BRT Apartments Corp. - Quarter Report: 2011 June (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC  20549

 

FORM 10-Q

 

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

 

For the quarterly period ended June 30, 2011

 

OR

 

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

 

Commission File Number 001-07172

 

BRT REALTY TRUST

(Exact name of Registrant as specified in its charter)

 

 

 

516-466-3100

(Registrant’s telephone number, including area code)

 

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

 

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

 

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

 

 

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

 

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

 

14,070,774 Shares of Beneficial Interest,

$3 par value, outstanding on August 5, 2011

 

 

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BRT REALTY TRUST AND SUBSIDIARIES

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		Page No.
Part I - Financial Information
Item 1.	Financial Statements
	Consolidated Balance Sheets — June 30, 2011 and September 30, 2010	1
	Consolidated Statements of Operations — Three and nine months ended June 30, 2011 and 2010	2
	Consolidated Statement of Shareholders’ Equity — Nine months ended June 30, 2011	4
	Consolidated Statements of Cash Flows — Nine months ended June 30, 2011 and 2010	5
	Notes to Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risks	29
Item 4.	Controls and Procedures	29
Part II — Other Information
Item 6.	Exhibits	30
	Signatures
	Ex 10.1
	Ex 31.1
	Ex 31.2
	Ex 32.1
	Ex 32.2
	Ex 101

 

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Part I - FINANCIAL INFORMATION

Item 1. Financial Statements

 

BRT REALTY TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except per share data)

 

		June 30, 2011 (Unaudited)			September 30, 2010
ASSETS
Real estate loans
Earning interest		$	85,891		$	17,263
Non-earning interest		8,488			35,143
		94,379			52,406
Deferred fee income		(1,095		)	(245		)
Allowance for possible losses		—			(3,165		)
		93,284			48,996
Purchase money mortgage loans		1,295			5,340
Real estate properties net of accumulated depreciation of $2,335 and $1,806		55,889			55,843
Investment in unconsolidated ventures		1,127			775
Cash and cash equivalents		26,723			58,497
Available-for-sale securities at market		3,600			10,270
Other assets		6,342			6,545
Total Assets		$	188,260		$	186,266
LIABILITIES AND EQUITY
Liabilities:
Junior subordinated notes		$	37,400		$	40,815
Mortgages payable		13,616			12,557
Accounts payable and accrued liabilities		1,253			1,332
Deposits payable		2,277			1,723
Total Liabilities		54,546			56,427
Commitments and contingencies		—			—
Equity:
BRT Realty Trust shareholders’ equity:
Preferred shares, $1 par value:
Authorized 10,000 shares, none issued
Shares of beneficial interest, $3 par value:
Authorized number of shares, unlimited, 15,001 and 15,148 issued		45,003			45,445
Additional paid-in capital		171,704			172,268
Accumulated other comprehensive income—net unrealized gain on available-for-sale securities		917			1,594
Accumulated deficit		(78,878		)	(83,389		)
Cost of 1,422 and 1,460 treasury shares of beneficial interest		(11,070		)	(11,364		)
Total BRT Realty Trust shareholders’ equity		127,676			124,554
Non-controlling interests		6,038			5,285
Total Equity		133,714			129,839
Total Liabilities and Equity		$	188,260		$	186,266

 

See accompanying notes to consolidated financial statements.

 

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BRT REALTY TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Dollars in thousands, except share data)

 

