BRT Apartments Corp. - Quarter Report: 2013 December (Form 10-Q)

Table of Contents

 

 

 UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC  20549

 

FORM 10-Q

 

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

 

For the quarterly period ended December 31, 2013

 

OR

 

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

 

Commission File Number 001-07172

 

BRT REALTY TRUST

(Exact name of Registrant as specified in its charter)

 

 

 

516-466-3100

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes  x  No  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes  x  No  o

 

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

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes  o  No  x

 

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

 

14,303,487 Shares of Beneficial Interest,

$3 par value, outstanding on February 5, 2014

 

 

Table of Contents

 

BRT REALTY TRUST AND SUBSIDIARIES

Table of Contents

 

			Page No.
Part I - Financial Information
Item 1.		Financial Statements
		Consolidated Balance Sheets — December  31, 2013 (unaudited) and September 30, 2013	1
		Consolidated Statements of Operations — Three months ended December 31, 2013 and 2012 (unaudited)	2
		Consolidated Statements of Comprehensive Loss — Three months ended December 31, 2013 and 2012(unaudited)	3
		Consolidated Statement of Equity — Three months ended December 31, 2013 (unaudited)	4
		Consolidated Statements of Cash Flows — Three months ended December 31, 2013 and 2012 (unaudited)	5
		Notes to Consolidated Financial Statements	6
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.		Quantitative and Qualitative Disclosures About Market Risks	25
Item 4.		Controls and Procedures	25
Part II — Other Information
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	26
Item 5.		Other Information	26
Item 6.		Exhibits	27

 

Table of Contents

 

Part 1 - FINANCIAL INFORMATION

Item 1. Financial Statements

 

BRT REALTY TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share data)

 

		December 31, 2013 (Unaudited)			September 30, 2013
ASSETS
Real estate properties, net of accumulated depreciation and amortization of $14,685 and $11,862		$	479,681		$	396,021
Real estate loans, net, all earning interest		20,250			30,300
Cash and cash equivalents		52,306			60,265
Restricted cash — construction holdbacks		25,074			29,279
Deferred costs		13,058			12,767
Prepaid expenses		4,102			3,955
Assets of discontinued operations		7,095			7,155
Other assets		12,005			9,749
Total Assets		$	613,571		$	549,491
LIABILITIES AND EQUITY
Liabilities:
Mortgages payable		$	369,795		$	308,529
Junior subordinated notes		37,400			37,400
Accounts payable and accrued liabilities		7,817			6,319
Deposits payable		1,424			1,258
Deferred income		25,848			25,848
Liabilities of discontinued operations		4,768			4,879
Total Liabilities		447,052			384,233
Commitments and contingencies		—			—
Equity:
BRT Realty Trust shareholders’ equity:
Preferred shares, $1 par value:
Authorized 10,000 shares, none issued		—			—
Shares of beneficial interest, $3 par value:
Authorized number of shares, unlimited, 13,535 issued in both periods		40,606			40,606
Additional paid-in capital		165,943			165,763
Accumulated other comprehensive income (loss)		21			(6		)
Accumulated deficit		(70,305		)	(67,572		)
Total BRT Realty Trust shareholders’ equity		136,265			138,791
Non-controlling interests		30,254			26,467
Total Equity		166,519			165,258
Total Liabilities and Equity		$	613,571		$	549,491

 

See accompanying notes to consolidated financial statements.

 

1

Table of Contents

 

BRT REALTY TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

 (Unaudited)

(Dollars in thousands, except share data)

 

		Three Months Ended
		December 31,
		2013			2012
Revenues:
Rental and other revenue from real estate properties		$	13,439		$	5,299
Interest and fees on real estate loans		1,138			1,879
Other income		271			732
Total revenues		14,848			7,910
Expenses:
Operating expenses relating to real estate properties		7,442			2,911
Interest expense		4,700			2,891
Advisor’s fees, related party		449			374
Property acquisition costs		1,181			878
General and administrative—including $213 and $205 to related party		1,756			1,863
Depreciation and amortization		3,141			1,238
Total expenses		18,669			10,155
Total revenues less total expenses		(3,821		)	(2,245		)
Equity in earnings of unconsolidated ventures		—			61
Loss from continuing operations		(3,821		)	(2,184		)
Discontinued operations:
Income from operations		70			2
Net loss		(3,751		)	(2,182		)
Plus: net loss attributable to non- controlling interests		1,018			878
Net loss attributable to common shareholders		$	(2,733	)	$	(1,304	)
Basic and diluted per share amounts attributable to common shareholders:
Loss from continuing operations		$	(.19	)	$	(.09	)
Discontinued operations		—			—
Basic and diluted loss per share		$	(.19	)	$	(.09	)
Amounts attributable to BRT Realty Trust:
Loss from continuing operations		$	(2,803	)	$	(1,306	)
Discontinued operations		70			2
Net loss		$	(2,733	)	$	(1,304	)
Weighted average number of common shares outstanding:
Basic and diluted		14,162,887			14,053,362

