UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
x |
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
fiscal year ended September
30, 2007
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)
Massachusetts
|
13-2755856
|
(State
or other jurisdiction
|
(I.R.S.
employer
|
of
incorporation or organization)
|
identification
no.)
|
60
Cutter Mill Road, Great Neck, New York
|
11021
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant's
telephone number, including area code
|
516-466-3100
|
Securities
registered pursuant to Section 12(b) of the Act:
Title
of each class
|
Name
of each exchange on which registered
|
Shares
of Beneficial
|
New
York Stock Exchange
|
Interest,
$3.00 Par Value
|
|
Securities
registered pursuant to Section 12(g) of the Act:
NONE
(Title
of
Class)
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 x
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 x
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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K 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, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer o Accelerated
filer x Non-accelerated
filer o
Indicate
by check mark whether registrant is a shell company (as defined in Exchange
Act
Rule
12b-2). Yes o No x
The
aggregate market value of voting and non-voting common equity held by
non-affiliates of the registrant was $212,282,000 based on the last sale price
of the common equity on March 31, 2007, which is the last business day of the
registrant’s most recently completed second quarter.
As
of
December 5, 2007, the registrant had 11,321,795 shares of Beneficial Interest
outstanding, excluding treasury shares.
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, 2008 are incorporated by reference
into Part III of this Form 10-K.
PART
I
Item
l. Business.
General
We
are a
real estate investment trust, also known as a REIT, organized as a business
trust under the laws of the Commonwealth of Massachusetts in 1972. We are
primarily engaged in originating and holding for investment senior and junior
commercial mortgage loans secured by real property in the United States. These
loans generally have relatively high yields and are short term or bridge loans
with an average duration ranging from six months to three years. We generally
lend at a floating rate of interest based on a spread over the prime rate and
receive an origination fee for the loans we originate. At September 30, 2007,
we
had 51 loans outstanding that were secured by properties located in 11
states.
From
time
to time, we have also participated as both an equity investor in, and a mortgage
lender to, joint ventures which acquire income-producing real property and
in
the past we have purchased equity securities in other REITs. As of September
30,
2007, we had equity investments totaling approximately $2.1 million in six
real
estate joint ventures, and owned approximately 625,000 common shares of
Entertainment Properties Trust (NYSE:EPR) having a market value on that date
of
$31.7 million.
As
of
September 30, 2007, our portfolio consisted of approximately $249.5 million
in
outstanding mortgage loans (without taking into account $48.7 million in
outstanding mortgage loans held by our joint venture with CIT Capital USA,
Inc.)
before allowances for loan losses of $8.9 million, with an average contractual
interest rate of 12.74%. This compares with a loan portfolio of approximately
$284.6 million, before allowances for loan losses of $669,000, as of September
30, 2006, with an average contractual interest rate of 13.14%. As of September
30, 2007, 44 mortgage loans in the aggregate principal amount of $185.9 million,
with an aggregate allowance for loan losses of $3.0 million, were earning
interest, and seven mortgage loans in the aggregate principal amount of $63.6
million, with an aggregate allowance for loan losses of $5.9 million, were not
earning interest. This compares with 60 mortgage loans in the aggregate
principal amount of $283.3 million, with an aggregate allowance for loan losses
of $644,000, earning interest as of September 30, 2006 and one mortgage loan
in
the aggregate principal amount of $1.3 million, with an aggregate allowance
for
loan losses of $25,000, not earning interest as of September 30, 2006. Mortgage
loans not earning interest represent approximately 25.5% of our outstanding
loan
portfolio and approximately 19.4% of our total assets at September 30, 2007
and
represented approximately .5% of our outstanding loan portfolio and
approximately .4% of our total assets at September 30, 2006.
During
the fiscal year ended September 30, 2007, in addition to originating mortgage
loans, we were engaged in servicing our loan portfolio, supervising managers
of
real estate assets owned by us (including real estate assets acquired by us
in
foreclosure or by deed in lieu of foreclosure) and managing or overseeing the
activities of joint ventures in which we were an equity participant. With
respect to mortgage loans in default and not earning interest, we were actively
engaged in workout negotiations with borrowers, supervising mortgage foreclosure
actions, and interfacing with receivers and managers of real estate assets
securing defaulted loans and the subject of foreclosure actions.
In
November 2006, we entered into a joint venture with CIT Capital USA, Inc.
Pursuant to the joint venture agreement, we present all loan proposals to the
joint venture (known as BRT Funding LLC), for its consideration on a first
refusal basis until the joint venture originates $100 million in aggregate
principal amount of loans ($150 million in the event that the joint venture
obtains a line of credit of $50 million). The joint venture funded 100% of
the
first $50 million in principal amount of loans that it originated. Currently,
the joint venture is to fund 50% of the principal of any loan that it accepts,
and we are to fund the other 50% for our own account. If loan proposals
presented to the joint venture do not meet the investment criteria of the joint
venture or the joint venture otherwise declines to participate in a loan
presented to it, we have the right to originate any such loan for our own
account. The joint venture has funded an aggregate of $58.4 million of loans
through September 30, 2007. At September 30, 2007 the joint venture had an
outstanding loan portfolio of approximately $48.7 million (with no allowances
for loan losses), all of which are first mortgage loans. This joint venture
is
described in greater detail in this Form 10-K under “Business, Joint Venture
with CIT Capital U.S.A., Inc.” The loans funded and held by the joint venture
are not reported by us in our financial statements or otherwise in this Form
10-K as being part of our loan portfolio. Rather, our share of income from
the
joint venture is reported as a part of our equity in earnings of unconsolidated
joint ventures. Unless specific reference is made to the joint venture with
CIT
Capital USA, Inc., all information provided in this Form 10-K with respect
to
the loan portfolio, including information with respect to loan originations,
outstanding loan portfolio,
non-earning
loans and loan loss allowance relates only to loans originated and held by
BRT
Realty Trust.
The
Effect on BRT of Recent Developments in the Mortgage
Industry
During
the second half of the fiscal year ended September 30, 2007, the mortgage
lending industry was subject to disruptions and uncertainty, with increases
in
borrower defaults and non-performing loans, and severe limitations on the
availability of credit. In addition the secondary and securitization markets
deteriorated, and were unpredictable and volatile, which had an adverse effect
on our industry. Although we do not participate in the secondary and
securitization markets, the difficulties in these markets affected our borrowers
ability to pay debt service and, therefore, affected our business.
As
of
September 30, 2007, seven of our mortgage loans in the aggregate principal
amount of $63.6 million, with an aggregate allowance for loan losses of $5.9
million, were not earning interest. Mortgage loans not earning interest
represent approximately 25.5% of our outstanding loan portfolio and
approximately 19.4% of our total assets at September 30, 2007. By contrast,
at
September 30, 2006, mortgage loans not earning interest represented
approximately 0.5% of our outstanding loan portfolio and approximately 0.4%
of
our total assets. In addition, at September 30, 2007, 28% of our loan portfolio,
or $70.3 million in aggregate principal amount (before allowance for loan
losses) consisted of loans secured by existing multi-family and hotel properties
being converted to condominium ownership, of which 54%, or $37.8 million in
aggregate principal amount of mortgage loans, were not earning interest and
subject to foreclosure actions.
