BRT Apartments Corp. - Annual Report: 2013 (Form 10-K)

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:

         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 $59.6 million based on the last sale price of the common equity on March 31, 2013, which is the last business day of the registrant's most recently completed second quarter.

         As of November 29, 2013, the registrant had 14,162,887 Shares of Beneficial Interest outstanding.

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, 2014 are incorporated by reference into Part III of this Form 10-K.

TABLE OF CONTENTS

Form 10-K

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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our acquisition strategy, which may not produce the cash flows or income expected;



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competition could adversely affect our ability to acquire properties;



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competition could limit our ability to lease apartments or retail space or increase or maintain rental income;



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losses from catastrophes may exceed all insurance coverage;



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a limited number of multi-family property acquisition and mortgage origination opportunities acceptable to us;



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national and local economic and business conditions;



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the condition of Fannie Mae or Freddie Mac, which could adversely impact us;



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our failure to comply with laws, including those requiring access to our properties by disabled persons, which could result in substantial costs;



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our failure to qualify as a REIT in accordance with the Internal Revenue Code of 1986, as amended, which could have adverse consequences,



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insufficient cash flows, which could limit our ability to make required payments for debt obligations;



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an inability to renew, repay, or refinance our outstanding debt;



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general and local 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 or 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 providers of short-term bridge loans;



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changes in interest rates; and



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the availability of and costs associated with sources of capital and 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.

PART I

Item l.    Business.

General

        We are a real estate investment trust, also known as a REIT, engaged in three principal business activities: the ownership and operation of multi-family properties, real estate lending, and the ownership, operation and development of commercial, mixed use and other real estate assets.

        Our multi-family property activities commenced in 2012 and involves our ownership and operation, primarily through joint ventures in which we typically have an 80% equity interest, of such properties. We acquired five multi-family properties with 1,452 units in 2012 and nine multi-family properties with 2,334 units in 2013. At September 30, 2013 our equity investment in these 14 properties was approximately $59.6 million and the net book value of these properties was approximately $299.8 million. From October 1, 2013 through November 29, 2013, we acquired six additional multi-family properties with an aggregate of 1,834 units and our equity investment in these six properties was approximately $24.8 million. At November 29, 2013, we own 20 multi-family properties located in seven states with an aggregate of 5,620 units.

        Our real estate lending activities involve originating and holding for investment short-term senior mortgage loans secured by commercial and multi-family real estate property in the United States. Revenue is generated from the interest income (i.e, the interest borrowers pay on our loans) and to a lesser extent, loan fee income generated on the origination and extension of loans. 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, with up to a one year extension in certain cases. Our loans carry a floating rate of interest based on a spread over the prime rate, with a stated minimum rate, though we originate fixed rate loans as circumstances dictate. Our lending activities have decreased during the past three years and may continue to decrease due to increased competition, reduced demand for our loans and our increased emphasis on our multi-family activities.

        We also own and operate various other real estate assets, the most significant of which are properties (including development properties) located in Newark, New Jersey. At September 30, 2013, the net book value of the real property included in these other real estate assets was $103.1 million, which includes $92.4 million related to our Newark, New Jersey activities.

        Information regarding our multi-family property, real estate lending, and other real estate assets segments is included in Note 13 to our consolidated financial statements and is incorporated herein by this reference.

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        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 Form 8-K and other filings with the Securities and Exchange Commission, or SEC, can be obtained free of charge. These SEC filings are added to our website as soon as reasonably practicable.

        Unless otherwise indicated or the context otherwise requires, all references to a year (e.g., 2013) refer to the applicable fiscal year ended September 30^th.

Our Multi-Family Property Activities

        Beginning in the second quarter of 2012, we, together with joint venture partners, began to acquire multi-family properties. As of November 29, 2013, we own 20 multi-family properties with an aggregate of 5,620 units. These are garden apartment or town home style properties that typically provide residents with amenities, such as a clubhouse, swimming pool, laundry facilities and cable television access. Generally, residential leases are for a one year term and may require security deposits equal to one month's rent. Substantially all of the units at these properties are market rate and are not subject to rent control or similar requirements. Set forth below is selected information regarding our multi-family properties. Except as otherwise indicated in the notes to the table below, all of these properties are owned by joint ventures in which we have an 80% equity interest and our joint venture partner has a 20% equity interest.

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        As of November 29, 2013, the 20 properties owned by us are located in seven states. The following tables set forth certain information, presented by state, related to our properties as of such date (dollars in thousands):

Joint Venture Arrangements

        The arrangements with our joint venture multi-family property partners are deal specific and vary from transaction to transaction. Generally, these arrangements provide for us and our partner to receive net cash flow available for distribution in the following order of priority:

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a preferred return of 9% to 10% on each party's unreturned capital contributions, until such preferred return has been paid in full,



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the return in full of each party's capital contribution,



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30% to 35% to our partner, and the balance to us, until an internal rate of return ranging from 14% to 15% has been achieved by us, and



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thereafter, shared equally between us and our venture partner.

        Though, as noted above, each joint venture operating agreement contains different terms, such agreements generally provide for a buy-sell procedure under specified circumstances (including (i) after the passage of time (e.g., two years after the acquisition), (ii) if the partners are unable to agree on major decisions, (iii) upon a change in control of our subsidiary owning the interest in the joint venture, or (iv) one or more of the foregoing). Further, these arrangements may also allow us to force the sale of the property after it has been owned by the joint venture for a specified period (e.g., four to five years after the acquisition).

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Our Acquisition Process and Underwriting Criteria

        We identify multi-family property acquisition opportunities primarily through relationships developed over time by our officers with our borrowers, real estate investors and brokers.

        Our goal is to acquire properties with cap rates ranging from 5.0% to 7.5% and that will provide stable risk adjusted total returns (i.e., operating income plus capital appreciation). In identifying opportunities that will achieve such goal, we seek acquisitions that will achieve an approximate 8% to 10% annual return on invested cash and a 12% internal rate of return. We have also focused, but have not limited ourselves, to acquiring properties located in the South and in particular, the Southeast United States. Subject to the foregoing, we are opportunistic in pursuing multi-family property acquisitions and do not mandate any specific acquisition criteria, though we take the following into account in evaluating an acquisition opportunity: location, size of the target market, property quality, availability and terms and conditions of long term fixed rate mortgage debt, potential for capital appreciation or recurring income, extent and nature of contemplated capital improvements and property age. We generally acquire these properties with a joint venture partner with knowledge and experience in owning and operating multi-family properties in the target market as this enhances our understanding of such market and assists us in managing our risk with respect to a particular acquisition.

