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| BRT > SEC Filings for BRT > Form 10-Q on 8-May-2009 | All Recent SEC Filings |
8-May-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. The continuing crisis in the credit and real estate markets has had a substantial effect on our lending business by significantly limiting investments in real estate and substantially reducing demand for short-term commercial mortgage loans. In addition, in the current credit environment we have concerns about the ability of potential borrowers to be able to (i) refinance and repay loans we originate, (ii) sell the underlying collateral for an amount in excess of a loan we originate or (iii) otherwise raise funds to repay loans. As a result we only originated one new loan in the aggregate principal amount of $8,700,000 and advanced funds pursuant to prior commitments in the aggregate amount of $4,026,000 during the six months ended March 31, 2009.
In the fiscal year ending September 30, 2008 and the six months ending March 31, 2009 many of our borrowers 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 (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. Set forth below are material effects the crisis in the credit and real estate markets has had on our business during the three or six months ended March 31, 2009:
· non-earning loans increased by $49,240,000 to $67,647,000 at March 31, 2009 from $18,407,000 at September 30, 2008;
· during the three months ended March 31, 2009, 19 loans totaling $37,804,000 to 19 separate entities controlled by the same individual and three other loans to three separate borrowers totaling $27,500,000, became non-earning. These loans, totaling $65,304,000, represent approximately 97% of our non-earning loans, 50% of our total loan portfolio of $126,905,000 and 31% of our total assets of $202,822,000. The 19 loans are secured by several land assemblage sites which include existing office, retail, parking and vacant land located, in Newark, New Jersey. Another loan in the amount of $22,967,000 is secured by an existing eight story vacant office building, with occupied retail, located in Brooklyn, New York. In view of the accelerating decline in the value of real estate in which these properties are located we established a loan loss allowance of $11,500,000 against the Newark assemblage and $4,350,000 against the Brooklyn property. We established additional allowances of $2,730,000 against two other loans with aggregate principal balances totaling $5,000,000;
· during the quarter ending March 31, 2009, we offered properties for sale that we acquired in foreclosure. In the course of this process, we ascertained that real estate values in the current recessionary environment, coupled with the serious difficulties potential purchasers are having in obtaining mortgage money, has significantly and adversely impacted the market values of commercial real estate in the geographic areas in which these properties are located. Accordingly, we took impairment charges of $12,315,000 against five real estate properties and impairment charges of $8,435,000 against six properties classified as held for sale. Included in the charges against real estate properties is $10,720,000 relating to two separate multi family residential properties and one multi-family condominium complex consisting of 388, 250 and 162 units, respectively, located in Ft. Wayne, Indiana, Nashville, Tennessee and Apopka, Florida. Included in impairment charges against properties held for sale is $7,075,000 against four multi-family residential properties, with a total of 484 units, located in Nashville, Tennessee that are under contracts of sale for a total consideration of $14,150,000 which, after all costs of sale and impairment charges, we anticipate will result in no gain or loss. On May 7, 2009 the sale with respect to one of these properties, with 112 units, was consummated at a contract price of $3,150,000.
· for the six months ended March 31, 2009, our income from real estate properties, excluding our real estate properties held for sale, was $2,525,000 and our operating expenses for these properties was $4,169,000, resulting in a loss from real estate operations of $1,644,000 as compared to operating income of $944,000, operating expenses of $1,328,000 and a net loss from operations of $384,000 in the six months ended March 31, 2008.
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, (iv) a continuing decline in real estate values, and (v) limited 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 March 31, 2009 was approximately $37,534,000, including $14,089,000 of cash and cash equivalents, $21,700,000 of availability under our revolving credit facility and $1,715,000 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. In addition, many of the properties we have acquired by foreclosure are being offered for sale. Consummation of any such sales will increase our liquidity.
During the six months ended March 31, 2009, we generated cash of $6,074,000 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 $12,726,000, pay shareholder dividends in October 2008 of $15,565,000 and fund an operating loss of $2,464,000. 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. The credit facility matures on February 1, 2010 and there are no extension options. 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 March 31, 2009, $27,700,000 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 March 31, 2009, $1,715,000, was available under the margin lines of credit, of which zero was outstanding. If the value of the EPR shares (our principal securities investment) declines, 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 reviews 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.
Results of Operations
Interest on loans decreased by $1,376,000, or 36%, to $2,457,000 for the three months ended March 31, 2009 from $3,833,000 for the three months ended March 31, 2008. A decline in the average balance of earning loans outstanding, due to a combination of payoffs, reduced originations caused by weakness in the real estate and credit markets, transfers to owned real estate and transfers to non performing loans, accounted for a decrease in interest income of $1,299,000. A decrease in the rate earned on the performing loan portfolio of 14 basis points from 12.50% to 12.36% in the three months ended March 31, 2009 when compared to March 31, 2008 caused a decrease in interest income of $77,000.