We
believe that our portfolio was affected by weakness in the residential
condominium sales markets, and the difficulty that potential purchasers of
residential condominium properties had in obtaining mortgage loans. As a result
condominium sales declined which affected our borrowers whose exit strategy
was
to sell units. In addition, our originations declined because borrowers who
typically make use of our short-term lending have limited or ceased their real
estate activities. Further, our borrowers had and may continue to have
difficulty in refinancing their existing debt, thereby limiting their ability
to
repay loans due to us.
Our
Investment Strategy and Underwriting Criteria
Our
primary strategy is to maintain and increase the cash available for distribution
to our shareholders by originating mortgage loans secured by a diversified
portfolio of real property. We actively pursue lending opportunities with
property owners and prospective property owners who require short-term financing
until permanent or construction financing can be obtained or until the property
is sold. Our investment policy emphasizes the origination of short-term real
estate mortgage loans secured by senior liens on real property. As of September
30, 2007, 94% of the principal balance of our portfolio consisted of first
mortgage loans or pari passu participations in first mortgage loans. Our lending
activities focus on operating properties such as multi-family residential
properties (including residential property being renovated and converted to
condominium ownership), office buildings, shopping centers, mixed use buildings,
hotels/motels, and industrial buildings. We also will make senior mortgage
loans
secured by unimproved land, but generally require that the unimproved land
collateralizing our loan has proper entitlements and that zoning is in place
for
the intended purpose. During the 2007 fiscal year we experienced an increase
in
the number of inquiries and applications for loans secured by unimproved land.
The aggregate principal amount of loans outstanding on unimproved land increased
to 17.5% of our loan portfolio at September 30, 2007 from 12.3% at September
30,
2006.
At
September 30, 2006, 39% of our loan portfolio ($111.0 million principal amount
of mortgage loans) consisted of loans secured by existing multi-family and
hotel
properties being converted to condominium ownership. In fiscal 2007, the
percentage of our loans secured by properties being converted to condominium
ownership decreased due to loan payoffs and paydowns (including loan paydowns
resulting from the sale of individual condominium units). At September 30,
2007,
28% of our loan portfolio ($70.3 million principal amount of mortgage loans)
consisted of loans secured by existing multi-family and hotel properties being
converted to condominium ownership, of which 54% ($37.8 million principal amount
of mortgage loans) is not earning interest and is subject to foreclosure
actions.
We
also
originate and hold for investment loans secured by improved commercial or
multi-family residential property which is vacant, pending renovation and sale
or leasing of the property. From time to time, we sell senior, junior or pari
passu participations in mortgage loans that we originate. We may also acquire
participations in mortgage loans originated by others, and we may invest in
the
securities of other REIT’s.
From
time
to time, we originate mezzanine loans to the owners of real property secured
by
some or all of the ownership interests that directly or indirectly control
the
real property. We originated one mezzanine loan in fiscal 2007 in the principal
amount of $3 million, which represented 1.2% of our loan portfolio at September
30, 2007. The loan was repaid subsequent to September 30, 2007. Mezzanine loans
are subordinate to the direct mortgage or mortgages placed on the property
owned
and senior to the equity of the ownership entity.
When
we
invest in junior mortgage loans, junior participations in existing loans or
mezzanine loans, the collateral securing our loan is subordinate to the liens
of
senior mortgages or senior participations. At September 30, 2007, approximately
6% of our real estate mortgages, or $14 million in principal amount, were
represented by junior mortgages, junior participations or mezzanine loans.
In
certain cases, we may find it advisable to make additional payments in order
to
maintain the current status of prior liens or to discharge them entirely or
to
make working capital advances to support current operations. It is possible
that
the amount which may be recovered by us in cases in which we hold a junior
position may be less, or significantly less, than our total investment, less
allowances for possible loan losses.
We
originated $120.3 million of mortgage loans in fiscal 2007 (without taking
into
account $58.4 million of mortgage loans originated by our joint venture with
CIT
Capital USA, Inc.). This compares with $309.7 million of mortgage loans
originated by us in fiscal 2006 (the joint venture with CIT Capital USA, Inc.
was not organized until the first quarter of fiscal 2007). We believe the
decline in our originations is primarily due to the weakened environment in
the
real estate and credit markets. This trend may continue to have an adverse
impact on our loan originations in fiscal 2008 and we cannot project when this
trend will change. Many of our borrowers do not have a current need or have
a
reduced need for our short term lending solutions as their activity in the
real
estate market has slowed or been curtailed.
Our
lending activities are national in scope. It is not our present intent to
originate or otherwise invest in any mortgage loan which is secured by property
located outside the United States and Puerto Rico.
When
underwriting a loan, the primary focus of our analysis is the fundamental value
of a property, which we determine by considering a number of factors including
location, current use and potential for alternative use, current or potential
net operating income, if any, the local market for condominium conversion if
conversion of the property to condominium ownership is contemplated or is a
potential alternative, 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 financial condition of the principals of
our
borrowers and take into consideration their ability to meet the operational
needs of the property and the experience of our borrower’s principals in real
estate ownership and management and real estate development, if applicable.
Because of our emphasis on fundamental property value, we believe that in the
event of a default and our acquisition of title to a property, we will generally
be able to hold and, if necessary, manage the property until market conditions
present a favorable opportunity to sell the property. If we acquire title to
an
undeveloped property as a result of a default, the holding period will usually
be longer than it would be if we acquired a developed parcel which is income
producing or has been substantially renovated for sale.
Our
Origination Process
We
originate mortgage loans in a number of ways. We rely on the relationships
developed by our officers and loan originators with real estate investors,
commercial real estate brokers, mortgage brokers and bankers. We have
experienced a great deal of repeat business with our borrowers.
Loan
approvals are based on a review of property information as well as other due
diligence activities undertaken by us, including a site visit to the property,
an in-house property valuation, a review of the results of operations of the
property (if any) or, in the case of an acquisition of the property by our
borrower, a review of the borrower's projected results of operations for the
property, and a review of the financial condition of the principals of the
prospective borrower. 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 BRT. 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
each
loan which exceeds $20 million in principal
amount,
and the approval of our Board of Trustees is also required where loans by us
to
one borrower exceed $50 million, in the aggregate.
We
generally 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 and payment of mortgage interest to us, real estate taxes
and other operating expenses are current. The "walk-away guarantee" is intended
to provide an incentive to the principals of a borrower, in a situation where
our borrower has defaulted, to have the collateral deeded to us in lieu of
foreclosure, thereby eliminating the cost of foreclosure proceedings. By
complying with the terms of the "walk-away guarantee," the principals of the
borrower avoid the further risk of being personally responsible for any
difference between the amount owed to us and the amount we recover in a
foreclosure proceeding. If we make more than one loan to a borrower, we may
require that all or some of the outstanding loans to that borrower be
cross-collateralized.