        Approvals of the acquisition of a multi-family property are based on a review of property information as well as other due diligence activities undertaken by us and, as applicable, our venture partner. Those activities include a consideration of economic, demographic and other factors with respect to the target market and sub-market (including the stability of its population and the potential for population growth, its economic and employment base, presence of and barriers to entry of alternative housing stock, market prices for comparable properties, the competitive positioning of the proposed acquisition and the regulatory environment (i.e. applicable rent regulation)), a review of an independent third party property condition report, a Phase I environmental report with respect to the property, a review of recent and projected results of operations for the property prepared by us or our venture partner, an assessment of our joint venture partner's knowledge and expertise with respect to the acquisition and operation of multi-family properties and the relevant market and sub-market, a site visit to the property and the surrounding area (i.e., the target market), an inspection of a sample of units at the property, the potential for rent increases and the possibility of enhancing the property and the costs thereof. To the extent a property to be acquired requires renovations or improvements, funds are set aside by us and our joint venture partner at the time of acquisition to provide the capital needed for such renovation and improvements.

        A key consideration in our acquisition process is the evaluation of the availability of mortgage debt to finance the acquisition (or the ability to assume the mortgage debt on the property) and the terms and conditions (e.g. interest rate, amortization and maturity) of such debt. Typically, approximately 25% to 35% of the purchase price is paid in cash and the balance is financed with mortgage debt. We believe that in light of our small market capitalization compared to our competitors, the use of leverage of 75% allows us the ability to earn a greater return on our investment. The mortgage debt obtained in connection with an acquisition generally matures seven to ten years after the acquisition, provides for a fixed interest rate, is interest only for one to three years from the closing and provides for the amortization of the principal of such debt over 30 years. As of November 29, 2013, the weighted average annual interest rate of the mortgage debt on our 20 multi-family properties is 4.08% and the weighted average maturity of such debt is approximately 8.3 years. The mortgage debt associated with our multi-family properties is non-recourse to (i) the joint venture that owns the property, subject to standard carve-outs and (ii) to us and our subsidiary acquiring the equity interest in such joint venture. (The term "standard carve-outs" refers to recourse items to an otherwise non-recourse mortgage and are customary to mortgage financing. While carve-outs vary from lender to lender and transaction to transaction, the carve-outs may include, among other things, a voluntary bankruptcy filing,

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environmental liabilities, the sale, financing or encumbrance of the property in violation of loan documents, damage to property as a result of intentional misconduct or gross negligence, failure to pay valid taxes and other claims which could create liens on property and the conversion of security deposits, insurance proceeds or condemnation awards.)

        Before a property is acquired, the acquisition must be reviewed and approved by our investment committee. Approval occurs after the assent of not less than four of the seven members of our investment committee, all of whom are executive officers of ours. The approval of our board of trustees is required: (i) for any single multi-family property acquisition in which our equity investment exceeds $15 million; and (ii) if we desire to invest more than $150 million of equity in multi-family properties acquisitions.

Property Management

        The day-to-day management of our multi-family properties is overseen by property management companies operating in the market in which the property is located. Some of these management companies are owned by our joint venture partners or their affiliates. Generally, we can terminate these management companies upon specified notice or for cause, subject to the approval of the mortgage lender or our joint venture partner. Satisfactory replacements for these property managers are available, if required.

Insurance

        We generally carry all risk property insurance covering 100% of the replacement cost for each building and business interruption and rental loss insurance (covering up to twelve months of loss). On a case-by-case basis, based on an assessment of the likelihood of the risk, availability of insurance, cost of insurance and in accordance with standard market practice, we obtain earthquake, windstorm, flood, terrorism and boiler and machinery insurance. We carry comprehensive liability insurance and umbrella policies for each of our properties which provide no less than $5 million of coverage per incident. We request certain extension of coverage, valuation clauses, and deductibles in accordance to standard market practice and availability.

        Although we may carry insurance for potential losses associated with our multi-family properties, we may still incur losses due to uninsured risks, deductibles, co-payments or losses in excess of applicable insurance coverage and those losses may be material. In addition, certain insurance coverage is part of blanket policies in which a loss on an unrelated property could affect the coverage limits on a joint venture property.

Our Real Estate Lending Activities

        The following table highlights certain information regarding our real estate lending activities for the periods indicated:

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        We believe that our originations have declined since 2011 due to increased competition (and in particular, competition from lenders lending at higher loan-to-value ratios) and reduced demand for our short-term high interest rate loans and, since 2012, our increased emphasis on our multi-family property activities.

Our Loan Portfolio

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

        Interest on our loans is payable monthly. Our loans frequently require that our borrowers pay monthly escrow amounts that are adequate to pay, when due, real estate tax payments on the properties securing our loans. We may also require and hold funds in escrow for the payment of casualty insurance premiums. 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.

        At September 30, 2013, our three largest loans outstanding of approximately $10.1 million, $8 million and $2.5 million represented approximately 8.6%, 7.6% and 3.4%, respectively, of the total interest and fees earned on our loan portfolio in 2013, and 1.8%, 1.5% and 0.5%, respectively, of our total assets. There were no other loans in our portfolio that, at such date, represented more than 0.5% of our total assets. At September 30, 2013, our loan-to-value ratio was approximately 55%.

        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, 2013 and 2012, approximately 85% and 95%, respectively, of the principal amount of our outstanding loans had a floating rate of interest. The balance of the loans as of such dates were fixed rate mortgages.

        The following table sets forth information regarding the types of properties securing our mortgage loans outstanding at September 30, 2013 and 2012, all of which are earning interest (dollars in thousands):

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Our Lending Strategy

        We pursue lending opportunities with purchasers and prospective purchasers of commercial and multi-family properties and property owners who require short-term financing for renovation or repositioning of a real estate asset.

        Our lending policy emphasizes the origination of short-term real estate loans secured by senior liens on real property. As of September 30, 2013, 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 properties, residential properties being converted to condominium ownership, retail properties, mixed use buildings and hotels/motels.

Our Origination Process and Underwriting Criteria

        In originating loans, we primarily rely on relationships developed by our officers and loan originators with real estate investors, commercial 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 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: (i) each loan which exceeds $20 million in principal amount; or (ii) loans exceeding $50 million in the aggregate to one borrower.

        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.

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Our Other Real Estate Assets and Activities

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 several sites (including development sites) and properties located in downtown Newark, NJ. The sites and properties are surrounded by a variety of governmental, educational, cultural and entertainment institutions and facilities. In close proximity to these properties 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), the Essex County Court Complex, Newark's City Hall and a Federal Courthouse. These 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 sites are served by various highways, including the Garden State Parkway, Interstate-95, Interstate-78 and Interstate-280.

        In 2007, 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 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).