Interest on loans decreased by $3,310,000, or 34%, to $6,305,000 for the six months ended March 31, 2009 from $9,615,000 for the six months ended March 31, 2008. A decline in the average balance of earning loans outstanding due to a combination of payoffs, reduced originations caused by weakness in the real estate and credit markets, transfers to owned real estate and transfers to non performing loans accounted for a decrease in interest income of $3,033,000. The average interest rate earned on the earning loan portfolio decreased 24 basis points to 12.49% in the six months ended March 31, 2009 from 12.73% in the six months ended March 31, 2008, which caused interest income to decrease by $277,000.
Loan fee income decreased by $312,000, or 72%, to $123,000 for the three months ended March 31, 2009 from $435,000 for the three months ended March 31, 2008. This category also decreased by $503,000, or 45%, to $607,000 for the six months ended March 31, 2009 from $1,110,000 for the six months ended March 31, 2008. The decreases in both the three and six month periods are the result of a decline in our loan originations over the past several quarters due to the weakness in the real estate and credit markets.
Operating income from real estate properties increased $716,000, or 143%, for the three month period ended March 31, 2009 to $1,215,000 from $499,000 in the three month period ended March 31, 2008. Operating income from real estate properties increased $1,581,000, or 167%, for the six month period ended March 31, 2009 to $2,525,000 from $944,000 in the six month period ended March 31, 2008. The increase for both the three and six month periods was primarily the result of rental revenues received from tenants at two multi-family apartment complexes located in Fort Wayne, Indiana and Nashville, Tennessee and the rental of condominium units located in Miami Beach, Florida. The Trust acquired title to these properties by foreclosure or deed in lieu of foreclosure in the prior fiscal year.
Other, primarily investment income declined by $374,000, or 70%, to $162,000 in the three months ended March 31, 2009 from $536,000 in the three months ended March 31, 2008, and declined by $779,000, or 68%, to $363,000 in the six months ended March 31, 2009 from $1,142,000 in the six months ended March 31, 2008. The decline in both periods was primarily due to reduced dividend income that resulted from the sale of shares of EPR in the prior fiscal year.
Interest expense on borrowed funds decreased to $1,403,000 for the three months ended March 31, 2009, from $1,710,000 for the three months ended March 31, 2008, a decline of $307,000, or 18%. For the three month period ended March 31, 2009, the average outstanding balance of borrowed funds declined from $78.2 million for the three months ended March 31, 2008 to $62.7 million, the result of our paydown of the credit facility with funds from loan repayments. This decline accounted for a decrease in interest expense of $158,000. A decline of 313 basis points in the interest rate paid on the credit facility caused a decrease in interest expense of $118,000. The remaining decrease of $31,000 was the result of a decline in the amortization of deferred fees on our credit facility.
Interest expense on borrowed funds decreased to $2,802,000 for the six months ended March 31, 2009, from $3,445,000 for the six months ended March 31, 2008, a decline of $643,000, or 19%. For the six month period ended March 31, 2009, the average outstanding balance of borrowed funds declined from $75.6 million for the six months ended March 31, 2008 to $61.2 million, the result of our paydown of the credit facility with funds from loan repayments. This decline accounted for a decrease in interest expense of $332,000. A decline of 313 basis points in the interest rate paid on the credit facility caused a further decrease in interest expense of $211,000. The remaining decrease of $100,000 was the result of a decline in the amortization of deferred fees on our credit facility.
The advisor's fee, which is calculated based on invested assets, decreased by $162,000, or 35%, for the three months ended March 31, 2009, to $295,000 from $457,000 for the three months ended March 31, 2008 and decreased by $269,000, or 29%, for the six months ended March 31, 2009, to $652,000 from $921,000 for the six months ended March 31, 2008. The decline in both periods was the result of a decreased level of invested assets on which the fee is based, resulting primarily from the impairment charges taken on our real estate assets.
For the three months ended March 31, 2009, the Trust recorded $12,315,000 of impairment charges against its real estate portfolio. Management in its regular review process, analyzed the real estate portfolio and determined that the continuing deterioration in the credit markets and in the real estate markets where the Trust's properties are located, has made it necessary to recognize declines in the value of our properties. The impairment charge was taken against five properties with an aggregate book value of approximately $30,886,000. For the three months ended March 31, 2008, there was no comparable expense.
For the six months ended March 31, 2009, the Trust recorded $15,815,000 of impairment charges against its real estate portfolio. Management analyzed the real estate portfolio and determined that the deterioration in the credit markets and real estate markets where the Trust's properties are located has made it necessary to record declines in the value of our properties, which includes $3,500,000 taken in the quarter ended December 31, 2008. The impairment charges were taken against five properties with an aggregate book value of approximately $34,386,000. For the six months ended March 31, 2008 there was no comparable expense.