Our
Loan Portfolio
At
September 30, 2007, we had 51 outstanding mortgage loans, aggregating
approximately $249.5 million in principal amount (before allowances of $8.9
million and not including $48.7 million in mortgage loans held by our joint
venture with CIT), which include senior and junior mortgage loans,
participations in mortgage loans (which as of September 30, 2007 were all on
a
pari passu basis), and a mezzanine loan. Our loan loss allowances of $8.9
million relates to five of our mortgage loans with an aggregate principal amount
of $61.6 million outstanding to five separate borrowers.
At
September 30, 2007, our loan portfolio was secured by real property located
in
11 states. Loans representing 43% of the principal amount of our total
outstanding loans were secured by properties located in the New York
metropolitan area, including New Jersey, 25% of the principal amount by
properties located in Tennessee, 24% of the principal amount by properties
located in Florida, and 8% of the principal amount by properties in the
remaining states.
During
the year ended September 30, 2007, we originated approximately $120.3 million
of
mortgage loans (and our joint venture with CIT Capital USA, Inc. originated
an
additional $58.4 million of mortgage loans), we repurchased a participation
interest of approximately $5.7 million, approximately $152.1 million of our
outstanding loans were repaid in whole or in part and we sold participation
interests of approximately $1.1 million. Our three largest mortgage loans
outstanding (before allowances and net of participations to others) at September
30, 2007 of approximately $26.1 million, $24.8 million and $19.4 million,
respectively, each of which is secured by one property, represented
approximately 7.9%, 7.5% and 5.9%, respectively, of our total assets. There
were
no other mortgage loans in our portfolio that represented more than 4.9% of
our
total assets as of September 30, 2007.
We
make
loans to multiple borrowing entities that are controlled by the same individual.
At September 30, 2007, we had six loans outstanding with an aggregate principal
amount of $64.0 million to six borrowing entities controlled by one individual.
In fiscal 2007 loans to borrowing entities controlled by this individual
accounted for approximately 51% of the loans originated by us and 34.1% of
loans
originated by us and the CIT joint venture. The individual controlling these
borrowing entities became incapacitated in May 2007, is not able to manage
his
business or to make business decisions and is not expected to be actively
engaged in business in the future and, therefore, neither he nor any entity
controlled by him is expected to obtain any additional loans from us. A guardian
appointed by the Court to oversee the affairs of this individual and the
management group of our borrowers are seeking to complete an orderly sale of
the
assets securing our loans.
At
September 30, 2007 we had 14 loans outstanding with an aggregate principal
amount of $28.9 million to 14 borrowing entities controlled by another
individual. In fiscal 2007 loans to borrowing entities controlled by this
individual accounted for approximately 25% of the loans originated by us and
17.0% of the loans originated by us and the CIT joint venture.
At
September 30, 2007, approximately 99% of our mortgage loans had a floating
rate
of interest calculated based on a variable spread above the prime rate, with
a
stated minimum interest rate (also referred to as adjustable rate mortgages),
and the balance of our mortgage loans provided for a fixed rate of interest.
Interest on our mortgage loans is payable to us monthly. Under our first
mortgage loans, we usually require and hold funds in escrow that are payable
to
us monthly and are used to pay real estate taxes and casualty insurance
premiums. In
many
instances, a borrower will fund an interest reserve out of the net loan
proceeds, from which all or a portion of the interest payments due us are made
for a specified period of time.
The
following sets forth information regarding our outstanding mortgage loans
outstanding at September 30, 2007:
|
|
|
|
Interest
|
|
Not-Interest
|
|
No.
of
|
|
%
of
|
|
Prior
|
|
|
|
Total
|
|
Earning
|
|
Earning
|
|
Loans
|
|
Portfolio
|
|
Liens
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Mortgage Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-Family
Residential
|
|
$
|
86,731,000
|
|
$
|
73,168,000
|
|
$
|
13,563,000
|
|
|
10
|
|
|
34.77
|
|
|
—
|
|
Condominium
Units (existing multi-family and commercial rental units)
(1)
|
|
|
65,716,000
|
|
|
27,869,000
|
|
|
37,847,000
|
|
|
4
|
|
|
26.34
|
|
|
—
|
|
Hotel
Condominium Units
|
|
|
4,550,000
|
|
|
4,550,000
|
|
|
—
|
|
|
2
|
|
|
1.82
|
|
|
—
|
|
Undeveloped
Land
|
|
|
43,766,000
|
|
|
37,602,000
|
|
|
6,164,000
|
|
|
10
|
|
|
17.54
|
|
|
—
|
|
Shopping
Centers/Retail
|
|
|
27,879,000
|
|
|
26,741,000
|
|
|
1,138,000
|
|
|
14
|
|
|
11.17
|
|
|
—
|
|
Office
|
|
|
3,500,000
|
|
|
3,500,000
|
|
|
—
|
|
|
2
|
|
|
1.40
|
|
|
—
|
|
Residential
|
|
|
3,396,000
|
|
|
3,396,000
|
|
|
—
|
|
|
4
|
|
|
1.36
|
|
|
—
|
|
Second
Mortgage Loans, Junior Participations and mezzanine:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
|
7,915,000
|
|
|
3,000,000
|
|
|
4,915,000
|
|
|
2
|
|
|
3.17
|
|
$
|
17,560,000
|
|
Multi-Family
Residential
|
|
|
6,073,000
|
|
|
6,073,000
|
|
|
—
|
|
|
3
|
|
|
2.43
|
|
|
29,195,000
|
|
|
|
$
|
249,526,000
|
|
$
|
185,899,000
|
|
$
|
63,627,000
|
|
|
51
|
|
|
100.00
|
|
$
|
46,755,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Subsequent
to September 30, 2007, we acquired in foreclosure 174 condominium
units in
a multi-family residential property converted to condominium ownership.
The mortgage secured by these condominium units had an unpaid principal
balance of $19.4 million as of September 30, 2007 and was not earning
interest as of September 30, 2007. This property is expected to be
recorded on our books at December 31, 2007 as property held for sale
with
an anticipated book value of $17.1
million.
|
Loan
Defaults
At
September 30, 2007 seven loans (each to a separate borrower) on which an
aggregate of $63.6 million principal balance is outstanding, (before
allowances), were not earning interest and were subject to foreclosure
proceedings. Subsequent to September 30, 2007 we acquired in foreclosure 174
unsold condominium units in a multi-family residential property located in
a
suburb of Orlando, Florida containing a total of 240 units converted to
condominium ownership. These 174 units secured a loan on which $19,442,000
was
outstanding (before a loan allowance of $2,297,000). This property is expected
to be recorded on our books as property held for sale with a value of
$17,125,000 (after giving effect to a charge off of $2,297,000) at December
31,
2007 and when recorded on our books as property held for sale will reduce the
aggregate of non-earning loans by $19,442,000.