        The Newark Joint Venture is in the process of redeveloping the Teachers Village site and intends to redevelop all or a portion of the remaining sites, particularly the Market Street site, with personnel hired by the Newark Joint Venture or with development partners or sell some of its sites to developers or end users. Although we own only a 50.1% membership interest in the Newark Joint Venture, in accordance with generally accepted accounting principles in the United States, the assets, liabilities and results of operations of the Newark Joint Venture are consolidated with our financial statements. Accordingly, the $92.3 million net book value of real estate owned and being developed by the Newark Joint Venture is included in our real estate properties, mortgage debt of $79.9 million incurred by the Newark Joint Venture is included in our mortgages payable and at September 30, 2013, our two mortgage loans aggregating $20.1 million to the Newark Joint Venture (which are secured by all of the real estate assets of the Newark Joint Venture other than the Teachers Village properties and the Broad Street properties), are eliminated in consolidation and are not included in our outstanding mortgage receivables.

        We believe that the properties owned by the Newark Joint Venture have adequate insurance coverage for their current use.

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Current Property Information

        The following table sets forth, as of September 30, 2013, information regarding the properties owned by the Newark Joint Venture (dollars in thousands):

        The following table sets forth as of September 30, 2013, a schedule of the annual lease expirations of the Newark Joint Venture's real estate assets and the anticipated contributions to 2014 contractual rental income (i.e., the fixed rental payments to be provided by such leases in 2014) and assuming that none of the tenants exercise renewal or cancellation options, if any (dollars in thousands):

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Information and Activities Relating to Development and Other Sites

        Set forth below is information regarding the Newark Joint Venture's most significant properties.

Market Street

        The Market Street site is an approximately 68,000 square foot site, currently representing approximately 303,000 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, a hotel, 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 there have been discussions with various parties concerning the development of the Market Street area, the Newark Joint Venture has not entered into any 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.

Teachers Village

        The Teachers Village site 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. In 2012, the Newark Joint Venture obtained, in two phases, financing of approximately $68.5 million, which together with $25.8 million of New Markets Tax Credit net proceeds is, after payment of transaction expenses and payment of approximately $13.8 million of principal and accrued interest on debt (inclusive of $8 million of principal and accrued interest on debt owed to us which is eliminated in consolidation), being used to construct five buildings.

        Two buildings with an aggregate of 113,903 rentable square feet were completed on schedule in the summer of 2013. Approximately 88,833 square feet is leased to three charter schools and a day-care center. The Newark Joint Venture incurred $339,000 of prepaid leasing costs in connection with the leasing of such space which costs will be amortized over the terms of the applicable leases. The Newark Joint Venture is engaged in leasing activities for the approximately 25,070 square feet of retail space at these buildings and expects, subject to the achievement of certain conditions, including the receipt by the tenant and/or joint venture of financing for tenant improvements, that approximately 60% of the retail space at these buildings will be leased by January 2014.

        Construction has commenced on three buildings that are to contain approximately 123 residential rental units and approximately 29,140 square feet of retail space. We anticipate that one building will be ready for occupancy in each of March, August and October 2014.

        At September 30, 2013, the $73 million of outstanding debt related to Teachers Village carries a weighted average effective interest rate (after giving effect to an annual subsidy of $1.1 million (without giving effect to the annual reduction of approximately $100,000 due to the sequester) from the United States Department of Treasury), of approximately 3.49%, a weighted average maturity of 13.7 years (at September 30, 2013) and is secured by the Teachers Village properties. In addition, the Newark Joint Venture guaranteed, among other things, up to $31 million in principal amount of mortgage debt, which guarantees only expire after satisfaction of performance thresholds relating to the leasing and occupancy of these facilities within specified periods, losses incurred by the lenders by reason of the borrower's bad acts (e.g., fraud or misappropriation), the failure to complete construction of the five

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buildings to be constructed and the carrying costs with respect to certain properties. The Newark Joint Venture has also agreed to provide indemnity with respect to specified environmental matters and to indemnify the beneficiaries of the New Markets Tax Credits for losses sustained if such credits are disallowed. We estimate that the New Markets Tax Credit indemnity obligation would not exceed $40 million (exclusive of interest and penalties) and is subject to reduction to the extent the credits are not disallowed.

        A third financing phase contemplates obtaining an additional $33 million from private and government sources (other than the Newark Joint Venture) for the construction of one building containing 91 residential units and approximately 10,000 square feet of retail space at Teachers Village.

        No assurance can be given that sufficient financing will be obtained to complete the Teachers Village project, that if completed, that the Teachers Village will ever be profitable for us or that the Newark Joint Venture will ever be able to develop the other properties it owns.

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 Member 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. Depending on the circumstances, we may remove the manager immediately or upon six months advance written notice.

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

        Buy-Sell.    During specified periods and circumstances, 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 the $20.6 million balance due on our loans (which have been eliminated in consolidation on our financial statements) has been fully repaid, including accrued interest. Once it has been fully repaid,

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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 us, until we receive a 10% return on our preferred capital contributions, (iii) third, to us until we receive an amount equal to our preferred capital contributions, (iv) fourth, to each member pro rata until such member receives 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.

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, 41 years of age, has over 19 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.

Other Real Estate Assets

        We also own the following properties with a net book value of $10.7 million at September 30, 2013:

•

an 8.7 acre vacant parcel of land in South Daytona Beach, Florida,



•

18 cooperative apartments, all of which are rent controlled or rent stabilized, in two buildings in upper Manhattan, New York, and



•

a sub-leasehold interest in a portion (approximately 29% of a 99,000 square foot facility) of a shopping center in Yonkers, NY.

        In July 2013, we sold substantially all of our interest in an unconsolidated joint venture that holds a leasehold interest in a property located in midtown, New York City, for a gain of approximately $5.5 million.

        In addition, an unconsolidated joint venture in which we have a 50% equity interest owns an aggregate of 19 cooperative apartment units in buildings located in Lawrence, New York.

Financing Arrangements

Junior Subordinated Notes

        As of September 30, 2013, $37.4 million in principal amount of our junior subordinated notes were outstanding. These notes mature in April 2036, are redeemable at any time at our option and bear interest at the rates set forth below:

Credit Facility

        A subsidiary of ours is able, pursuant to a senior secured revolving credit facility with Capital One, National Association, to borrow up to an aggregate of $25 million to originate loans and for other permitted general corporate purposes. The subsidiary may borrow (i) on an unsecured basis,

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$10 million for up to 90 days and (ii) on a secured basis, up to 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 mortgage receivables acceptable 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 have guaranteed our subsidiary's obligations under this facility. At September 30, 2013 and November 29, 2013, no amount was outstanding under the facility and the maximum amount we could borrow was $10 million for 90 days.

Competition

        We compete to acquire real estate assets and in particular, multi-family properties, with other owners and operators of such properties including other multi-family REITs, pension and investment funds, real estate developers and private real estate investors. Competition to acquire such properties is based on price and ability to secure financing on a timely basis and complete an acquisition. To the extent that a potential joint venture partner introduces us to a multi-family acquisition opportunity, we compete with other sources of equity capital to participate in such joint venture based on the financial returns we are willing to offer such potential partner and the other terms and conditions of the joint venture arrangement. We also compete for tenants at our multi-family properties—such competition depends upon various factors, including alternative housing options available in the applicable sub-market, rent, amenities provided and proximity to employment and quality of life venues.