 

See accompanying notes to consolidated financial statements.

 

2

Table of Contents

 

BRT REALTY TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

(Dollars in thousands)

 

		Three Months Ended
		December 31,
		2013			2012
Net loss		$	(3,751	)	$	(2,182	)
Other comprehensive income (loss):
Net unrealized loss on available-for-sale securities		—			(23		)
Unrealized gain on derivative instruments		27			11
Other comprehensive income (loss)		27			(12		)
Comprehensive loss		(3,724		)	(2,194		)
Comprehensive loss attributable to non-controlling interests		1,014			880
Comprehensive loss attributable to common shareholders		$	(2,710	)	$	(1,314	)

 

See accompanying notes to consolidated financial statements.

 

3

Table of Contents

 

BRT REALTY TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF EQUITY

Three Months Ended December 31, 2013

(Unaudited)

(Dollars in thousands, except share data)

 

		Shares of Beneficial Interest			Additional Paid-In Capital			Accumulated Other Comprehensive Income			Accumulated Deficit			Non- Controlling Interest			Total
Balances, September 30, 2013		$	40,606		$	165,763		$	(6	)	$	(67,572	)	$	26,467		$	165,258
Compensation expense — restricted stock		—			180			—			—			—			180
Contributions from non-controlling interests		—			—			—			—			5,300			5,300
Distributions to non-controlling interests		—			—			—			—			(495		)	(495		)
Net loss		—			—			—			(2,733		)	(1,018		)	(3,751		)
Other comprehensive income		—			—			27			—			—			27
Comprehensive loss		—			—			—			—			—			(3,724		)
Balances, December 31, 2013		$	40,606		$	165,943		$	21		$	(70,305	)	$	30,254		$	166,519

 

See accompanying notes to consolidated financial statements.

 

4

Table of Contents

 

BRT REALTY TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in Thousands)

 

		Three Months Ended December 31,
		2013			2012
Cash flows from operating activities:
Net loss		$	(3,751	)	$	(2,182	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Recovery of previously provided allowances		—			(422		)
Amortization and depreciation		3,646			1,683
Amortization of deferred fee income		(224		)	(333		)
Amortization of restricted stock		180			193
Equity in earnings of unconsolidated joint ventures		—			(61		)
Distribution of earnings of unconsolidated joint ventures		4			45
Increases and decreases from changes in other assets and liabilities:
Change in straight-line rent		(135		)	3
Decrease (increase) in interest and dividends receivable		92			(44		)
Increase in prepaid expenses		(488		)	(406		)
Decrease in prepaid interest		341			814
Increase in accounts payable and accrued liabilities		1,560			376
Increase in deferred costs		—			(152		)
(Increase) decrease in security deposits and other receivable		(2,203		)	567
Other		40			214
Net cash (used in) provided by operating activities		(938		)	295
Cash flows from investing activities:
Collections from real estate loans		15,244			8,657
Additions to real estate loans		(5,103		)	(42,818		)
Loan loss recoveries		—			422
Additions to real estate properties		(81,520		)	(57,400		)
Net costs capitalized to real estate owned		(5,305		)	(8,791		)
Net change in restricted cash — construction holdbacks		4,205			5,655
Collection of loan fees		132			877
Proceeds from the sale of real estate owned		—			6
Net cash used in investing activities		(72,347		)	(93,392		)
Cash flows from financing activities:
Increase in mortgages payable		61,611			46,010
Mortgage principal payments		(345		)	(484		)
Increase in deferred borrowing costs		(744		)	(558		)
Capital contributions from non-controlling interests		5,300			2,894
Capital distribution to non-controlling interests		(496		)	(397		)
Net cash provided by financing activities		65,326			47,465
Net decrease in cash and cash equivalents		(7,959		)	(45,632		)
Cash and cash equivalents at beginning of period		60,265			78,245
Cash and cash equivalents at end of period		$	52,306		$	32,613
Supplemental disclosure of cash flow information:
Cash paid during the period for interest		$	4,158		$	2,316
Taxes paid		$	11		$	3
Real estate property reclassified to assets of discontinued operations		$	6,853		$	6,875

 

See accompanying notes to consolidated financial statements.

