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| BRT > SEC Filings for BRT > Form 10-Q on 6-Feb-2009 | All Recent SEC Filings |
6-Feb-2009
Quarterly Report
Forward-Looking Statements
With the exception of historical information, this report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended. We intend such forward-looking statements to be covered by the safe harbor provision for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and include this statement for purposes of complying with these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words "may", "will", "believe", "expect", "intend", "anticipate", "estimate", "project", or similar expressions or variations thereof. Forward-looking statements involve known and unknown risks, uncertainties and other factors which are, in some cases, beyond our control and which could materially affect actual results, performance or achievements. Investors are cautioned not to place undue reliance on any forward-looking statements.
Overview
We are a real estate investment trust, also known as a REIT. Our business is to originate and hold for investment short-term senior and junior commercial mortgage loans, and our primary source of revenue is interest and loan fee income. Our revenues also include income from real properties (including income from real properties acquired in foreclosure and by deed in lieu of foreclosure).
Although we continue to pursue loan originations, it is at a dramatically reduced level due to both limited demand for our short-term bridge loans and our concerns about the ability of potential borrowers, in the current credit environment, to (i) refinance and repay a loan that we originate, (ii) be able to sell the underlying collateral for an amount in excess of a loan or (iii) be able to otherwise raise funds in order to repay a loan.
The current crisis in the credit and real estate markets has had a direct and substantial effect on our primary lending business. Many of our borrowers have defaulted on their monetary obligations to us, which has required us to focus significant resources on servicing our loan portfolio, work-out activities, pursuing foreclosure actions and acquiring the underlying real property by foreclosure or deed in lieu of foreclosure, operating and stabilizing real property acquired by us in foreclosure or deed in lieu of foreclosure (including interfacing with receivers and local property managers), and engaging in activities related to the sale process with respect to properties we are attempting to sell. As a result:
· at December 31, 2008, we owned $43,207,000 of real estate assets acquired by foreclosure or deed in lieu of foreclosure, which does not include real estate held for sale, compared with $17,015,000 of real estate assets acquired by foreclosure or deed in lieu of foreclosure at December 31, 2007, which does not include real estate held for sale;
· our real estate properties held for sale acquired by foreclosure or deed in lieu of foreclosure were $35,533,000 at December 31, 2008 as compared to $9,355,000 at December 31, 2007;
· for the three months ended December 31, 2008, our income from real estate properties, excluding our real estate properties held for sale, was $1,001,000 and our operating expenses for these properties was $1,688,000, resulting in an operating loss of $687,000, compared to income and expenses for these properties of $445,000 and $398,000, respectively, for the three months ended December 31, 2007, resulting in operating income of $47,000;
· for the three months ended December 31, 2008, our income from our real estate properties held for sale was $1,253,000 and our operating expenses for these properties was $1,211,000, resulting in operating income of $42,000, compared to income and expenses for these properties of $196,000 and $133,000, respectively, for the three months ended December 31, 2007, resulting in operating income of $63,000;
· we originated one loan and advanced funds in the aggregate principal amount of $11,860,000 in the quarter ended December 31, 2008;
· earning and non-earning loans declined to $128,116,000 and $5,384,000, respectively, at December 31, 2008 compared to $168,082,000 and $61,552,000, respectively, at December 31, 2007; and
· we recorded a $3,500,000 impairment charge against our real estate assets in the quarter ended December 31, 2008.
Despite the problems mentioned above, we note that substantially all our
mortgage loans are secured by first liens, and our short-term debt at December
31, 2008 was $6,000,000, or 3% of our shareholders' equity, and 2% of our total
assets. Until the credit markets stabilize and credit is made available to real
estate owners and developers, we could experience (i) more borrower defaults,
(ii) additional foreclosure actions (with an increase in direct and indirect
expenses in pursuing such actions), (iii) the acquisition of additional
properties in foreclosure or by deed in lieu of foreclosure, and (iv) reduced
origination activity, all of which will result in a decline in our revenues and
net income (or an increase in our net loss).