        We compete for loan origination opportunities with other entities, including other mortgage REITs, banks, specialty finance companies, public and private lending companies, pension and investment funds and others. Competitive factors in our lending activities include size of loans offered, loan-to-value requirements, interest rate, market visibility, 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.

        The Newark Joint Venture competes for funding, and in particular, tax credit allocations and financing provided by governmental and quasi-governmental sources with other real estate developers. It competes for commercial, retail, residential and educational tenants with landlords owning properties in Newark, New Jersey and the surrounding area and developers interested in developing facilities in Newark or the surrounding area.

        Many of our competitors possess greater financial and other resources than we possess.

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 primarily in the ownership and operation of a diversified portfolio of real estate assets, and One Liberty Properties, Inc., a publicly-traded equity REIT. Seven individuals (including Jeffrey A. Gould, Chief Executive Officer, Mitchell Gould, Executive Vice President and George Zweier, Chief Financial Officer), devote substantially all of their business time to our acquisition, development and loan origination activities, 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

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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, as amended, between us and REIT Management Corp., our advisor. REIT Management is wholly owned by Fredric H. Gould, a member of our Board of Trustees and the former chairman of such board, and he and certain of our executive officers, including our Chairman of the Board, President and Chief Executive Officer, receive compensation from REIT Management. 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 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, REIT Management received, for the services it performed pursuant to the Advisory Agreement, 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. The Advisory Agreement was amended effective as of January 1, 2012, and as so amended, provides (i) for a stated termination date of June 30, 2014, (ii) that the minimum and maximum fees payable in a fiscal year to REIT Management are $750,000 and $4 million, respectively, subject to adjustment for any fiscal year of less than twelve months, and (iii) that we pay REIT Management the following annual fees, which are 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 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

Our property acquisition, loan origination, and Newark Joint Venture development activities are limited by available funds.

        At November 29, 2013, we had approximately $31 million of cash and cash equivalents available for the acquisition of multi-family properties, loan originations, capital contributions to the multi-family and Newark joint ventures and general operations. If we pursue the acquisition of additional multi-family properties or demand for our mortgage loans increases, as to which no assurance can be given, or if we are required to contribute capital to the Newark Joint Venture or our multi-family properties, our ability to engage in these activities or make these contributions will be limited by the funds available to us. Our ability to use our credit facility is limited by the obligation to pledge collateral acceptable to the lender (and its ability to make such decisions on a timely basis) and covenants that require us to maintain certain financial ratios, including net worth and debt service coverage ratios. At November 29, 2013, the maximum amount that we can borrow under our credit facility is $10 million and such amount can only be borrowed for 90 days, and may only be used for loan originations and other permitted general corporate purposes. Our loan origination, multi-family property acquisition and Newark Joint Venture development activities may be limited by the lack of available funds which will limit our revenues and operating results.

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

        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, 2012, we had a tax loss carry-forward of approximately $58.3 million. Under current tax laws, we can offset our future taxable income against our tax loss carry-forward until 2028 or until the tax loss carry-forward has been fully used, whichever occurs first. As a result, we do not expect to pay a dividend in 2014 and it is unlikely that we will be required to pay a dividend for many years thereafter in order to maintain our REIT status. The non-payment of cash dividends may negatively impact the price of our common shares.

We may not be able to compete with competitors many of which have greater financial and other resources than we possess.

        We compete with many third parties engaged in the ownership and operation of multi-family properties and real estate lending, including other REITs, specialty finance companies, public and private investors and lenders, investment and pension funds and other entities. The Newark Joint Venture also competes (i) with real estate developers for tax credit allocations and financing provided by governmental and quasi-governmental authorities, and (ii) for tenants, with landlords and developers with, or interested in developing, properties in Newark, New Jersey and the surrounding area. Many of these competitors have substantially greater financial and other resources than we do. Larger and more established competitors enjoy significant competitive advantages that result from, among other things, enhanced operating efficiencies and more extensive networks providing greater and more favorable access to capital, financing and tax credit allocations and more favorable lending and acquisition opportunities. Larger multi-family property operators have the ability to acquire a greater number of higher quality properties at more favorable locations and on more favorable terms and conditions.

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Larger competitors engaged in real estate lending are better able to diversify their loan portfolios thereby reducing the risk of loss from any single property or loan and are better equipped to fund larger loan requests, enhancing their appeal to prospective borrowers.

We may incur impairment charges and loan loss provisions in 2014.

        We evaluate on a quarterly basis our real estate and loan portfolios for indicators of impairment or loan losses. Impairment charges and loan loss provisions reflect management's judgment of the probability and severity of the decline in the value of real estate assets we own and real estate assets collateralizing a loan. These charges and provisions may be required in the future as a result of factors beyond our control, including, among other things, changes in the economic environment and market conditions affecting the value of real property assets and loan collateral. If we are required to take impairment charges or loan loss provisions, our results of operations will be adversely impacted.

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

        We require our borrowers to obtain, for our benefit, all risk property 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 all risk property insurance covering the property and any improvements to the property owned by the joint venture for the cost of replacement in the event of a casualty. Further, we carry insurance for such purpose on properties owned by us. However, the amount of insurance coverage maintained for any property may 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 feasible to insure. 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 loans collateralized by such property. As a result, our returns and the value of our investment may be reduced.

In order for real estate properties to generate positive cash flow or to make real estate properties suitable for sale, we may need to make significant capital improvements and incur deferred maintenance costs with respect to these properties.

        Some of our properties, and in particular, our multi-family properties may face competition from newer, more updated properties. At November 29, 2013, the approximate weighted average age (based on the number of units) of our multi-family properties is approximately 28 years. To remain competitive and increase occupancy at these properties and/or make them attractive to potential tenants or purchasers, we may have to make significant capital improvements and/or incur deferred maintenance costs with respect to these properties. The cost of these improvements and deferred maintenance items may impair our financial condition and liquidity.

Our transactions with affiliated entities involve conflicts of interest.

        Entities affiliated with us and with certain of our executive officers provide services to us and on our behalf. Although our policy is to obtain terms in transactions with affiliates that are at least as favorable as those that we would receive if the transactions were entered into with unaffiliated entities,

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these transactions raise the potential that we may not receive terms as favorable as those that we would receive if the transactions were entered into with unaffiliated entities.

Liability relating to environmental matters may impact the value of properties that we 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 impose liability without regard to whether the owner or operator knew of, or was responsible for, the release of such hazardous substances.

        If we acquire properties, including properties acquired through foreclosure proceedings, the presence of hazardous substances on a property may adversely affect our ability to finance or sell the property and we may incur substantial remediation costs. The discovery of material environmental liabilities attached to such properties could have a material adverse effect on our results of operations and financial condition.

        The presence of hazardous substances may adversely affect 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.

Senior management and other key personnel are critical to our business and our future success may depend on our ability to retain them.