The
other
properties subject to foreclosure proceedings as of September 30, 2007 (all
of
which foreclosure proceedings are in various stages) are as
follows:
|
·
|
65
condominium units in a multi-family residential property containing
206
units converted to condominium ownership located in Miami Beach,
Florida
securing a loan on which $11,927,000 is outstanding, and 18 condominium
units located in West Palm Beach, Florida held as additional
collateral.
|
|
·
|
8,250
square feet of buildable residential space and three underground
parking
spaces in a property under construction located in Manhattan, N.Y.,
securing a loan on which $6,164,000 is
outstanding.
|
|
·
|
A
44 unit vacant and fully renovated apartment complex located in Naples,
Florida to be offered for sale as condominium units, securing a loan
on
which $6,498,000 is outstanding.
|
|
·
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A
484 unit rental garden apartment project located in Fort Wayne, Indiana,
with approximately a 55% occupancy, securing a loan on which $13,564,000
is outstanding.
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First
and second mortgages secured by a portfolio of retail, office and
residential properties located
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in
New
Jersey, all securing a loan on which the balance outstanding is
$4,915,000.
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A
two-story vacant building containing retail and residential space
located
in Manhattan, N.Y., on which $2,275,000 is outstanding. BRT is a
50%
participant in this loan and the CIT joint venture is a 50%
participant.
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In
substantially all cases, a monetary default by a borrower requires us to become
involved in expensive and time consuming procedures, including foreclosure
and/or bankruptcy proceedings. In the event of a default by a borrower on a
mortgage loan, we will foreclose on the mortgage or other collateral held by
us
and seek to protect our investment through negotiations with the borrower or
other interested parties, which may involve further cash outlays by us. From
the
time a loan becomes non-performing until the time that a foreclosure sale or
bankruptcy auction occurs, or until the time that a satisfactory workout is
completed or the loan is reinstated by the borrower, we will generally not
receive interest payments under our loan, thereby affecting our revenues, net
income and cash distributions to our shareholders. Foreclosure proceedings
in
certain jurisdictions can take a considerable period of time, and may extend
for
as long as two years. In addition, if a borrower files for protection under
the
United States federal bankruptcy laws during the foreclosure process, the delays
may be longer. In a mortgage foreclosure proceeding, we will typically seek
to
have a receiver appointed by the court or an independent third party property
manager appointed with the borrower's consent in order to preserve the
property’s rental stream and provide for the maintenance of the property. At the
conclusion of the foreclosure or a negotiated workout process, which occurs
after the property is either sold at a foreclosure sale or a bankruptcy auction
to a third party purchaser, acquired by us, or the workout process results
in
the borrower or its designee retaining the property, the rents collected by
the
receiver or the third party manager, less costs and expenses of operating the
property and the receiver's or manager's fees, are usually paid over to
us.
Our
Credit Facility and Our Lines of Credit
We
have a
revolving credit facility with a group of banks consisting of North Fork Bank,
VNB New York Corp., Signature Bank and Manufacturers and Traders Trust Company
to finance our real estate mortgage lending, and pursuant to which these banks
make available to us up to an aggregate of $185 million on a revolving basis.
The revolving credit facility matures on February 1, 2008, and may be extended
for two one year periods for a fee of $462,500 for each extension.
Subsequent to September 30, 2007, we extended the facility to February 1, 2009
and paid a fee of $462,500. The amount which can be outstanding under the
revolving credit facility may not exceed an amount equal to the sum of (1)
65%
of our first mortgages, plus (2) 50% of our second mortgages and (3) 50% of
the
fair market value of certain of our owned real estate, all of which are pledged
to the lending banks as collateral and the sum of (2) and (3) may not exceed
15%
of the borrowing base. At September 30, 2007 and November 30, 2007, $82 million
and $88 million, respectively, was available to be drawn down by us based on
the
lending formula under the revolving credit facility and $20 million and $12
million, respectively, was outstanding. Borrowings under the revolving credit
facility bear interest at 30 day LIBOR plus 225 basis points, or 7.37% per
annum
as of September 30, 2007. The loan agreement between us and our lenders contains
affirmative and negative covenants, including (1) a requirement that the ratio
of shareholders' equity (including trust preferred securities) to bank debt
shall not be less than 1.00 to 1.00, and (2) a required debt coverage ratio
of
1.50 to 1.00.
We
also
have the ability to borrow under two margin lines of credit maintained with
a
national brokerage firm, secured by the common shares we own in Entertainment
Properties Trust and by other securities that we own. Under the terms of these
lines of credit, we may borrow up to an amount equal to 50% of the market value
of the securities we own. At September 30, 2007 and November 30, 2007, zero
was
outstanding under these margin accounts.
Sale
of Beneficial Shares
On
December 11, 2006, we sold 2,800,000 of our shares of beneficial interest,
par
value $3.00 per share, pursuant to an underwritten public offering, and on
December 13, 2006, the underwriters exercised their over-allotment option in
part and purchased an additional 132,500 shares of beneficial interest. The
net
proceeds to us from the offering, after deducting the underwriting discount
and
offering expenses payable by us, were $77.1 million. The net proceeds were
used
by us to pay down our revolving credit facility by $58 million and to pay in
full the outstanding balance of $19 million due on our margin
lines.
Trust
Preferred Securities
We
have
issued trust preferred securities, in an aggregate principal amount of $56.7
million, through two wholly-owned subsidiaries, BRT Realty Trust Statutory
Trust
I and BRT Realty Trust Statutory Trust II. Of these, trust preferred securities
with an aggregate principal amount of $25.8 million require distributions at
a
rate of 8.23% per annum through April 30, 2016, and trust preferred securities
with an aggregate principal amount of $30.9 million require distributions at
a
rate of 8.49% per annum through April 30, 2016. The trust preferred securities
mature on April 30, 2036 and are redeemable at our option, at par, beginning
on
April 30, 2011.
Joint
Venture with CIT Capital USA, Inc.
On
November 2, 2006, BRT Joint Venture No. 1 LLC, a wholly owned subsidiary of
ours, which we refer to herein as the BRT member, entered into a joint venture
agreement by and among (a) CIT Capital USA, Inc., which we refer to herein
as
the CIT member and which is a wholly owned subsidiary of CIT Group, Inc., and
(b) BRT Funding LLC, a limited liability company formed under the laws of the
State of Delaware, which we refer to as the joint venture. The joint venture
is
engaged in the business of investing in short-term commercial real estate loans
for terms of six months to three years, similar to those that we originate.
The
BRT member is the managing member of the joint venture. The initial
capitalization of the joint venture is up to $100 million, of which 25% is
funded by the BRT member and 75% by the CIT member. In addition, the joint
venture is seeking to obtain a line of credit from a third party lender for
up
to $50 million. At this time, however, there are no agreements in place with
respect to such line of credit and neither we nor the joint venture can provide
any assurance that the joint venture will ultimately obtain a line of
credit.