 

5

Table of Contents

 

BRT REALTY TRUST AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2013

 

Note 1 — Organization and Background

 

BRT Realty Trust (“BRT” or the “Trust”) is a business trust organized in Massachusetts. BRT owns and operates multi-family properties, originates and holds for investment senior mortgage loans secured by commercial and multi-family real estate property and owns and operates commercial and mixed use real estate assets. All of the properties owned or securing mortgage loans are located in the United States.

 

The multi-family properties are generally acquired with venture partners in transactions in which the Trust contributes 50% to 90% of the equity.

 

BRT conducts its operations to qualify as a real estate investment trust, or REIT, for federal income tax purposes.

 

Note 2 - Basis of Preparation

 

The accompanying interim unaudited consolidated financial statements as of December 31, 2013 and for the three months ended December 31, 2013 and 2012 reflect all normal recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the results for such interim periods. The results of operations for the three months ended December 31, 2013 are not necessarily indicative of the results for the full year.  The balance sheet as of September 30, 2013 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

 

Certain items on the consolidated financial statements for the preceding period have been reclassified to conform with the current period’s presentation, primarily to reclassify the assets and liabilities of a property held for sale to assets and liabilities of discontinued operations and to reclassify the operations of this property to discontinued operations.

 

The consolidated financial statements include the accounts and operations of BRT Realty Trust, its wholly owned subsidiaries, and its majority owned or controlled real estate entities and its interests in variable interest entities in which the Trust is determined to be the primary beneficiary. Material intercompany balances and transactions have been eliminated.

 

RBH-TRB Newark Holdings LLC, referred to herein as the Newark Joint Venture, was determined to be a variable interest entity (“VIE”) because the total equity investment at risk is not sufficient to permit it to finance its activities without additional subordinated financial support by its equity holders. The Trust was determined to be the primary beneficiary of this joint venture because it has a controlling interest in that it has the power to direct the activities of the VIE that most significantly impact the entity’s economic performance and it has the obligation to absorb losses of the entity and the right to receive benefits from the entity that could potentially be significant to the VIE.

 

The Trust’s consolidated joint ventures that own multi-family properties, with the exception of its Mountain Park joint venture, were determined to be VIE’s because the voting rights of some equity investors are not proportional to their obligations to absorb the expected losses of the entity and their right to receive the expected residual returns. The Trust was determined to be the primary beneficiary of

 

6

Table of Contents

 

Note 2 - Basis of Preparation (Continued)

 

these joint ventures because it has a controlling interest in that it has the power to direct the activities of the VIE that most significantly impact the entity’s economic performance and it has the obligation to absorb losses of the entity and the right to receive benefits from the entity that could potentially be significant to the VIE.

 

The joint venture that owns the Mountain Park property was determined not to be a VIE but is consolidated because the Trust has substantive participating rights in the entity giving it a controlling financial interest in the entity.

 

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

 

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

 

Note 3 - Equity

 

Common Share Dividend Distribution

 

During the quarter ended December 31, 2013, the Trust did not declare a dividend on its shares.