        We depend on the services of Jeffrey A. Gould, our president and chief executive officer, and other members of senior management to carry out our business and investment strategies. Although Jeffrey A. Gould devotes substantially all of his business time to our affairs, he devotes a limited amount of his business time to entities affiliated with us. In addition to Jeffrey A. Gould, only two other executive officers, Mitchell Gould, our executive vice president, and George Zweier, a vice president and our chief financial officer, devote all or substantially all of their business time to us. The remainder of our executive management personnel share their services on a part-time basis with entities affiliated with us and located in the same executive offices pursuant to a shared services agreement. We rely on part-time executive officers to provide certain services to us, including legal, 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.

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Risks Related to our Multi-Family Activities

Unfavorable changes in market and economic conditions could adversely affect occupancy, rental rates, operating expenses, and the overall market value of multi-family properties we acquire.

        Conditions in markets in which we acquire multi-family properties may significantly affect occupancy, rental rates and the operating performance of such assets. The risks that may adversely affect conditions in those markets include the following:

•

industry slowdowns, plant closings and other factors that adversely affect the local economy;



•

an oversupply of, or a reduced demand for, multi-family units;



•

a decline in household formation or employment or lack of employment growth;



•

the inability or unwillingness of residents to pay rent increases;



•

rent control or rent stabilization laws, or other laws regulating housing, that could prevent us from raising rents to offset increases in operating costs; and



•

economic conditions that could cause an increase in our operating expenses, such as increases in property taxes, utilities, and routine maintenance.

We could be negatively impacted by the condition of Fannie Mae or Freddie Mac and by changes in government support for multi-family housing.

        Fannie Mae and Freddie Mac have been a major source of financing for multi-family real estate in the United States and we have used loan programs sponsored by one or more of these entities to finance certain acquisitions. Should these entities have their mandates changed or reduced, lose key personnel, be disbanded or reorganized by the government or otherwise discontinue providing liquidity for the multi-family sector, it would significantly reduce our access to debt capital and/or increase borrowing costs and could significantly limit our ability to acquire properties on acceptable terms and reduce the values realized upon property sales.

Most of our multi-family properties are located in a limited number of markets, which makes us susceptible to adverse economic developments in such markets.

        In addition to general, regional and national economic conditions, the operating performance of our multi-family residential properties is impacted by the economic conditions of the specific markets in which our properties are concentrated. Approximately 26%, 26%, 19% and 18% of our estimated 2014 revenues from multi-family properties is attributable to properties located in Texas, Georgia, Florida and Tennessee, respectively. Accordingly, adverse economic developments in such markets could adversely impact the operations of these properties and therefore our operating results and cash flow. The concentration of properties in a limited number of markets exposes us to risks of adverse economic developments which are greater than the risks of owning properties with a more geographically diverse portfolio.

Increased competition and increased affordability of residential homes could limit our ability to retain our tenants or increase or maintain rents.

        Our multi-family properties compete with numerous housing alternatives, including other multi-family and single-family rental homes, as well as owner occupied single and multi-family homes. Our ability to retain tenants and increase or maintain rents could be adversely affected by the alternative housing in a particular area and, due to declining housing prices, mortgage interest rates and government programs to promote home ownership, the increasing affordability of owner occupied single and multi-family homes.

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Risks involved in conducting real estate activity through joint ventures.

        We have in the past and may in the future acquire properties in joint ventures with other persons or entities when we believe that circumstances warrant the use of such structure. Joint venture investments involve risks, including the possibility that our partner might become insolvent or otherwise refuse to make capital contributions or distributions when due; that we may be responsible to our partner for indemnifiable losses; that our partner might at any time have business goals which are inconsistent with ours; and that our partner may be in a position to take action or withhold consent contrary to our instructions or requests. Frequently, we and our partner may each have the right to trigger a buy-sell arrangement, which could cause us to sell our interest, or acquire our partner's interest, at a time when we otherwise would not have initiated such a transaction.

        In some instances, joint venture partners may have competing interests in our markets that could create conflicts of interest. Further, our joint venture partners may experience financial distress, including bankruptcy, and to the extent they do not meet their obligations to us or our joint ventures with them, we may be adversely affected.

        Six of our 19 multi-family property joint ventures are owned with one venture partner or its affiliates. We may be adversely effected if we are unable to maintain a satisfactory working relationship with this joint venture partner or if this partner becomes financially distressed.

Risks Related to our Real Estate Lending Activities

Increased competition, decreased demand for our loans and our increase in emphasis on our multi-family property activities may result in decreased loan originations adversely affecting our business.

        As a result of increased competition, decreased demand and our increase in emphasis on our multi-family properties activities, our loan originations decreased by 29% from $98.6 million in 2012 to $70.3 million in 2013. If loan originations decline further or continue at a reduced level, our revenues, net income and cash flow would be negatively affected.

The geographic concentration of our loans may make our revenues and the value of the related mortgages vulnerable to adverse changes in economic conditions in the New York metropolitan and Florida regions.

        At September 30, 2013, 73% and 16% of principal amount of our outstanding loans are secured by properties located in New York City and Florida, respectively. A lack of geographical diversification makes our mortgage portfolio more sensitive to local or regional economic conditions. A significant decline in the economy of either of these regions could result in a greater risk of default compared with the default rate for loans secured by properties in other geographic locations. This could result in a reduction of our revenues and provision for loan loss allowances which might not be as acute if our loan portfolio were more geographically diverse.

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

        Defaults by our borrowers on their loans 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.

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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 a 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.

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

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

        We anticipate that the Newark Joint Venture will operate at a loss in 2014 and for several years thereafter. If the Newark Joint Venture operates at a loss, we and our partners in the venture may be required to fund the operating losses and capital requirements by making additional capital contributions. No assurance can be given that we or our venture partners will have the resources or be willing to make such contribution and the failure to make the required contribution may have an adverse impact on us.

If we are unable to pay debt service as it become due, we may be forced to sell properties at disadvantageous terms or relinquish our rights to such properties, which would result in the loss of revenues and in a decline in the value of our real property portfolio.

        At September 30, 2013, approximately $5.4 million of debt service relating to the Newark Joint Venture is payable prior to the end of 2014 and $13.2 million of debt service is payable from 2015 through 2016. The cash flow from the properties securing the mortgage debt may be insufficient to meet required debt service payments. In particular, the rental revenues from the current tenants at Teachers Village are insufficient to cover all of the Newark Joint Ventures debt service obligations payable from 2014 through 2016. If efforts to generate additional rental revenues from the Teachers Village site are unsuccessful (due to, among other things, the failure to complete the three buildings under construction or to fully rent the residential and retail space at the five buildings currently comprising Teachers Village), the Newark Joint Venture may be unable to meet its debt service obligation with respect to the Teachers Village properties and such properties would require additional capital from the members of the venture or may be foreclosed on by the lenders.