We
have
agreed to present all loan proposals received by us to the joint venture for
its
consideration on a first refusal basis, under procedures set forth in the joint
venture agreement, until the joint venture originates loans with an aggregate
principal amount of $100 million (or, in the event that a line of credit at
the
maximum level is obtained, $150 million).
Following
is a summary of the provisions of the joint venture agreement, which is
qualified in its entirety by reference to the joint venture agreement, a copy
of
which was filed as an exhibit to our Current Report on Form 8-K filed with
the
Securities and Exchange Commission on November 8, 2006.
Funding.
For so
long as the joint venture does not have a line of credit from a third party
lender, the BRT member funds 25% of each loan made by the joint venture, and
the
CIT member funds 75%. In the event that the joint venture obtains a line of
credit from a third party lender, the joint venture will draw down on the line
of credit to fund one third of each loan made by the joint venture, the BRT
member will fund one sixth of the principal amount of such loans and the CIT
member will fund half of the principal amount of such loans. The joint venture
funded 100% of the loans that met its investment criteria until the joint
venture originated loans in the aggregate principal amount of $50 million.
The
$50 million benchmark was satisfied in fiscal 2007. Accordingly, all loans
hereafter made by the joint venture will be funded 50% by the joint venture
and
50% by BRT, in each such case pursuant to a participation agreement with respect
to each such loan to be entered into by us with the joint venture. At September
30, 2007, the joint venture held $48.7 million in outstanding first mortgage
loans (there are no allowances for loan losses).
Allocations.
We
manage the joint venture and receive a management allocation calculated as
1% of
the loan portfolio amount, annualized, and payable quarterly. Origination fees
up to 2% of the principal amount of a loan are distributed 37.5% to the CIT
member and 62.5% to the BRT member. Any origination fees in excess of 2% of
the
principal amount of a loan, but not exceeding 3% of the principal amount of
the
loan, are paid to REIT Management Corp., BRT's advisor. Any joint venture
origination fees which exceed 3% of the principal amount of a loan are paid
37.5% to the CIT member and 62.5% to the BRT member. The joint venture will
distribute net available cash to its two members on a pro-rata basis until
each
member receives a return of 9% (inclusive of origination fees), annualized
on
its outstanding advances. If the joint venture provides each member with an
annualized 9% return, thereafter, additional available net cash is distributed
37.5% to the CIT member and 62.5% to the BRT member.
Loan
Review.
Loan
proposals presented to the joint venture are reviewed by BRT's loan committee.
Three individuals have been designated by the CIT member to receive notice
of,
to attend and to participate in any such meeting of BRT's loan committee. If
a
proposed loan meets the joint ventures specified investment criteria (as
delineated in the joint venture agreement), it will be deemed accepted by both
members. If a proposed loan does
not
meet
such criteria, then following the meeting of the loan committee, the CIT member
has two business days to indicate its disapproval of the proposal, and if such
disapproval is not provided, then the loan proposal is deemed approved;
provided, however, that in the event that the CIT member requests additional
information with respect to any loan proposal, the CIT member has two business
days following the earlier of (i) the receipt of such information or (ii) the
loan closing to approve or disapprove of such loan. BRT may originate for its
own account any loan that is disapproved, or deemed disapproved, by the CIT
member.
Losses.
If the
joint venture sustains any loss of principal with respect to loans that are
foreclosed upon, the BRT member will reimburse the CIT member up to 75% of
the
actual loss, but only to the extent that amounts received by BRT member from
cash distributions exceed the BRT member's 9% return, with such reimbursement
to
be capped at two-thirds of 1% of the highest aggregate principal amount of
the
venture's loans outstanding.
Restrictions.
The
joint venture agreement includes a number of restrictions on the activities
of
BRT, the BRT member, CIT and the CIT member, some of which are summarized
herein:
During
the term of the joint venture agreement and until eighteen months following
the
dissolution of the joint venture (which period is referred to as the restricted
period), CIT's commercial real estate business unit will not, without the
consent of BRT or the BRT member, make any commercial real estate loans to
any
borrowers that are initially introduced to the joint venture by the BRT member,
by a mortgage broker associated with the BRT member or by any of BRT's
affiliates.
During
the term of the joint venture agreement, without the consent of CIT or of the
CIT member, BRT will not make any commercial real estate loan other than through
the joint venture or as provided by the joint venture agreement; provided
however, that BRT shall not be precluded during the term of the joint venture
agreement from making any loan that is disapproved or deemed disapproved by
the
joint venture or that the joint venture is not able to make because of the
absence of available funding.
During
the term of the joint venture agreement, BRT will not enter into any transaction
or arrangement with any other person to manage or service such person's mortgage
loan portfolio or other real estate loans. BRT has also agreed that it shall
not
during the term of the joint venture agreement, enter into any joint venture
or
partnership to make, manage or service any third parties mortgage loan portfolio
or other real estate loans.
Termination.
The
joint venture agreement is terminable by either member upon 60 days notice.
Upon
any such termination, any loans then held by the joint venture will continue
to
be held by the joint venture until the maturity or, if earlier, repayment,
of
such loans.
We
have
agreed to pay a fee of 4% of the funds advanced by the CIT member to the joint
venture, as and when such funds are advanced, to a merchant banking firm that
performed certain services for us and the joint venture in the transaction.
One
of the managing directors of the merchant bank is an independent director of
One
Liberty Properties, Inc., which is an affiliate of BRT. The merchant banking
firm is otherwise unrelated to BRT.
Our
Investment in Entertainment Properties Trust
As
of
September 30, 2007 and November 30, 2007, we owned approximately 625,000 common
shares of Entertainment Properties Trust, which is referred to herein as EPR.
These shares were purchased at an average cost for book purposes of $13.14
per
share. As of September 30, 2007, the market value of this investment was
approximately $31.7 million, or $50.80 per share and as of November 30, 2007
was
approximately $33.3 million, or $53.29 per share. In our 2007 fiscal year,
EPR
paid or declared cash dividends to its shareholders at a quarterly rate of
$.76
per share, which provided us with an annual yield of 23% on our book cost.
From
time to time, we evaluate our investment in EPR and determine whether or not
to
sell any EPR shares, taking into consideration EPR's results of operations
and
business prospects, as well as general market conditions. In fiscal 2007, we
sold 384,800 shares of EPR for a gain for book purposes of $19.4 million. For
tax purposes, we report on a calendar year and we expect to recognize a capital
gain on the sale of EPR stock in 2007 of approximately $20.3
million.
Our
Real Estate Assets
In
addition to originating mortgage loans, we supervise the management of our
real
estate assets, which includes properties acquired by foreclosure (or deed in
lieu of foreclosure) and properties owned by joint ventures in which we
participate as an equity investor. In fiscal 2007, we acquired two properties
in
foreclosure, which secured
loans
in
the aggregate principal amount of $9.4 million, after loan allowances, and
which
we recorded on our books at $9.4 million at September 30, 2007, representing
approximately 3% of our total assets. Since September 30, 2007, we acquired
an
additional property in foreclosure which secured a loan having an unpaid
principal balance of $19,422,000, and after an anticipated valuation allowance
of $2,297,000, we expect to record this property on our books at $17,125,000
at
December 31, 2007. At September 30, 2007, approximately 1.6% of our total
assets, or an aggregate of approximately $5.3 million, was represented by
interests in consolidated and unconsolidated joint ventures (other than our
venture with CIT which does not own any properties) that collectively own seven
properties.