 

Restricted Shares

 

The Trust’s 2012 Incentive Plan, approved by its shareholders in March 2012, permits the Trust to grant stock options, restricted stock, restricted stock units, performance shares awards and any one or more of the foregoing, up to a maximum of 600,000 shares. As of December 31, 2013, 131,525 shares were issued pursuant to this plan of which 50 shares had vested and 131,475 shares are outstanding.  In January 2014, the Trust granted 140,600 shares of restricted stock pursuant to this plan.  An aggregate of 495,950 shares of restricted stock are outstanding pursuant to the Trust’s 2003 and 2009 equity incentive plans (collectively, the “Prior Plans”) and have not yet vested. No additional awards may be granted under the Prior Plans. The restricted shares that have been granted under the 2012 Incentive Plan and the Prior Plans vest five years from the date of grant and under specified circumstances, including a change in control, may vest earlier. For accounting purposes, the restricted shares are not included in the outstanding shares shown on the consolidated balance sheets until they vest, but are included in the earnings per share computation.  For the three months ended December 31, 2013 and 2012, the Trust recorded $180,000 and $193,000 of compensation expense respectively.  At December 31, 2013, $1,704,000 has been deferred as unearned compensation and will be charged to expense over the remaining vesting periods.  The weighted average vesting period is 2.4 years.

 

Per Share Data

 

Basic earnings (loss) per share was determined by dividing net income (loss) applicable to common shareholders for the applicable year by the weighted average number of shares of beneficial interest outstanding during such period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue shares of beneficial interest were exercised or converted into shares of beneficial interest or resulted in the issuance of shares of beneficial interest that

 

7

Table of Contents

 

Note 3 — Equity (Continued)

 

share in the earnings of the Trust. Diluted earnings per share was determined by dividing net income applicable to common shareholders for the applicable period by the total of the weighted average number of shares of beneficial interest outstanding plus the dilutive effect of the Trust’s unvested restricted stock and outstanding options and warrants using the treasury stock method.

 

Basic and diluted shares outstanding for the three months ended December 31, 2013 and 2012, were 14,162,887 and 14,053,362, respectively.

 

Note 4 - Real Estate Properties

 

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

 

		September 30, 2013 Balance			Additions (a)			Capitalized Costs and Improvements			Depreciation, Amortization and other reductions			December 31, 2013 Balance
Multi-family		$	292,917		$	81,520		$	1,077		$	(2,716	)	$	372,798
Commercial / mixed use (b)		92,354			—			4,205			(397		)	96,162
Vacant land		7,972			—			—			—			7,972
Retail/Shopping centers		2,645			—			—			(25		)	2,620
Coop/condo apartments		133			—			—			(4		)	129
Total real estate properties		$	396,021		$	81,520		$	5,282		$	(3,142	)	$	479,681

 

(a)         In the quarter ended December 31, 2013, the Trust purchased, through consolidated joint ventures in which the Trust has an 80% equity interest (except for the Columbus, Ohio property which is wholly owned), the following multi-family properties (dollars in thousands):

 

Location		Purchase Date		No of Units		Contract Purchase Price			Acquisition Mortgage Debt			BRT Equity			Property Acquisition Costs
Houston, TX		10/4/13		798		$	32,800		$	24,100		$	10,525		$	474
Pasadena, TX		10/15/13		144		5,420			4,065			1,687			125
Humble, TX		10/15/13		260		10,500			7,875			3,129			180
Humble, TX		10/15/13		160		6,700			5,025			1,908			129
Huntsville, AL		10/18/13		208		12,050			9,573			3,950			176
Columbus, OH		11/21/13		264		14,050			10,651			3,734			97
				1,834		$	81,520		$	61,289		$	24,933		$	1,181

 

8

Table of Contents

 

Note 4 - Real Estate Properties (Continued)

 

(b)        Represents the real estate assets of RBH-TRB Newark Holdings LLC, a consolidated VIE which owns operating and development properties in Newark, New Jersey. These properties contain a mix of office, retail space, charter schools and surface parking totaling approximately 690,000 square feet, which includes 190,000 square feet currently under construction. Certain of these assets are subject to mortgages in the aggregate principal balance of $20,100,000 held by the Trust, which are eliminated in consolidation. Several of the assets are also encumbered by other mortgages which are discussed in Note 7—Debt Obligations. The Trust contributed capital of $1,729,000 to this venture in the year ended September 30, 2013, representing its proportionate share of capital required to fund the operations of the venture for the venture’s current fiscal year and to purchase additional land parcels.

 

On January 21, 2014, the Trust purchased, through a consolidated joint venture in which it has an 80% equity interest, a 400 unit multi- family property in Indianapolis, IN.  The purchase price was $18,830,000, including $14,500,000 of mortgage debt.  The Trust contributed $5,300,000 of equity to this venture.