		Three Months Ended						Nine Months Ended
		June 30,						June 30,
		2011			2010			2011			2010
Revenues:
Interest on real estate loans		$	2,764		$	592		$	5,480		$	1,751
Interest on purchase money mortgage loans		64			344			250			1,029
Loan fee income		690			48			1,208			163
Rental revenue from real estate properties		763			871			2,576			2,610
Recovery of previously provided allowance		1,002			365			3,568			365
Other, primarily investment income		61			125			411			335
Total revenues		5,344			2,345			13,493			6,253
Expenses:
Interest on borrowed funds		452			729			1,651			2,167
Advisor’s fees, related party		237			199			699			596
Provision for loan loss		—			—			—			3,165
Impairment charges		—			2,625			—			2,625
Foreclosure related professional fees		162			141			519			310
General and administrative—including $215 and $188 to related party for the three months ended and $636 and $622 for the nine months ended , respectively		1,585			1,565			4,645			4,581
Operating expenses relating to real estate properties		889			918			2,655			2,587
Amortization and depreciation		183			190			555			543
Total expenses		3,508			6,367			10,724			16,574
Total revenues less total expenses		1,836			(4,022		)	2,769			(10,321		)
Equity in earnings of unconsolidated ventures		60			33			195			143
Gain on sale of available-for-sale securities		176			—			1,190			1,586
Loss on extinguishment of debt		—			—			(2,138		)	—
Income (loss) from continuing operations		2,072			(3,989		)	2,016			(8,592		)
Discontinued operations:
Loss from operations		—			(54		)	—			(596		)
Impairment charges		—			—			—			(745		)
Gain on sale of real estate assets		645			643			1,342			1,918
Discontinued operations		645			589			1,342			577
Net income (loss)		2,717			(3,400		)	3,358			(8,015		)
Less net loss attributable to non-controlling interests		455			429			1,153			1,166
Net income (loss) attributable to common shareholders		$	3,172		$	(2,971	)	$	4,511		$	(6,849	)
Basic and diluted per share amounts attributable to common shareholders:
Income (loss) from continuing operations		$	.18		$	(.25	)	$	.22		$	(.54	)
Discontinued operations		.05			.04			.10			.04
Basic and diluted earnings (loss) per share		$	.23		$	(.21	)	$	.32		$	(.50	)

 

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BRT REALTY TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)

(Unaudited)

(Dollars in thousands, except share data)

 

		Three Months Ended						Nine Months Ended
		June 30,						June 30,
		2011			2010			2011			2010
Amounts attributable to BRT Realty Trust:
Income (loss) from continuing operations		$	2,527		$	(3,560	)	$	3,169		$	(7,426	)
Discontinued operations		645			589			1,342			577
Net income (loss)		$	3,172		$	(2,971	)	$	4,511		$	(6,849	)
Weighted average number of common shares outstanding:
Basic and diluted		14,070,774			14,106,816			14,031,861			13,800,708

 

See accompanying notes to consolidated financial statements.

 

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BRT REALTY TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(Unaudited)

(Dollars in thousands, except share data)

 

		Shares of Beneficial Interest			Additional Paid-In Capital			Accumulated Other Comprehensive Income			Accumulated Deficit			Treasury Shares			Non Controlling Interests			Total Equity
Balances, September 30, 2010		$	45,445		$	172,268		$	1,594		$	(83,389	)	$	(11,364	)	$	5,285		$	129,839
Restricted stock vesting					(294		)							294						—
Compensation expense — restricted stock		—			636			—			—			—			—			636
Issuance of warrants in connection with joint venture agreement		—			259			—			—			—			—			259
Contributions from non-controlling Interests		—			—			—			—			—			2,256			2,256
Distributions to non-controlling interests		—			—			—			—			—			(66		)	(66		)
Purchase of minority interest					(429		)										(284		)	(713		)
Shares repurchased (147,387)		(442		)	(736		)	—			—			—			—			(1,178		)
Net income		—			—			—			4,511			—			(1,153		)	3,358
Other comprehensive loss - net unrealized loss on available-for-sale securities (net of reclassification adjustment for gains of $376 included in net income)		—			—			(677		)	—			—			—			(677		)
Comprehensive income		—			—			—			—			—			—			2,681
Balances, June 30, 2011		$	45,003		$	171,704		$	917		$	(78,878	)	$	(11,070	)	$	6,038		$	133,714

 

See accompanying notes to consolidated financial statements.

 

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BRT REALTY TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in Thousands)

 