The Newark Joint Venture will be adversely effected if it is limited from using the Teachers Village facilities for purposes other than as contemplated by the applicable financing and tax credit transactions.

        The terms and conditions of the financings and tax credits provided to the Newark Joint Venture limit the venture's ability to use the Teachers Village facilities in a manner other than as permitted to be used by the governing transaction documents. Among other things, the New Markets Tax Credits and related contractual obligations provide that if prior to the seven year recapture period, the facilities are used in a manner prohibited by such tax credit program, the credits may be disallowed. The qualified school construction bonds in principal amount of approximately $22.7 million at September 30, 2013 requires that the facilities (or certain portions thereof) be used for at least 19 years as public school facilities and the annual $1 million interest reimbursement provided by the US Treasury (after giving effect to the impact of the sequester which is currently reducing such payment by approximately $100,000 annually) is subject to recapture if the facilities or portions thereof are not used for educational purposes for specified periods. The New Jersey Urban Transit Hub tax credits program requires that certain portions of the facilities must be used for residential purposes for at least ten

21

years and that at least 20% of the residential units be allocated for lower/middle income housing. If as a result of market or other conditions, it is determined that the contemplated uses of the facilities are not financially viable, the Newark Joint Venture will be limited in its ability to use these facilities in an alternative manner which may adversely impact our financial condition and results of operations.

We have limited experience in developing and operating development sites.

        The principal assets of our Newark Joint Venture are several development sites and additional properties located in downtown Newark, NJ. Since we have limited experience in the real estate development business, we are subject to risks that differ from those to which we have been subject to historically. Although the principal of the managing member of the Newark Joint Venture (who is formerly the principal of our borrowers) is knowledgeable with respect to the local real estate market, he has limited experience in development projects. As a result, to redevelop these sites, the Newark Joint Venture may 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 and is responsible for, among other things, overseeing the construction activities at Teachers Village and development activities with respect to Market Street and the other properties owned by the venture. We believe that the principal's continued involvement is important to the success of the Newark Joint Venture. The diminution or loss of his services due to disability, death or for any other reasons could have a material adverse effect on the Newark Joint Venture's business, which would result in a material adverse effect on our business.

        The Newark Joint Venture carries key man life insurance on the principal of the manager of the Newark Joint Venture in the amount of $40 million. There can be no assurance that the proceeds from such life insurance would be sufficient to compensate the Newark Joint Venture for the loss of his services, and these policies do not provide any benefits if he becomes disabled or is otherwise unable to render services to the Newark Joint Venture.

Our Newark Joint Venture is subject to risks particular to real estate development activities.

        Our Newark Joint Venture is subject to the risks associated with development activities. These risks include:

•

The inability to complete the second phase of the Teachers Village project because the funds available from the financing and New Markets Tax Credits transactions, due to cost overruns or under estimating the funds needed, may be insufficient for such purpose.



•

The inability to obtain the approximately $33 million or more of financing needed to fund the third phase of 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;

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•

The time required to complete the construction of Teachers Village or to lease up the completed project may be greater than originally anticipated, thereby adversely affecting the Newark Joint Venture's cash flow and liquidity;



•

Occupancy rates and rents of a completed project may be insufficient to make such project profitable;



•

The inability to acquire all the properties needed to develop the project to its full potential; and



•

The inability to complete a development.

Failure of the Newark Joint Venture to comply with the requirements of the New Markets Tax Credit program may result in significant losses and impair our financial condition.

        The Newark Joint Venture entered into various arrangements to obtain funding under the New Markets Tax Credit program for the Teachers Village project and in connection therewith received approximately $25.8 million of net tax credit proceeds. New Markets Tax Credits are subject to recapture for a period of seven years as provided in the Internal Revenue Code. The Newark Joint Venture is required to comply with various regulations and contractual provisions that apply to the these credits and has indemnified the beneficiaries thereof for any loss or recapture of the benefits of such credits until the obligation to deliver tax benefits is relieved. We estimate that such indemnity obligation would not exceed approximately $40 million (exclusive of interest and penalties) and is subject to reduction to the extent the credits are not disallowed. Non-compliance with applicable requirements could result in the tax benefits not being realized by the beneficiaries which would have an adverse effect on our financial position and results of operations.

Risks Related to our Industry

Compliance with REIT requirements may hinder our ability to maximize profits.

        In order to qualify as a REIT for Federal income tax purposes, we must continually satisfy tests concerning among other things, our sources of income, the amounts we distribute to our shareholders and the ownership of securities. We may also be required to make distributions to shareholders at disadvantageous times or when we do not have funds readily available for distribution. Accordingly, compliance with REIT requirements may hinder our ability to operate solely on the basis of maximizing profits.

        In order to qualify as a REIT, we must also ensure that at the end of each calendar quarter at least 75% of the value of our assets consists of cash, cash items, government securities and qualified REIT real estate assets. The remainder of our investment in securities cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of such issuer. In addition, no more than 5% of the value of our assets can consist of the securities of any one issuer, other than a qualified REIT security. If we fail to comply with these requirements, we must dispose of the portion of our assets in excess of such amounts within 30 days after the end of the calendar quarter in order to avoid losing our REIT status and suffering adverse tax consequences. This requirement could cause us to dispose of assets for consideration of less than their true value and could lead to a material adverse impact on our results of operations and financial condition.

Because Real Estate Investments Are Illiquid, We May Not Be Able to Sell Properties When Appropriate.

        Real estate investments generally cannot be sold quickly. We may not be able to reconfigure our portfolio promptly in response to economic or other conditions. This inability to reallocate our capital promptly could adversely affect our financial condition and results of operations.

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Item 1B.    Unresolved Staff Comments.

        None.

Executive Officers of Registrant

        Set forth below is a list of our executive officers whose terms will expire at our 2014 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, 2014.

        Mitchell K. Gould (age 41), employed by us since 1998, has been a Vice President since 1999 and Executive Vice President since 2007.

        Simeon Brinberg (age 79) served as our Secretary from 1983 through 2013, as a Senior Vice President since 1988, and as Senior Counsel since 2006. Mr. Brinberg has been a Vice President of Georgetown Partners, Inc., the managing general partner of Gould Investors L.P., since 1988. Since 1989, Mr. Brinberg has been a Vice President or Senior Vice President of One Liberty Properties, Inc. Mr. Brinberg is a member of the New York Bar.

        David W. Kalish (age 66), a certified public accountant, has been our Senior Vice President, Finance since 1998. Mr. Kalish was our Vice President and Chief Financial Officer from 1990 until 1998. He has been Chief Financial Officer of One Liberty Properties, Inc. and Georgetown Partners, Inc. since 1990.

        Mark H. Lundy (age 51) has been our General Counsel since 2007 and a Senior Vice President since 2005. From 1993 to 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. Since 2013 Lundy has served as Chief Executive Officer, and from 1990 through 2013 as a Vice President (including Senior Vice President) of Georgetown Partners, Inc. He is a member of the bars of New York and Washington, D.C.