 

In January 2014, the Trust’s wholly-owned subsidiary entered into a joint venture with affiliates of The Beach Company.  The joint venture paid approximately $7 million for a vacant parcel of land located in Greenville, South Carolina and obtained access to construction financing of up to $38.6 million. The construction loan, which is to be funded as and when customary construction financing conditions are met, is secured by a first mortgage on the property.  The Trust contributed approximately $6.4 million (subject to additional capital contributions of up to $3.3 million through May 2014) to the joint venture in exchange for a 74.4% equity interest therein.

 

Note 5 — Assets of Discontinued Operations

 

At December 31, 2013 the Trust classified the assets and liabilities of a property to assets and liabilities of discontinued operations.  The property is located in Lawrenceville, GA and is under contract for sale.  The property has a book value of $4,102,000.  The Trust estimates that an approximate $1,300,000 gain will be realized on the sale.

 

Note 6 - Real Estate Loans

 

Information relating to real estate loans, all of which are earning interest, is summarized as follows (dollars in thousands):

 

		December 31, 2013					September 30, 2013
Property Type		Real Estate Loans			Percent		Real Estate Loans			Percent
Multi-family residential		$	12,200		60	%	$	16,772		55	%
Hotel		1,680			8	%	1,680			6	%
Land		—			—		8,000			26	%
Retail		6,491			32	%	3,100			10	%
Single family		—			—		961			3	%
		20,371			100	%	30,513			100	%
Deferred fee income		(121		)			(213		)
Real estate loans, net		$	20,250				$	30,300

 

9

Table of Contents

 

Note 6 - Real Estate Loans (Continued)

 

Substantially all of the Trust’s loan portfolio consists of senior mortgage loans secured by real properties, 63% of which are located in New York, 22% in Maryland, 8% in Tennessee, and 7% in Florida.

 

Note 7 — Debt Obligations

 

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

 

		December 31, 2013			September 30, 2013
Junior subordinated notes		$	37,400		$	37,400
Mortgages payable		369,795			308,529
Mortgage payable — property held for sale		4,687			4,687
Total debt obligations		$	411,882		$	350,616

 

Junior Subordinated Notes

 

At December 31, 2013 and September 30, 2013, the Trust’s junior subordinated notes had an outstanding principal balance of $37,400,000.  The interest rates on the outstanding notes is set forth in the table below:

 

Interest Period		Interest Rate
August 1, 2012 through April 29, 2016		4.90%
April 30, 2016 through April 30, 2036		Libor + 2.00%

 

Interest expense relating to the junior subordinated notes was $458,000, in each of the three month periods ended December 31, 2013 and 2012.  Amortization of the deferred costs, which is a component of interest expense was $5,000 for each of the three months ended December 31, 2013 and 2012.

 

Mortgages Payable

 

In the quarter ended December 31, 2013, the Trust purchased six additional properties (five through joint ventures and one wholly-owned) and incurred the following debt (dollars in thousands):

 

Location		Purchase Date		Acquisition Mortgage Debt			Interest Rate		Interest Only Period		Maturity Date
Houston, TX		10/4/13		$	24,100		4.85	%	12 months		October 2018
Pasadena, TX		10/15/13		4,065			4.90	%	12 months		November 2018
Humble, TX		10/15/13		7,875			4.90	%	12 months		November 2018
Humble, TX		10/15/13		5,025			4.90	%	12 months		November 2018
Huntsville, AL		10/18/13		9,573			4.99	%	24 months		November 2023
Columbus, OH		11/21/13		10,651			4.35	%	—		February 2045
				$	61,289

 

10

Table of Contents

 

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

 

On September 11, 2012 and February 3, 2012, special purpose subsidiaries of the Newark Joint Venture entered into transactions with affiliates of Goldman Sachs (“Goldman”) related to the Teacher’s Village project and received proceeds related to New Market Tax Credits (“NMTC”) program for which the project qualified. The NMTC program was enacted by Congress to serve low-income and distressed communities by providing investors with tax credit incentives to make capital investments in those communities. The program permits taxpayers to claim credits against their Federal income tax for up to 39% of qualified investments.