		Nine Months Ended June 30,
		2011			2010
Cash flows from operating activities:
Net income (loss)		$	3,358		$	(8,015	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Provision for loan loss		—			3,165
Recovery of previously provided allowance		(3,568		)	(365		)
Impairment charges		—			3,370
Amortization and depreciation		697			688
Amortization of deferred fee income		(1,185		)	(163		)
Accretion of junior subordinated notes principal		277			433
Amortization of securities discount		(28		)	(52		)
Amortization of restricted stock		636			640
Gain on sale of real estate assets from discontinued operations		(1,342		)	(1,918		)
Gain on sale of available-for-sale securities		(1,190		)	(1,586		)
Loss on extinguishment of debt		2,138			—
Equity in earnings of unconsolidated joint ventures		(195		)	(143		)
Distribution of earnings of unconsolidated joint ventures		150			138
Increase in straight line rent		(56		)	(279		)
Increases and decreases from changes in other assets and liabilities:
(Increase) decrease in interest and dividends receivable		(468		)	308
Decrease (increase) in prepaid expenses		94			(354		)
Increase (decrease) in accounts payable and accrued liabilities		438			(1,188		)
Increase in deferred costs		—			(47		)
Increase in security deposits and other receivable		(77		)	(181		)
Other		122			(124		)
Net cash used in operating activities		(199		)	(5,673		)
Cash flows from investing activities:
Collections from real estate loans		47,260			9,329
Additions to real estate loans		(112,442		)	(14,747		)
Proceeds from the sale of loans and loan participations		26,500			16,815
Loan loss recoveries		1,012			227
Net costs capitalized to real estate owned		(2,654		)	(2,609		)
Collection of loan fees		2,079			381
Proceeds from sale of real estate owned		4,021			15,857
Proceeds from sale of available for sale securities		7,266			4,425
Purchase of available for sale securities		(55		)	(2,352		)
Distributions of capital of unconsolidated joint ventures		—			1,701
Contributions to unconsolidated joint ventures		(10		)	—
Purchase of interest from non controlling partner		(713		)	—
Net cash (used in) provided by investing activities		(27,736		)	29,027
Cash flows from financing activities:
Repayment of junior subordinated notes		(5,000		)	—
Proceeds from mortgages payable		1,261			1,277
Mortgage principal payments		(202		)	(68		)
Increase in deferred borrowing costs		(910		)

 

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BRT REALTY TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(Unaudited)

(Dollars in Thousands)

 

		Nine Months Ended June 30,
		2011			2010
Cash distribution — common shares		—			(1,334		)
Expenses associated with stock issuance		—			(60		)
Capital contributions from non-controlling interests		2,256			1,846
Capital distributions to non-controlling interests		(66		)	(180		)
Repurchase of shares of beneficial interest		(1,178		)	(290		)
Net cash (used in) provided by financing activities		(3,839		)	1,191
Net (decrease) increase in cash and cash equivalents		(31,774		)	24,545
Cash and cash equivalents at beginning of period		58,497			25,708
Cash and cash equivalents at end of period		$	26,723		$	50,253
Supplemental disclosure of cash flow information:
Cash paid during the period for interest		$	1,625		$	1,944
Non cash investing and financing activity:
Common stock dividend portion paid in the Trust’s common shares		$	—		$	11,916
Reclassification of real estate properties to real estate held for sale		$	—		$	8,552
Reclassification of deferred costs to real estate properties		$	396		$	—

 

See accompanying notes to consolidated financial statements.

 

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BRT REALTY TRUST AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2011

 

Note 1 — Organization and Background

 

BRT Realty Trust is a business trust organized in Massachusetts.  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.  Generally, in such transactions, we purchase the mortgage and our counterparty is obligated to repurchase such mortgage within a specified period. 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.  Historically, we loaned money at a floating rate of interest based on a spread over the prime rate.  Beginning in fiscal 2010, the majority of the loans we originated have been fixed rate loans.  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.

 

From time-to-time we originate junior commercial and multi-family mortgage loans, participate as an equity investor in, and mortgage lender to, joint ventures which acquire income producing real estate property, and purchase securities of other REITs.

 

Note 2 - Basis of Preparation

 

The accompanying interim unaudited consolidated financial statements as of June 30, 2011 and for the three and nine months ended June 30, 2011 and June 30, 2010 reflect all normal recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the results for such interim periods. The results of operations for the three and nine months ended June 30, 2011 and June 30, 2010 are not necessarily indicative of the results for the full year.  The balance sheet as of September 30, 2010 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

 

Certain items on the consolidated financial statements for fiscal 2010 have been reclassified to conform with the current presentation.

 

The consolidated financial statements include the accounts and operations of BRT Realty Trust, its wholly owned subsidiaries, and its majority-owned or controlled real estate entities and its interests in variable interest entities in which it is the primary beneficiary.  Material intercompany items and transactions have been eliminated. BRT Realty Trust and its subsidiaries are hereinafter referred to as “BRT” or the “Trust.”