Generally
our policy is to sell properties we acquire by foreclosure or deed in lieu
of
foreclosure. However, we may elect to retain a property if we determine that
it
is a property which has a longer term potential for appreciation. Prior to
sale
we may make necessary improvements to a property or engage in lease-up
activities in order to enhance the value of the property and we may engage
in
other management activities involving a property either directly or indirectly.
In October 2006, a property acquired by us in foreclosure, with a book value
of
$2.8 million was sold for $3.2 million. In November 2006, one of the joint
ventures in which we held a 50% equity interest sold its only property for
$17.4
million, which resulted in a book gain to us of approximately $1.8
million.
Competition
With
respect to our real estate lending activities, we compete for originations
with
other entities, including other mortgage REITs, commercial banks, savings and
loan associations, specialty finance companies, conduits, pension funds, public
and private lending companies, investment funds, hedge funds, mortgage bankers
and others. The business of originating mortgage loans is highly competitive.
Many of our competitors possess greater financial and other resources than
we
possess. Competitive variables include market visibility, size of loans offered,
rate, 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
employ more liberal underwriting standards, our origination volume and profit
margins could be adversely impacted. We compete by offering rapid response
time
in terms of approval and closing and by offering “no prepayment penalty” loans.
We may offer a higher loan to value ratio than institutional competitors. In
order to supplement our marketing activities, we engage in an active national
advertising program.
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 in the ownership and operation of a diversified portfolio of real
estate, and One Liberty Properties, Inc., a publicly-traded equity REIT. Jeffrey
A. Gould, our President and Chief Executive Officer, George Zweier, our Vice
President and Chief Financial Officer, two other officers engaged in loan
origination, underwriting and servicing activities, and four others engaged
in
underwriting and servicing activities devote substantially all of their business
time to our company, 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, which
we
refer to as the Shared Services Agreement. The allocation is based on the
estimated time devoted by 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, between us and REIT Management
Corp. Pursuant to the Advisory Agreement, REIT Management Corp. furnishes
advisory and administrative services with respect to our business, including,
without limitation, arranging credit lines for us, interfacing with our lending
banks, 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, foreclosure
activities and management and sale of properties taken back in foreclosure
and
deed in lieu of foreclosure, REIT Management Corp., 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 interfaces with receivers, managing agents and court appointed
trustees.
For
services performed by REIT Management Corp. under the Advisory Agreement, REIT
Management Corp. received through December 31, 2006, an annual fee of 1% payable
on mortgages receivable, subordinated land leases and investments in
unconsolidated ventures, as well as an annual fee of 1/2 of 1% of our invested
assets other than mortgages receivable, subordinated land leases and investments
in unconsolidated ventures. In addition, our borrowers paid fees directly to
REIT Management Corp. based on the loan principal, which generally are one-time
fees payable upon funding the loan commitment, in the amount of 1% of the total
commitment amount.
The
Advisory Agreement was amended to provide that effective January 1, 2007 the
asset management fee is six tenths of 1% of our invested assets and that there
is an incentive fee from borrowers payable upon funding a loan commitment of
1/2
of 1% of the total commitment amount, provided that we have received at least
a
loan commitment fee of 1% from the borrower in any such transaction and any
loan
commitment fee in excess of 1 ½% of the total commitment amount will be retained
by us. REIT Management Corp. is also entitled to receive certain fees under
the
joint venture agreement with CIT Capital USA, Inc. REIT Management Corp. is
wholly owned by the chairman of our Board of Trustees and he and certain of
our
executive officers, including our President and Chief Executive Officer, receive
compensation from REIT Management Corp. We discuss compensation paid by REIT
Management Corp. to our Chairman and President and Chief Executive Officer
and
to certain of our executive officers in our proxy statement for our Annual
Meeting of Shareholders.
We
believe that the Shared Services Agreement and the Advisory Agreement allow
our
company 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 to manage some of the properties taken back by us
in
foreclosure or deed in lieu of foreclosure and some of the properties owned
by
joint ventures in which we are an equity participant, including cooperative
apartments. These management services include, among other things, rent billing
and collection, property maintenance, contractor negotiation, construction
management, sales, leasing and mortgage brokerage. 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.
Available
Information
You
can
access financial and other information regarding our company on our website:
www.brtrealty.com.
The
information on our website is not a part of, nor is it incorporated by reference
into, this Annual Report. We make available, free of charge, copies of our
Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports
on
Form 8-K and Amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon
as
reasonably practicable after electronically filing such material with, or
furnishing such material to, the Securities and Exchange
Commission.
Item
1A. Risk Factors.
In
addition to the other information contained or incorporated by reference in
this
Form 10-K, readers should carefully consider the following risk
factors:
Risks
Related to Our Business
If
borrowers default on loans, we will experience a decrease in income and any
recovery may be limited by the value of the underlying
property
Loan
defaults 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 a loan default or defaults may be for a prolonged period
of time as we seek to recover, primarily through legal proceedings, the
outstanding principal balance, accrued interest and default 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 and
reorganization 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 shareholders’ equity. The decrease in interest
income and the costs involved in seeking to recover the outstanding amounts
due
to us could have an adverse impact on the cash distributions paid by us to
our
shareholders and our ability to continue to pay cash distributions in the
future.
Our
primary source of recovery in the event of a loan default is the real property
underlying a defaulted loan. Therefore, the value of our loan depends upon
the
value of the underlying real property. The value of the underlying property
is
dependent on numerous factors outside of our control, including national,
regional and local business and economic conditions, government economic
policies, the level of interest rates and non-performance of lease obligations
by tenants occupying space at the underlying real property. The loan to value
ratio is the ratio of the
amount
of
the loan, plus any indebtedness senior to our loan, to the estimated market
value of the real property underlying the loan as determined by our own in-house
valuation procedures. The higher the loan to value ratio, the greater the risk
that the amount obtainable from sale of a property (including a foreclosure
or
bankruptcy sale) may be insufficient to repay the loan in full upon default.
The
loan to value ratio of certain of our loans exceeds 80%. In addition, we often
find it necessary in a defaulted loan situation to acquire the property at
a
foreclosure sale or bankruptcy auction, in which event we assume the risks
that
result from ownership of the property.