 

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

 

Deferred income on the Trust’s consolidated balance sheet at December 31, 2013 and September 30, 2013 represents the Goldman contribution, which is net of fees. This amount will be recognized into income when the obligation to comply with the requirements of the NMTC program as set forth in the applicable provisions of the Internal Revenue Code of 1986, as amended (the “Code”), is eliminated. Risks of non-compliance include recapture (i.e. reversal of the benefit of the tax credit and the related indemnity obligation of the Newark Joint Venture). The tax credits are subject to recapture for a seven year period as provided in the Code.

 

Costs incurred in structuring these transactions are deferred and will be recognized as an expense based on the maturities of the various mortgage financings related to the NMTC transaction.  At December 31, 2013 and September 30, 2013 these costs totaled $9.3 million and $9.6 million, respectively, and are included in deferred costs on the consolidated balance sheets.

 

The Trust determined that these special purpose entities are VIE’s. The VIE’s ongoing activities, which include collecting and remitting interest and fees and NMTC compliance, were all considered in the design of the special purpose entities and are not anticipated to affect the economic performance during the life of the VIEs.

 

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

 

Note 9 - Segment Reporting

 

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

 

11

Table of Contents

 

Note 9 -Segment Reporting (Continued)

 

The following table summarizes our segment reporting for the periods indicated (dollars in thousands):

 

		Three Months Ended December 31, 2013
		Multi- Family Real Estate			Loan and Investment			Other Real Estate			Total
Rental and other revenues from real estate properties		$	12,239		—			$	1,200		$	13,439
Interest and fees on real estate loans		—			$	1,138		—			1,138
Other income		—			6			265			271
Total revenues		12,239			1,144			1,465			14,848
Operating expenses relating to real estate properties		6,368			—			1,074			7,442
Interest expense		3,429			72			1,199			4,700
Advisor’s fee, related party		293			87			69			449
Property acquisition costs		1,181			—			—			1,181
General and administrative		1,507			132			117			1,756
Depreciation and amortization		2,715			—			426			3,141
Total expenses		15,493			291			2,885			18,669
(Loss) income from continuing operations		(3,254		)	853			(1,420		)	(3,821		)
Discontinued operations:
Income from operations		70			—			—			70
Net (loss) income		(3,184		)	853			(1,420		)	(3,751		)
Plus: net loss attributable to non- controlling interests		187			—			831			1,018
Net (loss) income attributable to common shareholders		$	(2,997	)	$	853		$	(589	)	$	(2,733	)
Segment assets at December 31, 2013		$	397,618		$	66,678		$	149,275		$	613,571

 

12

Table of Contents

 

Note 9 -Segment Reporting (Continued)

 

The following table summarizes our segment reporting for the periods indicated (dollars in thousands):

 

		Three Months Ended December 31, 2012
		Multi-Family Real Estate			Loan and Investment			Other Real Estate			Total
Rental and other revenues from real estate properties		$	4,609		—			$	690		$	5,299
Interest and fees on real estate loans		—			$	1,879		—			1,879
Other income		—			442			290			732
Total revenues		4,609			2,321			980			7,910
Operating expenses related to real estate properties		2,065			—			846			2,911
Interest expense		1,686			126			1,079			2,891
Advisor’s fees, related party		134			186			54			374
Property acquisition costs		878			—			—			878
General and administrative		1,416			354			93			1,863
Depreciation and amortization		1,055			—			183			1,238
Total expenses		7,234			666			2,255			10,155
Total revenues less total expenses		(2,625		)	1,655			(1,275		)	(2,245		)
Equity in earnings of unconsolidated ventures		—			—			61			61
(Loss) income from continuing operations		(2,625		)	1,655			(1,214		)	(2,184		)
Discontinued operations:
Income from operations		2			—			—			2
Net (loss) income		(2,623		)	1,655			(1,214		)	(2,182		)
Plus net loss attributable to non-controlling interests		111			—			767			878
Net (loss) income attributable to common shareholders		(2,512		)	1,655			(447		)	(1,304		)
Segment assets at December 31, 2012		$	183,485		$	102,255		$	146,603		$	432,343

 

13

Table of Contents

 

Note 10 — Fair Value of Financial Instruments

 

Financial Instruments Not Measured at Fair Value

 

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

 

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

 

Real estate loans:  The earning mortgage loans of the Trust which have variable rate provisions, based upon a margin over prime rate, have an estimated fair value which is equal to their carrying value assuming market interest rates between 11% and 12%.  The earning mortgage loan of the Trust which has a fixed rate provision has an estimated fair value of $16,000 greater than its carrying value assuming a market rate of interest of 11% which we believe reflect institutional lender yield requirements.