 

With respect to its unconsolidated joint ventures, as (i) the Trust is primarily the managing member but does not exercise substantial operating control over these entities or the Trust is not the managing member and (ii) such entities are not variable interest entities, the Trust has determined that such joint ventures should be accounted for under the equity method of accounting for financial statement purposes.

 

RBH-TRB Newark Holdings LLC (the “Newark Joint Venture”) was determined to be a Variable Interest Entity (“VIE”) because the Trust has voting rights that are not proportionate to its economic interests.  The Trust was determined to be the primary beneficiary as it has the power to direct the

 

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Note 2 - Basis of Preparation (Continued)

 

activities that most significantly impact the economic performance and the obligation to absorb losses that could potentially be significant to this VIE.  For these reasons, the Trust has consolidated the operations of this VIE with the Trust’s consolidated financial statements.

 

These statements should be read in conjunction with the consolidated financial statements and related notes which are included in BRT’s Annual Report on Form 10-K for the year ended September 30, 2010.

 

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

 

Note 3 — Shareholders’ Equity

 

Common Share Dividend Distribution

 

During the nine months ended June 30, 2011, the Trust did not declare or distribute a dividend.

 

Restricted Shares

 

An aggregate of 850,000 shares have been authorized for issuance under the Trust’s equity incentive plans, of which 231,885 shares remain available for future grants at June 30, 2011. The shares issued vest five years from the date of issuance and under specified circumstances, including a change in control, may vest earlier.  Since inception of the plans, 126,410 shares have vested and 491,705 shares have been granted and have not yet vested. For accounting purposes, the restricted stock is not included in the outstanding shares shown on the consolidated balance sheet until they vest, but is included in the earnings per share computation.   The estimated fair value of restricted stock at the date of grant is being amortized ratably into expense over the applicable vesting period. For the three months ended June 30, 2011 and 2010, the Trust recorded $210,000 and $209,000 of compensation expense respectively, and for the nine months ended June 30, 2011 and 2010, recorded $636,000 and $640,000 of compensation expense, respectively, as a result of the amortization of restricted shares.   At June 30, 2011, $2,012,000 has been deferred as unearned compensation and will be charged to expense over the remaining weighted average vesting period of approximately 3.10 years.

 

Warrant

 

On June 2, 2011, in connection with entering into a joint venture with an affiliate of Torchlight Investors (“Torchlight”), the Trust issued a warrant to purchase 100,000 shares of beneficial interest of the Trust.  The warrant is exercisable, with specified exceptions, from the later to occur of June 1, 2012 and the funding by Torchlight of at least $40 million of capital contributions to the joint venture.  The warrant expires, subject to earlier termination upon the occurrence of specified events, on June 1, 2018.  The exercise price of the warrant is $9.00 per share and includes anti-dilution adjustments in the event of stock splits, stock dividends and issuances of securities.  The warrant’s fair value of $259,000 as of the issue date was determined by a third party appraiser using a Monte Carlo simulation model and is being recorded as a component of the Trust’s investment in the joint venture.

 

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Note 3 — Shareholders’ Equity (Continued)

 

Per Share Data

 

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

 

Diluted earnings (loss) per share attributable to holders of shares of beneficial interest reflects the potential dilution that could occur if securities or other contracts to issue common shares were exercised or converted into common shares or resulted in the issuance of common shares that shared in the earnings (losses) of the Trust.

 

Basic and diluted shares outstanding for the three months ended June 30, 2011 and 2010 were 14,070,774 and 14,106,816, respectively, and for the nine months ended June 30, 2011 and 2010 were 14,031,861 and 13,800,708, respectively.