Liquidity and Capital Resources
Our total available liquidity at December 31, 2008 was approximately $77,287,000, including $11,732,000 of cash and cash equivalents, $62,500,000 of remaining availability under our revolving credit facility and $3,055,000 of availability under our margin lines of credit. We believe that our existing sources of capital will be adequate for purposes of meeting our short-term and long-term liquidity needs.
During the three months ended December 31, 2008, we generated cash of $2,134,000 from real estate loan collections, and $3,000,000 from net advances from our credit facility. The cash, along with our cash on hand of $35,765,000 at September 30, 2008, was used primarily to fund real estate loan originations of $11,860,000, pay shareholder dividends of $15,565,000 and fund an operating loss of $169,000. If we continue to incur losses, we may be required to draw down additional amounts under our credit facility to fund our operations.
We have a revolving credit facility with a group of banks consisting of Capital One Bank, VNB New York Corp., Signature Bank and Manufacturers and Traders Trust Company. Under the revolving credit facility, Capital One Bank, VNB New York Corp., Signature Bank and Manufacturers and Traders Trust Company make available to us up to an aggregate of $185,000,000 on a revolving basis. Under the credit facility, we are required to maintain cash or marketable securities at all times of not less than $15,000,000. Borrowings under the credit facility are secured by specific receivables and the facility provides that the amount borrowed will not exceed (1) 65% of our earning first mortgages, plus (2) 50% of our earning second mortgages plus (3) 50% of the fair market value of certain owned real estate, all of which is pledged to the lending banks as collateral and the sum of (ii) and (iii) may not exceed 15% of the borrowing base or $22,500,000. At December 31, 2008, $68,500,000 was available to be drawn based on the lending formula under our credit facility and $6,000,000 was outstanding.
We also have the ability to borrow under our margin lines of credit maintained with national brokerage firms, secured by the common shares we own in EPR and other investment securities. Under the terms of the margin lines of credit, we may borrow up to 50% of the market value of the shares we pledge. At December 31, 2008, $3,055,000, was available under the margin lines of credit, of which zero was outstanding. If the value of the EPR shares (our principal securities investment) continues to decline, the available funds under the margin lines of credit would decline.
Cash Distribution Policy
Our board of trustees suspended the payment of dividends on our common shares in December 2008. In view of the problems facing the real estate industry and the Trust at the present time, and the need to preserve capital, the board considered it prudent to suspend the payment of dividends. Our board of trustees will review the dividend policy at each regularly scheduled quarterly board meeting. Since we will likely report a tax loss for the year ended December 31, 2008, no distributions are likely to be required in 2009 in order for us to retain our REIT status.
The Trust has elected to be taxed as a real estate investment trust ("REIT"), as defined under the Internal Revenue Code of 1986, as amended. As a REIT, the Trust will generally not be subject to Federal income taxes at the corporate level if it distributes at least 100% of its REIT taxable income, as defined, to its shareholders. To maintain its REIT status, the Trust must distribute at least 90% of its income; however if it does not distribute 100% of its income, it will be taxed on undistributed income. There are a number of organizational and operational requirements the Trust must meet to remain a REIT. If the Trust fails to qualify as a REIT in any taxable year, its taxable income will be subject to Federal income tax at regular corporate tax rates and it may not be able to qualify as a REIT for four subsequent tax years. Even if it is qualified as a REIT, the Trust is subject to certain state and local income taxes and to Federal income and excise taxes on its undistributed taxable income. For income tax purposes the Trust reports on a calendar year.
Results of Operations
Interest on loans decreased by $1,934,000, or 33%, to $3,848,000 for the three months ended December 31, 2008 from $5,782,000 for the three months ended December 31, 2007. During the current quarter, the average balance of earning loans outstanding decreased by approximately $41.7 million, accounting for a decrease in interest income of $1,252,000. This is due to reduced originations combined with the increased completed foreclosures caused by a weakness in the real estate and credit markets nationally. Decreases in the prime rate during the calendar year 2008 have caused the average interest rate on the earning loan portfolio to decline to 11.88% in the three months ended December 31, 2008 from 13.74% in the three months ended December 31, 2007, which caused interest income to decrease, by $682,000.