 

Junior subordinated notes: At December 31, 2013, the estimated fair value of the Trust’s junior subordinated notes is lower than their carrying value by approximately $24.3 million based on a market interest rate of 7.53%.

 

Mortgages payable:  At December 31, 2013, the estimated fair value of the Trust’s mortgages payable is lower than their carrying value by approximately $17.8 million assuming market interest rates between 2.42% and 9.64%.  Market interest rates were determined using rates which the Trust believes reflects institutional lender yields requirements.

 

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

 

Financial Instruments Measured at Fair Value

 

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

 

14

Table of Contents

 

Note 10 — Fair Value of Financial Instruments (Continued)

 

Set forth below is information regarding the Trust’s financial assets measured at fair value as of December 31, 2013 (dollars in thousands):

 

		Carrying and			Fair Value Measurements Using Fair Value Hierarchy
		Fair Value			Level 1		Level 2
Financial Assets:
Interest rate swap		$	21		—		$	21

 

Derivative financial instrument:  Fair values are approximated using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of the derivatives. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves, foreign exchange rates, and implied volatilities.  At December 31, 2013, this derivative is included in other assets on the consolidated balance sheet.

 

Although the Trust has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with it utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparty.  As of December 31, 2013, the Trust assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives.  As a result, the Trust determined that its derivative valuation is classified in Level 2 of the fair value hierarchy.

 

Note 11 — Derivative Financial Instruments

 

Cash Flow Hedges of Interest Rate Risk

 

The Trust’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements.  To accomplish this objective, the Trust primarily uses interest rate swaps as part of its interest rate risk management strategy.  Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Trust making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

 

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income (loss) on our consolidated balance sheets and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings.  In March 2012, the Trust entered into an interest rate swap agreement used to hedge the variable cash flows associated with existing variable-rate debt.

 

Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments are made on the Trust’s variable-rate debt.

 

As of December 31, 2013, the Trust had the following outstanding interest rate derivative that was designated as a cash flow hedge of interest rate risk (dollars in thousands):

 

Interest Rate Derivative		Notional			Rate		Maturity
Interest rate swap		$	1,839		5.25	%	April 1, 2022

 

15

Table of Contents

 

Note 11 — Derivative Financial Instruments (Continued)

 

Non-designated Hedges

 

Derivatives not designated as hedges are not speculative and are used to manage the Trust’s exposure to interest rate movements and other identified risks but do not meet the hedge accounting requirements. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings and were equal to a loss of $500 and $4,500 for the three months ended December 31, 2013 and December 31, 2012, respectively. As of December 31, 2013, the Trust had the following outstanding derivatives that were not designated as hedges in qualifying hedging relationships (dollars in thousands):

 

		Notional
Interest Rate Derivative		Amount			Rate		Maturity
Interest Rate Caps		$	24,700		1.0	%	October 1, 2014

 

The table below presents the fair value of the Trust’s derivative financial instrument as well as its classification on the consolidated balance sheets as of the dates indicated (amounts in thousands):

 

Derivatives as of:

 

December 31, 2013					September 30, 2013
Balance Sheet Location		Fair Value			Balance Sheet Location		Fair Value
Other assets		$	21		Other assets		$	1
Accounts payable and accrued liabilities		$	—		Accounts payable and accrued liabilities		$	6

 

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

 

		Three Months Ended December 31,
		2013			2012
Amount of gain recognized on derivative in Other Comprehensive Income		$	18		$	2
Amount of loss reclassified from Accumulated Other Comprehensive Income into Interest Expense		(9		)	$	(9	)

 

No gain or loss was recognized related to hedge ineffectiveness or to amounts excluded from effectiveness testing on the Trust’s cash flow hedges during the three months ended December 31, 2013 and December 31, 2012.  During the twelve months ending December 31, 2014, the Trust estimates an additional $34,000 will be reclassified from other comprehensive income (loss) as an increase to interest expense.

 

Credit-risk-related Contingent Features

 

The agreement between the Trust and its derivatives counterparty provides that if the Trust defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, the Trust could be declared in default on its derivative obligation.

 

16