 

Note 4 - Real Estate Loans and Purchase Money Mortgages

 

At June 30, 2011, information relating to real estate loans and purchase money mortgages, is summarized as follows (dollars in thousands):

 

		Earning Interest			Non-Earning Interest			Total Real Estate Loans
Multi-family residential		$	22,218		$	—		$	22,218
Condominium units (existing multi-family)		6,244			8,488			14,732
Office		24,975			—			24,975
Retail		8,066			—			8,066
Hotel and Cooperative Apartment		12,469			—			12,469
Industrial		11,919			—			11,919
		85,891			8,488			94,379
Deferred fee income		(1,053		)	(42		)	(1,095		)
Real estate loans, net		84,838			8,446			93,284
Purchase money mortgage loans:
Multi-family residential		1,295			—			1,295
Real estate loans and purchase money mortgage loans, net		$	86,133		$	8,446		$	94,579

 

At June 30, 2011, the Trust had one non-earning loan outstanding, which was originated in October 2008.  The loan has an aggregate outstanding principal balance of $8,488,000, and represents 9.0% of total real estate loans and 4.5% of total assets.  This collateral dependent loan, secured by condominium units, is recourse to the borrower.  The loan is not impaired and no allowance for loan loss has been established.  This loan represents a pari passu interest in a loan with a principal balance of $16,976,000.  The borrower filed for protection under Chapter XI of the Federal Bankruptcy Code in December 2009.  In July 2011, the borrower, the Trust, and the Trust’s participant filed a joint plan of reorganization which was subsequently approved by the Federal Bankruptcy Court, pursuant to which the collateral will be conveyed to the Trust and its participant for an aggregate payment of $1.5 million.

 

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Note 4 - Real Estate Loans and Purchase Money Mortgages (Continued)

 

The Trust recognized cash basis interest of $149,000 and $145,000 on non-earning loans in the three months ended June 30, 2011 and 2010 and $452,000 and $422,000 in the nine months ended June 30, 2011 and 2010, respectively.

 

At June 30, 2011, three separate, unaffiliated borrowers had loans outstanding in excess of 5% of total assets. Information regarding these loans is set forth in the table below (dollars in thousands):

 

		Gross Loan Balance			# of Loans		% of Gross Loans		% of Assets		State		Status
Office building		$	22,800		1		23.8	%	12.1	%	NY		Performing
Hotel and Co-op Apartment		$	12,469		1		13.0	%	6.6	%	FL/NY		Performing
Industrial		$	11,919		1		12.5	%	6.3	%	MD		Performing

 

The Trust’s portfolio consists primarily of senior mortgage loans, secured by residential and commercial property, 61% of which are located in New York, 16% in Florida, 13% in Maryland and 10% in 3 other states.

 

Note 5 - Allowance for Possible Loan Losses

 

An analysis of the loan loss allowance at June 30, 2011 and June 30, 2010, respectively, is as follows (dollars in thousands):

 

		Three Months Ended June 30,						Nine Months Ended June 30,
		2011			2010			2011			2010
Balance at beginning of period		$	—		$	4,820		$	3,165		$	1,618
Recovery of previously provided allowance		(1,002		)	(365		)	(3,568		)	(365		)
Provision for loan loss		—			—			—			3,165
Charge-offs		—			(1,480		)	(608		)	(1,480		)
Recoveries		1,002			190			1,011			227
Balance at end of period		$	—		$	3,165		$	—		$	3,165

 

A loan is deemed to be impaired when based on current information and events, it is probable, in the judgment of management, that the Trust will not be able to collect all amounts due according to the contractual terms of the loan documents. When making this evaluation numerous factors are considered, including, market evaluations of the underlying collateral, estimated operating cash flow from the property during the projected holding period, and estimated sales value computed by applying an estimated capitalization rate to the projected stabilized net operating income of the specific property, less selling costs, discounted at market discount rates. If upon completion of the evaluation, the value of the collateral securing the loan is less than the recorded investment in the loan, an allowance is created with a corresponding charge to expense. The fair values related to the collateral securing our impaired loans are based on discounted cash flow models, which are considered to be Level 3 within the fair value hierarchy.  When the Trust acquires title to the property, the loan loss allowance is adjusted by charging off all amounts related to the loan and recording the property at the adjusted carrying value of the loan.

 

In the three and nine months ended June 30, 2011, the Trust recognized a recovery and the reversal of a previously provided loan loss allowance of $1,000,000 on a loan that was charged off in a

 

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Note 5 - Allowance for Possible Loan Losses (Continued)

 

prior year.  In the nine months ended June 30, 2011, the Trust also reversed $2,566,000 of previously provided loan loss allowance.  This allowance related primarily to a non-performing loan which was sold in the current nine month period.