Commencing
in the third quarter of fiscal 2007 (the quarter ended June 30, 2007) and
continuing into the fourth quarter, we realized an increase in the number of
borrowers defaulting on their monetary obligations to us. At September 30,
2007
we had seven non-earning loans having an aggregate outstanding principal balance
of $63.6 million, before loan loss allowances of $5.9 million. These non-earning
loans were outstanding to 7 separate borrowers, and represented 25.5% of the
principal balance of our outstanding loans and 19.4% of our total assets at
September 30, 2007. The non-accrual of interest income on these non-earning
loans had the effect of reducing our revenues by $2.5 million in the 2007 fiscal
year and will continue to reduce our revenues in 2008. We are actively pursing
our legal remedies against borrowers in default. We attribute the increase
in
the number of defaults in the third and fourth quarters of our 2007 fiscal
year
to two principal factors. The first factor is the weakness in the single family
home and condominium sales markets, and the difficulty potential purchasers
of
residential properties had in obtaining mortgage loans. As a result of such
difficulty, the pace of condominium sales slowed considerably, sales of
condominium units by our borrowers engaged in condominium conversions were
adversely affected and such borrowers could not meet their monetary obligations
to us. The second factor is the general tightening of credit standards by
lending/financial institutions and a resulting decrease in mortgage
originations. Accordingly, our borrowers had difficulty in refinancing, thereby
affecting their ability to repay loans due to us. If uncertainty in the mortgage
industry continues, we may continue to experience defaults by our
borrowers.
The
inability of our borrowers to refinance or sell underlying real property may
lead to defaults on our loans
A
substantial majority of our mortgage portfolio is short term and due within
three years. In addition, our borrowers are required to pay all or substantially
all of the principal balance of our loans at maturity, in most cases with little
or no amortization of principal over the term of the loan. Accordingly, in
order
to satisfy this obligation, at the maturity of a loan, a borrower will be
required to refinance or sell the property or otherwise raise a substantial
amount of cash. The ability to refinance or sell or otherwise raise a
substantial amount of cash is dependent upon certain factors which neither
we
nor our borrowers control, such as national, local and regional business and
economic conditions, government economic policies and the level of interest
rates. In recent months, difficulties in the “sub-prime” mortgage market and in
the markets relating to collateralized debt obligations have resulted in a
tightening of the credit markets. Institutional lenders have increased the
costs
of borrowing and have otherwise tightened credit standards (more conservative
loan to value ratios, etc.). Accordingly, our borrowers are finding it more
difficult and costly to refinance, thereby effecting their ability to repay
loans due to us. If a borrower is unable to pay the balance due at maturity
and
we are not willing to extend or restructure the loan or make other
accommodations with a borrower, we will, in most cases, foreclose on the
property, which can be expensive and time consuming and could adversely affect
our net income, shareholders’ equity and cash distributions to
shareholders.
Decrease
in Loan Originations 2007 Fiscal Year compared to the 2006 Fiscal
Year
Although
we experienced an increase in the average balance of loans outstanding in fiscal
2007 compared to fiscal 2006, there was a 61% decrease in the principal amount
of loans originated by us in fiscal 2007 as compared to fiscal 2006 and
including the loans originated by our joint venture with CIT, there was a 42%
decrease in the principal amount of loans originated in fiscal 2007 as compared
to fiscal 2006. We attribute this decrease to a weakened environment in the
real
estate and credit markets, as a result of which many of our borrowers did not
have a need for our short-term lending, as their activity in the real estate
markets slowed or was curtailed.
Although
our origination staff is actively engaged in origination activities, which
includes continued marketing and advertising efforts, many of our executives
who
would otherwise be involved in origination activities, are devoting time to
activities relating to non-earning loans and the portfolio of real estate
acquired (and to be acquired) in foreclosure. Unless there are positive changes
in the environment for real estate transactions and in the credit markets,
the
level of originations may decrease in fiscal 2008 as compared to 2007, which
could have an effect on our revenues and net income.
If
a significant number of our mortgage loans are in default or we otherwise must
write down our loans, a breach of our revolving credit facility could
occur
Our
revolving credit facility with North Fork Bank, VNB New York Corp., Signature
Bank and Manufacturers and Traders Trust Company includes financial covenants
that require us to maintain certain financial ratios, including a debt service
ratio and an equity to indebtedness ratio. If additional mortgage loans held
by
us go into default or if generally accepted accounting principles require us
to
take additional significant loan loss reserves against our loans or significant
loss allowances against our real estate assets, our financial position could
be
materially adversely affected causing us to be in breach of the financial
covenants. During the fiscal year ended September 30, 2007, we took an
additional $9.3 million of loan loss reserves, which directly reduced our net
income for fiscal 2007 and our shareholders’ equity at September 30,
2007.
A
breach
by us of the covenants to maintain the financial ratios would place us in
default under our revolving credit facility, and, if the banks called a default
and required us to repay the full amount outstanding under the revolving credit
facility, we might be required to rapidly dispose of assets, which could have
an
adverse impact on the amounts we receive on such disposition. If we are unable
to dispose of assets in a timely fashion to the satisfaction of the banks,
the
banks could foreclose on that portion of our loan portfolio pledged to the
banks
as collateral, which could result in the disposition of loans at below market
values. The disposition of loans at below our carrying value would adversely
affect our net income, reduce our shareholders’ equity and adversely affect our
ability to pay cash distributions to our shareholders.
Our
allowance for loan losses and valuation allowances against owned real estate
may
not be adequate to cover actual losses
A
significant source of risk arises from the possibility that losses could be
sustained because borrowers, guarantors and related parties may fail to perform
in accordance with the terms of their loans. We establish and maintain an
allowance for loan losses to manage the risk associated with loan defaults
and
non-performance. We also write down the value of real estate assets owned by
us
or joint ventures if in our judgment the value of real estate owned has been
impaired. However, unexpected factors may occur that could have a material
adverse effect on our business, financial condition, results of operations
and
cash flows. Unexpected losses in our loan portfolio or diminution in value
of
our loan collateral or real estate assets may arise from a wide variety of
specific or systemic factors, many of which are beyond our ability to predict,
influence or control.
As
of
September 30, 2007 our allowance for loan losses is $8,917,000 compared to
$669,000 as of September 30, 2006. The allowance for loan losses and the
valuation allowance against owned real estate reflects our estimate of the
probable losses in our loan portfolio and our estimate of real estate values
at
the relevant balance sheet date. Our allowance for loan losses and valuation
allowance against owned real estate are based on an evaluation of known risks
and economic factors. The determination of an appropriate level of loan loss
allowances and valuation allowance is an inherently difficult process and is
based on numerous assumptions. The amount of future losses and future impairment
of real estate is susceptible to changes in economic, operating and other
conditions, including changes in interest rates, that may be beyond our control
and these losses may exceed current estimates. Our allowance for loan losses
and
impairment allowances may not be adequate to cover actual losses and we may
need
to take additional reserves in the future. Actual losses and additional reserves
in the future could materially and adversely affect our business, net income,
shareholders’ equity and cash distributions to our shareholders.
A
portion of our loans are subordinate loans which carry a greater risk of loss
than senior loans
We
also
loan funds to our borrowers in the form of junior mortgage loans, junior
participations in mortgage loans and mezzanine loans. Because of their
subordinate position, junior liens carry a greater risk than senior liens,
including a substantially greater risk of non-payment of interest or principal.