        George E. Zweier (age 49), a certified public accountant, has served as our Vice President and Chief Financial Officer since 1998.

        Isaac Kalish (age 38), a certified public accountant, has worked with us since 2004 and was elected Assistant Treasurer in 2007 and Vice President in 2013.

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Item 2.    Properties.

        Our executive office is located at 60 Cutter Mill Road, Suite 303, Great Neck, New York. This office is located in a building owned by a subsidiary of Gould Investors L.P. In 2013, we paid $121,000 for the use of this space. We believe that such facilities are satisfactory for our current and projected needs.

        The information set forth under "Item 1—Business" is incorporated herein by this reference to the extent responsive to the information called for by this item.

Item 3.    Legal Proceedings.

        None.

Item 4.    Mine Safety Disclosures.

        Not applicable.

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 29, 2013, the high and low sales prices of our Common Shares was $7.16 and $7.08, respectively.

        As of November 29, 2013, there were approximately 1,009 holders of record of our Common Shares.

        We did not pay any cash dividends in 2013 or 2012. Our tax loss carry forward at December 31, 2012, was approximately $58.3 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, an index consisting of publicly traded mortgage REITs and an index (i.e., FTSE NAREIT ALL REIT index) consisting of publicly traded equity and debt REIT's. In light of our increased emphasis on multi-family activities, we have included the last index as it includes both equity and debt focused REIT's. The graph assumes $100 invested on September 30, 2008 and assumes the reinvestment of dividends.

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

Issuer Purchases of Equity Securities

        In September 2013, we announced that our Board of Trustees had authorized a share buyback plan pursuant to which, through September 30, 2015, we may expend up to $2 million to repurchase our common shares. We did not repurchase any shares during the quarter ended September 30, 2013.

Item 6.    Selected Financial Data.

        The following table, not covered by the report of the independent registered public accounting firm, sets forth selected historical financial data for each of the fiscal years indicated. This table should

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be read in conjunction with the detailed information and financial statements appearing elsewhere herein.

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Funds from Operations; Adjusted Funds from Operations.

        In view of our equity investments in joint ventures which have acquired multi- family properties, we disclose below funds from operations ("FFO") and adjusted funds from operations ("AFFO") because we believe that such metrics are a widely recognized and appropriate measure of the performance of an equity REIT.

        We compute FFO in accordance with the "White Paper on Funds From Operations" issued by the National Association of Real Estate Investment Trusts ("NAREIT") and NAREIT's related guidance. FFO is defined in the White Paper as net income (computed in accordance with generally accepting accounting principles), excluding gains (or losses) from sales of property, plus depreciation and amortization, plus impairment write-downs of depreciable real estate and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures will be calculated to reflect funds from operations on the same basis. In computing FFO, we do not add back to net income the amortization of costs in connection with our financing activities or depreciation of non-real estate assets. Since the NAREIT White Paper only provides guidelines for computing FFO, the computation of FFO may vary from one REIT to another. We compute AFFO by deducting from FFO our straightline rent accruals and amortization of lease intangibles (including our share of our unconsolidated joint ventures).

        We believe that FFO and AFFO are useful and standard supplemental measures of the operating performance for equity REITs and are used frequently by securities analysts, investors and other interested parties in evaluating equity REITs, many of which present FFO and AFFO when reporting their operating results. FFO and AFFO are intended to exclude GAAP historical cost depreciation and amortization of real estate assets, which assures that the value of real estate assets diminish predictability over time. In fact, real estate values have historically risen and fallen with market conditions. As a result, we believe that FFO and AFFO provide a performance measure that when compared year over year, should reflect the impact to operations from trends in occupancy rates, rental rates, operating costs, interest costs and other matters without the inclusion of depreciation and amortization, providing a perspective that may not be necessarily apparent from net income. We also consider FFO and AFFO to be useful to us in evaluating potential property acquisitions.

        FFO and AFFO do not represent net income or cash flows from operations as defined by GAAP. FFO and AFFO should not be considered to be an alternative to net income as a reliable measure of our operating performance; nor should FFO and AFFO be considered an alternative to cash flows from operating, investing or financing activities (as defined by GAAP) as measures of liquidity.

        FFO and AFFO do not measure whether cash flow is sufficient to fund all of our cash needs, including principal amortization and capital improvements. FFO and AFFO do not represent cash flows from operating, investing or financing activities as defined by GAAP.

        Management recognizes that there are limitations in the use of FFO and AFFO. In evaluating our performance, management is careful to examine GAAP measures such as net income and cash flows

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from operating, investing and financing activities. Management also reviews the reconciliation of net income to FFO and AFFO.

        The table below provides a reconciliation of net income determined in accordance with GAAP to FFO and AFFO for each of the indicated years (amounts in thousands):

        The table below provides a reconciliation of net income per common share (on a diluted basis) determined in accordance with GAAP to FFO and AFFO.

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

Overview

        We are a REIT engaged in three principal business activities: the ownership and operation of multi-family properties, real estate lending, and the ownership and operation of commercial and mixed use real estate assets.

        Our multi-family activities derives revenue primarily from tenant rental payments. Generally, these activities involve our investment of 80% of the equity in a joint venture that acquires a multi-family property, with the balance of the equity contributed by our joint venture partner. We commenced these activities in 2012 and as of November 29, 2013, September 30, 2013 and September 30, 2012, we owned 20, 14 and five multi-family properties, respectively, with 5,620, 3,785 and 1,451 units, respectively.

        Our real estate lending activities involves originating and holding for investment short-term senior mortgage loans which are generally secured by commercial and multi-family real estate property in the United States. Revenue is generated from interest income (i.e, the interest borrowers pay on our loans) and to a lesser extent, loan fee income generated on the origination and extension of loans and

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investment income from securities transactions. Our lending activities have decreased and may continue to decrease due to increased competition, reduced demand for our loans and our increased emphasis on our multi-family activities.

        Our ownership and operation of commercial, mixed use and other real estate assets is comprised principally of the activities of the Newark Joint Venture and to a lesser extent, the ownership and operations of various real estate assets located in New York and Florida. The Newark Joint Venture is engaged in the development of properties in downtown Newark, NJ. The properties are to be developed for educational, commercial, retail and residential use. The Newark Joint Venture is currently developing a project known as "Teachers Village"—the project currently involves five buildings: two buildings were completed in the summer of 2013 and are partially tenanted by three charter schools and a day care center and three buildings, which we anticipate will to be completed from March through October 2014, and will provide approximately 29,140 square feet of retail space and 123 residential units. The venture is currently unprofitable and it is anticipated that the activities will continue to be unprofitable at least until the Teacher's Village project is constructed fully and reasonable occupancy levels achieved. The venture requires substantial third party funding (including tax credits and financing provided by governmental authorities) for its development activities—no assurance can be given that sufficient funding will be available for its development activities and even if sufficient funding is obtained and construction completed, that such activities will be profitable to us.