 

Note 6 - Real Estate Properties

 

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

 

		September 30, 2010 Balance			Costs Capitalized			Depreciation, Amortization and Paydowns			June 30, 2011 Balance
Shopping centers/Retail		$	2,957		—			$	(78	)	$	2,879
Multi-family and coop apartments		2,969			$	10		(2,679		)(a)	300
Commercial (b)		41,945			3,244			(451		)	44,738
Land		7,972			—			—			7,972
Total real estate properties		$	55,843		$	3,254		$	(3,208	)	$	55,889

 

(a)        Includes $2,597,000 which represents the payoff of a mortgage loan which was classified as real estate for accounting purposes.

 

(b)        Represents the real estate assets of the Newark Joint Venture, a consolidated VIE which owns operating and development properties in Newark, New Jersey.  These properties contain a mix of office and retail space, totaling approximately 594,000 square feet.  These assets are subject to blanket mortgages aggregating $27,000,000, held by the Trust, which are eliminated in consolidation.  Several of the assets are also encumbered by unaffiliated third party mortgages having an aggregate principal balance of $11,550,000 at June 30, 2011.

 

The risks associated with our involvement in the Newark Joint Venture, as described in our Annual Report on Form 10-K for the fiscal year ended September 30, 2010, have not changed in the three or nine months ended June 30, 2011.

 

For the three months ended June 30, 2011 and June 30, 2010, the Newark Joint Venture recorded revenues of $469,000 and $542,000, respectively, and operating expenses of $750,000 and $713,000, respectively, excluding interest expense and depreciation.  For the nine months ended June 30, 2011 and 2010, this venture recorded revenues of $1,617,000 and $1,568,000, respectively, and operating expenses of $2,157,000 and $1,987,000, respectively, excluding interest expense and depreciation.  The Trust made capital contributions to this venture of $2,265,000 during the nine months ended June 30, 2011 representing its proportionate share of capital required to fund the operations of the venture through May 31, 2012.

 

Note 7 — Investment in Unconsolidated Ventures

 

On June 2, 2011, a wholly owned subsidiary of the Trust ( the “BRT member”) entered into a joint venture with Torchlight.  The joint venture has the right, but not the obligation, to acquire all whole loans originated by the Trust.  The BRT member is the managing member of the joint venture.  The joint venture may be capitalized with up to $100 million of which 20% will be funded by the BRT member and 80% will be funded by Torchlight as and when loans are acquired.

 

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Note 7 — Investment in Unconsolidated Ventures (Continued)

 

The Trust will service the loans acquired by the joint venture and is to receive, on a quarterly basis, in arrears, a servicing fee of 0.5% (annualized) and 1% (annualized) of the weighted average outstanding principal amount of performing loans and non-performing loans, respectively.  The BRT member will pay the joint venture the prepaid interest (whether denominated as “points” or otherwise) on these loans and the BRT member and REIT Management Corp. (the Trust’s advisor), will each retain an origination fee of 0.25% of the principal amount of such loans.  REIT Management is wholly owned by the Chairman of the Board of Trustees of the Trust.

 

Generally, the joint venture will distribute net cash available for distribution in the following order of priority until the applicable performance threshold is achieved. The threshold is achieved when Torchlight has obtained an annual return, non-compounded, equal to the performance threshold percentage on the average weighted amount of its outstanding capital contribution as shown in the chart below:

 

		Performance Threshold			Torchlight			BRT Member			REIT Management
First Tier		8	%		80	%		20	%		—
Second Tier		11			70			29			1	%
Third Tier		13			60			38			2
Fourth Tier		more than 13			50			47			3

 

The BRT member is required to deposit from the promote income (i.e., the amount payable collectively to the BRT member and REIT Management in excess of 20% in each of the second through fourth tiers)  loan workout reserves equal to the greater of $250,000 and one percent of the maximum outstanding balances of the loans owned by the joint venture.  In addition, the BRT member must also deposit from its promote income an amount equal to the outstanding balance of all non- performing loans owned by the joint venture.  Annually and upon liquidation the BRT member is required to recalculate the distributions and return any promote income in excess of the promote income to which the BRT member and REIT Management are entitled (calculated on a cumulative basis from the inception of the joint venture).