For the three and six months ended March 31, 2009, the Trust recorded $17,530,000 in provisions for loan losses. Management in its regular review process, analyzed the loan portfolio and the underlying value of the collateral securing its loans and determined that it was necessary to record this provision to reflect an accelerated decrease in the value of the collateral securing several loans due to the continuation of the credit crisis and the national recession. The provision was taken against 22 loans with an aggregate outstanding balance of $65,771,000 and includes $2,265,000 taken against a loan due to a fraud committed by a borrower which has been reported to the criminal authorities. For the three and six month period ended March 31, 2008, the Trust recorded a $5,300,000 provision for loan losses. The prior period's provision was taken against three loans with an aggregate outstanding balance of $35,410,000.
Professional fees related to foreclosure activity decreased to $242,000 for the three months ended March 31, 2009 from $487,000 for the three months ended March 31, 2008, a decrease of $245,000, or 50%. This category also decreased to $590,000 for the six months ended March 31, 2009 from $1,226,000 for the six months ended March 31, 2008, a decline of $636,000, or 52%. These decreases are primarily the result of reduced legal fees and expenses incurred in connection with foreclosure actions and workouts.
Other taxes decreased by $52,000, or 72%, to $21,000 in the three months ended March 31, 2009 from $73,000 in the three months ended March 31, 2008, and decreased by $83,000, or 83%, to $17,000 in the six months ended March 31, 2009 from $100,000 in the six months ended March 31, 2008. Current period amounts represent the accrual of state franchise and excise taxes, while the prior periods include federal excise tax which is based on income generated in the prior year but not distributed until the current year.
Operating expenses relating to real estate properties increased $1,134,000, or 122%, from $933,000 in the three month period ended March 31, 2008 to $2,067,000 in the three month period ended March 31, 2009. Operating expenses relating to real estate properties also increased $2,841,000, or 214%, from $1,328,000 in the six month period ended March 31, 2008 to $4,169,000 in the six month period ended March 31, 2009. The increase in both periods is the result of operating expenses relating to four additional properties acquired by foreclosure or deed in lieu of foreclosure in the current six month period and a full period of operations at two properties that were acquired by foreclosure in the fiscal year ended September 30, 2008.
Amortization and depreciation increased $337,000, or 143%, from $235,000 in the three month period ended March 31, 2008 to $572,000 in the three month period ended March 31, 2009. For the six month period ended March 31, 2009, amortization and depreciation increased $573,000, or 206%, to $851,000 from $278,000 in the six months ended March 31, 2008. The increase in both periods is the result of depreciation expense relating to properties acquired in foreclosure and catch up depreciation taken on those properties reclassified from real estate properties held for sale.
Equity in (loss) earnings of unconsolidated ventures decreased $2,872,000 in the three months ended March 31, 2009 to a loss of $2,171,000 from earnings of $701,000 in the three months ended March 31, 2008. This category also decreased $3,239,000 in the six months ended March 31, 2009 to a loss of $2,087,000 from earnings of $1,152,000 in the six months ended March 31, 2008. This decrease in both periods is primarily the result of a loss recorded by our joint venture with the CIT Group. In the current three and six month period the venture recorded a loan loss provision to reflect a decrease in the value of a performing multi-family garden apartment complex which secured a non performing loan.
Gain on sale of joint venture interests increased $271,000 for both the three and six month period ended March 31, 2009 from $-0- in the three and six period ended March 31, 2008. In the current period the Trust sold its interests in four of its joint venture properties located in Connecticut. The proceeds of the sale were $1,350,000 and the Trust recognized a gain on the sale of $271,000.
Gain on sale of available-for-sale securities declined from $3,818,000 in both the three and six month periods ended March 31, 2008 to $-0- in the three and six month periods ended March 31, 2009. In the prior three and six month periods the Trust sold 101,400 shares of Entertainment Properties Trust. These securities, with a cost basis of $1,332,000 were sold for $5,150,000. There were no sales in the current three or six month period.
Loss from discontinued operations was $8,188,000 in the three month period ended March 31, 2009 as compared to income of $1,135,000 in the three month period ended March 31, 2008. Loss from discontinued operations was $8,041,000 in the six month period ended March 31, 2009 as compared to income of $1,591,000 in the six month period ended March 31, 2008. The losses in the current three and six month periods are due to impairment charges of $8,435,000 taken on four multi-family properties located in Tennessee and one multi-family property located in Naples, Florida. The Naples Florida property was sold in the quarter ended March 31, 2009. The impairment charges were taken to reflect the deterioration in the multi-family real estate market where these properties are located.
The discontinued operations in the quarter ended March 31, 2008 reflect income of $83,000 from the operations of a shopping center in Stuart, Florida and a gain of $154,000 from the sale of six condominium units, $632,000 from the sale of a cooperative apartment unit in New York, New York, and $266,000 from the sale of an industrial property located in South Plainfield, New Jersey. The discontinued operations in the six month period ended March 31, 2008 reflect income of $145,000 from the operations of a shopping center in Stuart, Florida and an industrial building in South Plainfield, New Jersey, a $1,180,000 gain from the sale of eight condominium and coop units, and a $266,000 gain from the sale of an industrial property located in South Plainfield, New Jersey.
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