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

        Net income attributable to common shareholders increased by $600,000 or 13.6% from $4.4 million in 2012 to $5 million in 2013. Net income was favorably impacted by the (i) $5.1 million of net income attributable to our other real estate segment due to the $5.5 million gain realized from sale of substantially all of our interest in a joint venture that owns a leasehold interest in midtown, New York City and (ii) $8.9 million of net income from our loan and investment activities. Net loss attributable to our multi-family activities increased primarily due to increased real estate operating expenses, interest expense and depreciation and amortization expense related to the multi-family properties acquired in this year and the inclusion, for a full year, of such expenses related to the properties acquired in 2012. In addition, the results of our multi-family activities were adversely impacted by, and the results of our loan and investment activities were favorably impacted by, the change, to more closely reflect operations, in the manner in which general and administrative expenses were allocated to our three segments.

        Historically, our primary source of revenue and income had been derived from our loan origination activities. As a result of the commencement in 2012 of our multi- family property activities, our primary source of revenues in 2013 is generated by our multi-family properties and to a lesser extent, loan origination activities. We anticipate that we will continue to generate more revenue from our multi-family activities and less revenue from our loan origination activities.

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        The following highlights certain of our activities in 2013 and our financial condition at year-end:

•

we acquired for an aggregate purchase price of $185.1 million (including aggregate mortgage debt of $140.9 million), nine multi-family properties with an aggregate of 2,334 units and invested equity of approximately $40.6 million in the joint ventures that acquired these properties;



•

we originated $70.3 million of mortgage loans in 2013 ($42.8 million, $20.2 million, $4.8 million and $2.5 million in the first, second, third and fourth quarter, respectively) compared to $98.6 million of mortgage loans originated in 2012 ($25.5 million, $40.6 million, $20.1 million and $12.4 million in the first, second, third and fourth fiscal quarters, respectively);



•

interest and fees on real estate loans in 2013 increased $416,000 or 4.4% from 2012;



•

we have cash and cash equivalents (excluding restricted cash of $29.3 million at September 30, 2013 which is to be used for the Teachers Village construction activities) of approximately $60.3 million and approximately $31 million, at September 30, 2013 and November 29, 2013, respectively;



•

in connection with the Teachers Village project, the Newark Joint Venture constructed two buildings which are leased to, among others, three charter schools, and commenced construction on three buildings to be used for residential rental and retail purposes; and



•

sold for a $5.5 million gain, substantially all of our interest in a joint venture that owns a leasehold interest in a property located in midtown, New York City.

        From October 1, 2013, through November 29, 2013, we (i) acquired six additional multi-family properties with an aggregate of 1,834 units (including one property acquired without a joint venture partner), and invested equity of approximately $24.8 million in connection therewith and (ii) originated, net of repayments, approximately $3.5 million of loans.

Year Ended September 30, 2013 Compared to Year Ended September 30, 2012

Revenues

        The following table compares our revenues for the years indicated:

        Rental and other revenue from real estate properties.    The components of the increase are: (i) approximately $11.8 million from nine multi-family properties acquired in 2013; (ii) approximately $7.3 million due to the inclusion, for a full year, of three properties that were only owned for a portion of 2012; (iii) approximately $2.7 million from the consolidation of two properties that were unconsolidated until August 1, 2012; and (iv) approximately $430,000 due to inclusion, beginning in September 2013, of rental income from the tenants at Teachers Village. We anticipate that rental revenue will increase in 2014 as the 2013 operating results only includes multi-family and Newark Joint Venture rental revenue for a portion of such year due to the timing of the acquisitions and the completion of two buildings at Teachers Village and excludes five multi-family properties acquired after September 30, 2013. Assuming, among other things, that rental and occupancy rates remain stable, and without giving effect to any further acquisitions, we estimate that rental revenue in 2014 from our 20 multi-family properties will be approximately $53 million. Partially offsetting the increase was a $365,000 decrease due to the loss of several commercial tenants at the Newark Joint Venture's Market Street and Broad Street properties. The Market Street property is a development site and accordingly, leasing space at this property, which leases are short-term in nature, is difficult.

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        Interest and fees on real estate loans.    The increase is due to the $7.5 million increase in the average balance of earning loans outstanding. This average balance increased due to the timing of loan originations and payoffs. However, loan originations decreased in 2013 from 2012 by 29%, due to increased competition, reduced demand for our short-term high interest rate loans and our increased emphasis on our multi-family property activities. The increase in interest was partially offset by the decrease, from 11.82% in 2012 to 11.61% in 2013, in the weighted average interest rate on outstanding loans and a net decrease of approximately $334,000 in fees earned on such loans. Loan fees decreased due to due to reduced originations and the accelerated prepayment, in prior periods, of outstanding loans. The reduced demand for our short-term loans and our increased emphasis on multi-family activities will adversely impact this component of revenues in the future.

        Recovery of previously provided allowances.    The increase is due to a $1.04 million recovery on two loans and our increased emphasis on multi-family activities, charged off in a prior year.

Expenses

        The following table compares our expenses for the periods indicated:

        Interest expense.    The components of the increase are as follows: (i) $5.2 million is due to the mortgage interest expense on our multi-family properties (of which $2.7 million is due to mortgages on the nine multi-family properties acquired in 2013, $1.9 million is due to the inclusion, for a full year, of interest expense associated with three multi-family properties acquired in 2012, and $707,000 is due to the interest expense associated with two multi-family joint ventures that were unconsolidated until August 2012); (ii) $1.9 million is due to the inclusion, for a full year, of the interest expense related to the Newark Joint Venture's 2012 financings; and (iii) $592,000 is due to the increase, in August 2012, of the annual interest rate on the junior subordinated notes from 3% to 4.9%. Interest expense will increase in 2014 because 2013 does not include the interest expense related to the mortgage debt of $61.3 million incurred in connection with the acquisition of six multi-family properties acquired after September 30, 2013, only includes interest expense for a portion of such year with respect to the aggregate mortgage debt of $140.9 million incurred in connection with the acquisition of multi-family properties in 2013 and, in late June 2013, we ceased capitalizing interest expense related to the construction of two buildings at Teachers Village. We estimate that 2014 interest expense attributable to our 20 multi-family properties, the Newark Joint Venture's financing arrangements and the junior subordinated notes, will be approximately $12.5 million, $3.8 million and $1.8 million, respectively, or an aggregate of $18.1 million. Capitalized interest was $2.3 million and $1.6 million in 2013 and 2012, respectively.

        Advisor's fee, related party.    The fee, calculated based on invested assets, increased primarily due to the purchase of 13 multi-family properties in 2013 and 2012.

        Property acquisition costs.    These costs were incurred in connection with our purchase of multi-family properties. Such costs included acquisition fees (including fees paid to our joint venture partners