 

The Trust is also a partner in two other unconsolidated ventures, each of which owns and operates one property.   The Trust’s share of the ventures’ earnings was $60,000 and $33,000 for the three months ended June 30, 2011 and 2010 and $195,000 and $143,000 for the nine months ended June 30, 2011 and 2010, respectively.  The Trust’s investment in these unconsolidated ventures totaled $830,000 and $775,000 at June 30, 2011 and September 30, 2010, respectively.

 

Note 8 — Available-For-Sale Securities

 

At June 30, 2011, the Trust’s available-for-sale securities consisted solely of equity securities with a fair value of $3,600,000 and a cost basis of $2,684,000.  Unrealized gains totaled $960,000 and unrealized losses totaled $44,000.

 

Unrealized gains and losses are reflected as accumulated other comprehensive income-net unrealized gain on available-for-sale securities in the accompanying consolidated balance sheets.

 

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Note 8 — Available-For-Sale Securities (Continued)

 

The Trust’s available-for-sale equity securities were determined to be Level 1 financial assets within the valuation hierarchy established by current accounting guidance, and the valuation is based on current market quotes received from financial sources that trade such securities.  All of the available-for-sale securities in an unrealized loss position are equity securities and amounts are not considered to be other-than-temporary impairment because the Company expects the value of these securities to recover and plans on holding them until at least such recovery.

 

During the three months ended June 30, 2011, the Trust sold available-for-sale equity securities for $978,000 with a basis of $802,000, determined using average cost.  Accordingly, the Trust recognized a gain of $176,000 from these sales.  In the nine months ended June 30, 2011, the Trust sold available-for-sale equity securities for $3,849,000 with a basis of $3,151,000, determined using average cost.  Accordingly, the Trust recognized a gain of $698,000 from these sales.

 

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

 

During the three and nine months ended June 30, 2010, the Trust sold available-for-sale equity securities for $2,425,000.  The basis of these securities was $975,000, determined using average cost.  Accordingly, the Trust recognized a gain of $1,450,000 from these sales. The Trust also sold an available-for-sale debt security for $1,000,000.  The basis of this security was $864,000 and was determined using specific identification.  Accordingly, the Trust recognized a gain of $136,000 on this sale.

 

Note 9 — Debt Obligations

 

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

 

		June 30, 2011			September 30, 2010
Line of credit		—			—
Junior subordinated notes		$	37,400		$	40,815
Mortgages payable		13,616			12,557
Total debt obligations		$	51,016		$	53,372

 

Line of credit

 

On June 22, 2011, the Trust, through a wholly owned subsidiary, entered into a senior secured revolving credit facility with Capital One, National Association.  The maximum amount that may be borrowed under the facility 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 the Trust’s option into an 18 month term loan.  The Trust has guaranteed the payment and performance of its subsidiary’s obligations under the facility.

 

The loan documents, among other things, require (A) the Trust (i)  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 the Trust from incurring debt, with specified exceptions, in excess of five percent of its net worth and (B) the subsidiary (i) to maintain  a debt service coverage ratio and a

 

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Note 9 — Debt Obligations (Continued)

 

collateral coverage ratio of not less than 1.5 to 1.0, and (iii) prohibits the subsidiary, with specified exceptions, from incurring debt.

 

We have paid, and in each of June 2012 and 2013 will pay, an $82,500 fee in connection with this facility.

 

At June 30, 2011 there was no outstanding balance on the facility as the Trust had not pledged any receivables with respect to the borrowing base.

 

Junior Subordinated Notes

 

On March 15, 2011, the Trust restructured its existing junior subordinated notes resulting in the repayment of $5,000,000 of the outstanding notes at par and the reduction of the interest rates on the remaining outstanding notes as set forth in the table below:

 

Interest period		Prior Interest Rate		New Interest Rate
March 15, 2011 through July 31, 2012		3.50%		3.00%
August 1, 2012 through April 29, 2016		8.37%		4.90%
April 30, 2016 through April 30, 2036		LIBOR + 2.95%		LIBOR + 2.00%

 

The Trust accounted for the restructuring of this debt as an extinguishment of debt.  For the nine months ended June 30, 2011, the Trust recognized a loss on the extinguishment of the debt of $2,138,000, which represented the unamortized principal of $1,308,000 and unamortized costs of $830,000.  The Trust also incurred third party costs of $512,000 which were deferred and will be amortized over the remaining life of the notes.