Loan fee income decreased by $191,000, or 28%, to $484,000 for the three months ended December 31, 2008 from $675,000 for the three months ended December 31, 2007. This is a result of a decline in loan originations over the past several quarters due to the weakness in the real estate and credit markets.
Income from real estate properties increased $556,000, or 125%, for the three month period ended December 31, 2008 to $1,001,000 from $445,000 for the three month period ended December 31, 2007. This increase was the result of $453,000 of rental revenues received on a multi-family residential property located in Fort Wayne, Indiana and three condominium conversion properties located in Florida that the Trust acquired by foreclosure in 2008. The remaining increase of $103,000 is primarily due to increased occupancy at a multi-family condominium conversion property located in Orlando, Florida. The Trust acquired this property by foreclosure in the quarter ended December 31, 2007.
Other, primarily investment income declined by $405,000, or 67%, to $201,000 in the three months ended December 31, 2008 from $606,000 in the three months ended December 31, 2007. Approximately $360,000 of the decline was due to reduced dividend income that resulted from the sale of 493,511 shares of EPR since December 31, 2007. The remaining decline was the result of lower rates earned on our invested balances.
Interest expense on borrowed funds decreased to $1,399,000 for the three months ended December 31, 2008, from $1,735,000 for the three months ended December 31, 2007, a decline of $336,000, or 19%. For the three month period ended December 31, 2008, the average outstanding balance of borrowed funds declined from $73.0 million for the three months ended December 31, 2007 to $59.8 million, the result of our paydown of the credit facility. This decline accounted for a decrease in interest expense of $183,000. The remaining decrease of $153,000 was the result of a 273 basis point decline in the average interest rate paid on the credit facility and a reduction in amortization of deferred borrowing costs.
The advisor's fee, which is calculated based on invested assets, decreased by $107,000, or 23%, for the three months ended December 31, 2008 to $357,000 from $464,000 for the three months ended December 31, 2007, due to a decreased level of invested assets, primarily loans and securities.
Professional fees related to foreclosure activity decreased to $348,000 for the three months ended December 31, 2008 from $739,000 for the three months ended December 31, 2007, a decrease of $391,000, or 53%. This decline is the result of a decrease in foreclosure actions and workout activity in the current quarter.
General and administrative expenses declined $93,000, or 5%, from $1,765,000 in the three months ended December 31, 2007 to $1,672,000 in the three months ended December 31, 2008. The decline was primarily the result of a reduction in advertising and marketing expenses and travel expenses.
Expenses relating to real estate properties increased $1,290,000, or 324%, from $398,000 in the three month period ended December 31, 2007 to $1,688,000 in the three month period ended December 31, 2008. The current quarter reflects $1,021,000 of expenses from seven properties that the Trust acquired by foreclosure since December 31, 2007. The Trust is performing the necessary repairs and maintenance at these properties in order to stablilize and improve the operating cash flow. The remaining increase of $269,000 is the result of a full period of expenses at a condominium conversion project located in Orlando, Florida that was acquired in the quarter ended December 31, 2007.
Equity in earnings of unconsolidated joint ventures declined $367,000 in the three months ended December 31, 2008 to $84,000 from $451,000 in the three months ended December 31, 2007. This decline is due to an increase in non-earning loans that took place during the year in our joint venture with CIT.
Discontinued operations represent the revenue, expenses, and gains from the sale of properties either sold or held for sale during the applicable fiscal quarter. Income from discontinued operations declined $415,000 from $457,000 in the three months ended December 31, 2007 to $42,000 in the three months ended December 31, 2008. The income from operations in the current period includes the operations of six multi-family garden apartment properties located in the Nashville, Tennessee area and condominium units at two separate projects located in Florida. The income from operations in the three month period ended December 31, 2007 results from the operations of a commercial property in Stuart, Florida and an industrial property in South Plainfield, New Jersey. These two properties were sold in the fiscal year ended September 30, 2008. The gain on sale of real estate assets in the three month period ended December 31, 2007 represents the sale of a cooperative apartment unit in Manhattan, New York.
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