain the necessary financing on acceptable terms or if such financing is obtained, that such project will be profitable for us.

Participation Arrangement

        In November 2011, we entered into an arrangement with 512 Lending, LLC pursuant to which each of us, with specified exceptions, must present to the other the opportunity (but not the obligation) to participate in loans such party originates. The arrangement expires in December 2014, subject to earlier termination by either party on not less than 60 days' notice for any reason. It is generally anticipated that 512 Lending will fund between 50% to 80% of the principal amount of loans we originate and in which they elect to participate and that we will fund up to 20% of the principal amount of loans they originate and in which we elect to participate.

Credit Facility

        A subsidiary of ours is able to borrow funds to originate loans and for its general corporate purposes through a senior secured revolving credit facility with Capital One, National Association. The maximum amount that may be borrowed is the lesser of $25 million and the borrowing base. The borrowing base is generally equal to 40% to 65% (depending on, among other things, the type of property secured by the eligible mortgage receivables pledged to the lender and the operating income of the related property) of such receivables. Interest accrues on the outstanding balance at the greater of (i) 4% plus LIBOR and (ii) 5.50%. The facility matures June 21, 2014 and, subject to the satisfaction of specified conditions, the outstanding balance may be converted at our option into an 18 month term loan. We have guaranteed the payment and performance of our subsidiary's obligations under the facility. At September 30, 2011 and November 30, 2011, no amount was outstanding thereunder.

        The loan documents, among other things, require:

•

(i) us to maintain on a quarterly basis and on a consolidated basis, net worth of not less than $100 million and liquidity of not less than $7.5 million, and (ii) prohibits us from incurring debt, with specified exceptions, in excess of five percent of our net worth; and



•

(i) our subsidiary to maintain a debt service coverage ratio and a collateral coverage ratio of not less than 1.5 to 1.0, and (ii) prohibits the subsidiary, with specified exceptions, from incurring debt.

Off Balance Sheet Arrangements

        We are not a party to any off balance sheet arrangements.

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Disclosure of Contractual Obligations

        The following table sets forth as of September 30, 2011 our known contractual obligations:

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:

Allowance for Possible Losses and Impairment Charges

        We conduct a quarterly review of (i) each loan in our mortgage portfolio, including the real estate securing each loan, (ii) each of our real estate assets, and (iii) each real estate asset owned by our joint ventures. This review is conducted in order to determine if there is uncertainty that the borrower has sufficient funds to repay the loan or if indicators of impairment are present on the real estate.

        In reviewing the value of the collateral underlying a loan and 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 piece of collateral and each real estate asset by using one or more valuation techniques, such as comparable sales, discounted cash flow analysis or replacement cost analysis. Determination of the fair value of the collateral securing a loan requires significant judgment, estimates and discretion by management. Our real estate assets (other than real estate held for sale) and our joint ventures' real estate assets are evaluated for indicators of impairment using an undiscounted cash flow analysis. 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

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estimated fair value. We do not obtain any third party appraisals regarding the value of the property securing loans made by us or our joint ventures, or the real estate assets owned by us or our joint ventures. Instead, we rely on our own "in-house" valuations. Any valuation allowances taken with respect to our loan portfolio or real estate assets reduces our net income, assets and shareholders' equity to the extent of the amount of the valuation allowance, but it will not affect our cash flow until such time as the property is sold. For fiscal 2010, $3.17 million of loan loss provisions were recorded against our mortgage portfolio and $3.37 million of impairment charges were taken with respect to our real estate assets (including real estate properties held for sale). In fiscal 2011, no such provisions or changes were taken.

Revenue Recognition

        We recognize interest income and rental income on an accrual basis, unless we make a judgment that impairment of a loan or of real estate owned renders doubtful collection of interest or rent in accordance with the applicable loan documents or lease. In making a judgment as to the collectability of interest or rent, we consider, among other factors, the status of the loan or property, the borrower's or tenant's financial condition, payment history and anticipated events in the future. Income recognition is suspended for loans when, in the opinion of management, a full recovery of income and principal becomes doubtful. Income recognition is resumed when the loan becomes contractually current and continued performance is demonstrated. Accordingly, management must make a significant judgment as to whether to treat a loan or real estate owned as impaired. If we make a decision to treat a "problem" loan or real estate asset as not impaired and therefore continue to recognize the interest and 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.

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.

        In December 2008, our board of trustees suspended the payment of regular quarterly dividends. No dividends were paid in fiscal 2011 or 2010. At December 31, 2010, we had a net operating loss carry-forward of $70.5 million and we anticipate utilizing approximately $8.2 million in calendar 2011. Since we can offset our future taxable income 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 2012 and it is unlikely that we will be required to pay a dividend for several years thereafter to maintain our REIT status. Although our board of trustees reviews the payment of dividends periodically, there is no expectation that a dividend will be paid in the 2012 calendar year and for several years thereafter.

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Item 7A.    Quantitative and Qualitative Disclosure About Market Risk.

        Our primary component of market risk is interest rate sensitivity. Our interest income is subject to changes in interest rates. We seek to minimize these risks by originating loans that are indexed to the prime rate, with a stated minimum interest rate. At September 30, 2011, approximately 82% of the principal amount of our outstanding mortgage loans were comprised of variable rate loans tied to the prime rate and with a stated minimum rate. When determining interest rate sensitivity, we assume that any change in interest rates is immediate and that the interest rate sensitive assets and liabilities existing at the beginning of the period remain constant over the period being measured. We assessed the market risk for our variable rate mortgage receivables as of September 30, 2011 and believe that a one percent increase in interest rates would cause an increase in income before taxes of $513,000 and a one percent decline in interest rates would not cause a decrease in income before taxes because all of our variable rate loans have a stated minimum rate. As of September 30, 2011, 71% of our loan portfolio was secured by properties located in the New York metropolitan area, and we are therefore subject to risks associated with the New York economy.

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.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

        Not applicable.

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 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

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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, 2011. 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.

        Based on its assessment, our management believes that, as of September 30, 2011, 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 F-1 of this Annual Report on Form 10-K.

Item 9B.    Other Information.

        On December 8, 2011, the Board of Trustees adopted, subject to shareholder approval, the Trust's 2012 Incentive Plan. This plan provides for the grant of up to 600,000 common shares pursuant to stock options, restricted stock, restricted stock units and performance share awards. Directors, officers, employees and consultants are entitled to participate in the Plan. Awards to be granted under the plan are subject to the terms and conditions imposed by the plan and by the plan administrators. Subject to earlier termination at the discretion of the plan administrators, the plan terminates ten years after its adoption by shareholders.

        On December 8, 2011, the Board of Trustees approved an amendment to the Advisory Agreement between us and REIT Management, which amendment is effective as of January 1, 2011. See "Business-Our Structure" for further information regarding this amendment.

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PART III

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 2012 Annual Meeting of Shareholders.

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 2012 Annual Meeting of Shareholders and is incorporated herein by reference.

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 2012 Annual Meeting of Shareholders and is incorporated herein by reference.

Equity Compensation Plan Information

        The table below provides information as of September 30, 2011 with respect to our Common Shares that may be issued upon exercise of outstanding options, warrants and rights:

Item 13.    Certain Relationships and Related Transactions.

        The information concerning relationships and certain transactions required by Item 13 will be included in the proxy statement to be filed relating to our 2012 Annual Meeting of Shareholders and is incorporated herein by reference.

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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 2012 Annual Meeting of Shareholders and is incorporated herein by reference.

PART IV

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.