 

Interest expense relating to the junior subordinated notes for the three and nine months ended June 30, 2011 was $280,000 and $1,284,000, respectively.  For the three and nine months ended June 30, 2010, interest expense was $518,000 and $1,547,000 respectively.  Amortization of the deferred costs was $6,000 and $21,000 for the three and nine months ended June 30, 2011, respectively.  For the three and nine months ended June 30, 2010, amortization of these costs was $8,000 and $25,000, respectively.

 

Mortgages Payable

 

The Trust has five first mortgages and one second mortgage outstanding with an aggregate principal balance at June 30, 2011 of $13,616,000.  One of these mortgages, with an outstanding balance at June 30, 2011 of $2,066,000, is secured by a long term leasehold position on a shopping center owned by a consolidated joint venture.  The remaining five mortgages, with outstanding balances at June 30, 2011 of $11,550,000, are secured by individual parcels of two land assemblages in Newark, NJ owned by another consolidated joint venture. The Trust has guaranteed $775,000 of one of the mortgage obligations at June 30, 2011, based on the current outstanding balance.  The guarantee will increase to $2,154,000 if the full amount of the $8,600,000 loan is drawn and outstanding.

 

Interest expense relating to the mortgages payable including amortized mortgage costs for the three and nine months ended June 30, 2011 was $331,000 and $908,000 respectively.  For the three and nine months ended June 30, 2010, interest expense was $202,000 and $595,000, respectively.

 

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Note 9 — Debt Obligations (Continued)

 

During the three and nine months ended June 30, 2011, the Trust capitalized interest expense of $165,000 and $562,000, respectively.  This interest is being capitalized in connection with the development of a portion of our Newark Joint Venture’s properties.

 

Note 10 — Comprehensive Income (Loss)

 

Comprehensive income (loss) for the three and nine month’s was as follows (dollars in thousands):

 

		Three Months Ended June 30,						Nine Months Ended June 30,
		2011			2010			2011			2010
Net income (loss)		$	2,717		$	(3,400	)	$	3,358		$	(8,015	)
Other comprehensive loss-unrealized loss on available-for-sale securities		(272		)	(274		)	(677		)	(1,543		)
Less: net loss attributable to non-controlling interests		455			429			1,153			1,166
Comprehensive income (loss) attributable to common shareholders		$	2,900		$	(3,245	)	$	3,834		$	(8,392	)

 

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Note 11 -Segment Reporting

 

Management has determined that it operates in two reportable segments: (i) a loan and investment segment which includes the origination and servicing of our loan portfolio and investments; and (ii) a real estate segment which includes the operation and disposition of our real estate assets.

 

The following table summarizes our segment reporting for the three and nine months ended June 30, 2011 (dollars in thousands):

 

		Three Months Ended June 30, 2011									Nine Months Ended June 30, 2011
		Loan and Investment			Real Estate			Total			Loan and Investment			Real Estate			Total
Revenues		$	4,581		$	763		$	5,344		$	10,917		$	2,576		$	13,493
Interest on borrowed funds		195			257			452			885			766			1,651
Other expenses		1,393			1,480			2,873			4,135			4,383			8,518
Amortization and depreciation		—			183			183			—			555			555
Total expenses		1,588			1,920			3,508			5,020			5,704			10,724
Total revenues less total expenses		2,993			(1,157		)	1,836			5,897			(3,128		)	2,769
Equity in earnings of unconsolidated ventures		—			60			60			—			195			195
Gain on sale of available-for-sale securities		176			—			176			1,190			—			1,190
Loss on extinguishment of debt		—			—			—			(1,447		)	(691		)	(2,138		)
Income (loss) from continuing operations		3,169			(1,097		)	2,072			5,640			(3,624		)	2,016
Discontinued operations:
Gain on sale of real estate assets		—			645			645			—			1,342			1,342
Net income (loss)		3,169			(452		)	2,717			5,640			(2,282		)	3,358
Less net loss attributable to non-controlling interests		—			455			455			—			1,153			1,153
Net income (loss) attributable to common shareholders		$	3,169		$	3		$	3,172		$	5,640		$	(1,129	)	$	4,511
Segment assets		$	127,457		$	60,803		$	188,260		$	127,457		$	60,803		$	188,260

 

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