A decline in real estate values in the geographic area in which the underlying
property is located could adversely affect the value of our collateral, so
that
the outstanding balance of senior liens may exceed the value of the underlying
property.
In
the
event of a default on a junior lien, if permitted, we may elect to make payments
to the senior mortgage holder in order to prevent foreclosure by the senior
mortgage holder. However, in certain situations, we may not have the right
to
make payments to the senior mortgage holder, or may choose not to make such
payments despite
having
the right to do so. In such cases, the senior mortgage holder may foreclose
and
we will be entitled to share in the proceeds of the foreclosure sale only after
amounts due to senior mortgage holders have been paid in full. This can result
in the loss of all or part of our investment, adversely affecting our net
income, shareholders’ equity and cash distributions to our shareholders.
We
may suffer a loss if a borrower defaults on a loan that is secured by
undeveloped land
We
provide loans that are secured by undeveloped land. Loans secured by undeveloped
land, aggregating $43.8 million, represented 17.5% of our loan portfolio at
September 30, 2007. These loans are subject to a higher risk of default because
such properties are not income producing properties. In addition, the market
value of such properties may be volatile. Although we only make loans on
undeveloped land if entitlements and zoning is in place for the intended use,
there is always the risk that entitlements and zoning may be changed or lapse.
Consequently, in the event of a default and foreclosure, we may not be able
to
sell such property for an amount equal to our investment. As a result, we may
lose a significant portion of our investment, adversely affecting our net
income, shareholders’ equity and cash distributions to our shareholders.
Alternatively, in the event of a default of a loan secured by undeveloped land,
we may elect to hold the property until the market becomes more favorable.
In
such case during the holding period, which we believe would be for a longer
period of time than the holding period for income producing real property,
we
will not receive any income from this property and we will be required to pay
the costs of carrying the property, primarily real estate taxes, which could
adversely affect our net income, shareholders’ equity and cash distributions to
shareholders.
We
may suffer a loss if a borrower defaults on a loan that is not secured directly
by underlying real estate
We
occasionally provide loans that are secured by equity interests in the borrowing
entities. These loans are subject to the risk that other lenders may be directly
secured by the real estate assets of the borrower. In the event of a default
and
foreclosure or bankruptcy sale, those secured lenders would have priority over
us with respect to the proceeds of a sale of the underlying real estate. As
a
result, we may lose all or part of our investment, adversely affecting our
net
income, shareholders’ equity and cash distributions to our shareholders.
Dependence
on Two Borrowers in Fiscal 2007
In
fiscal
2007 we made loans totaling $64 million to borrowers controlled by one
individual, accounting for approximately 34.1% of the loans originated by us
and
the CIT venture and loans totaling $28.9 million to borrowers controlled by
another individual, accounting for approximately 17% of the loans originated
by
us and the CIT venture. The individual controlling the borrowers which accounted
for 34.1% of the loans originated by us and the CIT venture became incapacitated
and is not able to manage his business or make business decisions. Accordingly,
neither he, nor any entity, controlled by him is expected to obtain additional
loans from us. A significant reduction in our originations, as a result of
the
loss of the business of these two individuals, or either of them, without
replacing them could have an adverse effect on our revenues and net income
in
fiscal 2008.
We
are subject to the risks associated with loan participations, such as lack
of
full control rights
Some
of
our investments are participating interests in loans in which we share the
rights, obligations and benefits of the loan with other participating lenders.
We may need the consent of these parties to exercise our rights under such
loans, including rights with respect to amendment of loan documentation,
enforcement proceeding and the institution of, and control over, foreclosure
proceedings. In addition, if our participation represents a minority interest,
a
majority of the participants may be able to take actions which are not
consistent with our objectives.
We
may have less control of our investment when we invest in joint
ventures
We
have
made loans to, and acquired equity interests in, joint ventures that own income
producing real property. Our co-venturers may have different interests or goals
than we do or our co-venturers may not be able or willing to take an action
that
is desired by us. A disagreement with respect to the activities of the joint
venture could result in a substantial diversion of time and effort by our
management and could result in our exercise, or one of our co-venturers
exercise, of the buy/sell provision typically contained in our joint venture
organizational documents. In addition, there is no limitation under our charter
documents as to the amount of funds that we may invest in joint ventures.
Accordingly, we may invest a substantial amount of our funds in joint ventures
which ultimately may not be profitable as a result of disagreements with and
among our co-venturers.
The
accounting treatment of the assets held by our CIT joint venture could make
it
difficult to analyze our financial statements and to compare them with our
prior
period financial statements
We
presently are a 25% joint venture partner with CIT Capital USA, Inc. in a joint
venture that was established in November 2006 to originate bridge loans similar
to those which we generally originate. Because our share of earnings from the
joint venture will be shown on our financial statements under the equity method
of accounting, it may be more difficult to analyze our earnings. In addition,
it
may be difficult to compare our investment in the joint venture, as reflected
in
our financial statements, with our financial statements from prior
periods.
Our
inability to control our joint venture with CIT could result in diversion of
time and effort by our management and the inability to achieve the goals of
the
joint venture
Our
investment in the joint venture with CIT Capital USA, Inc. may involve risks
not
otherwise present in investments made solely by us, including that our
co-investor may have different interests or goals than we do, and that our
co-investor may not be willing to take an action that is desired by us.
Disagreements with our co-investor could result in the inability of the joint
venture to successfully fund, finance or otherwise manage loans as intended
by
the joint venture agreement. In addition, under the joint venture agreement,
we
have agreed to present loan proposals received by us to the joint venture for
its consideration on a right of first refusal basis, until the joint venture
originates loans with an aggregate principal amount of $100 million (or $150
million if the joint venture obtains a line of credit of $50 million). As a
result, we will be required to share in the income of all loans we originate
that the joint venture accepts, until the joint venture's portfolio reaches
$100
million (or $150 million if the joint venture obtains a line of credit of $50
million). The BRT member of the joint venture has also agreed to reimburse
the
CIT member, on a limited basis, for certain losses, if any, incurred by the
joint venture on foreclosed property.
We
are exposed to risk of environmental liabilities with respect to properties
to
which we take title
In
the
course of our business, we foreclose and take title to real estate, and could
be
subject to environmental liabilities with respect to these properties. We may
be
held liable to governmental entities or to third parties for property damage,
personal injury, investigation and clean-up costs incurred by these parties
in
connection with environmental contamination, or may be required to investigate
or clean up hazardous or toxic substances, or chemical releases at a property.
The costs associated with investigation or remediation activities could be
substantial. In addition, as the owner or former owner of a contaminated site,
we may be subject to common law claims by third parties based on damages and
costs resulting from environmental contamination associated with the property.
If we become subject to significant environmental liabilities, our business,
financial condition, results of operations and cash flows could be materially
adversely affected.
The
geographic concentration of our portfolio may make our revenues and the value
of
our portfolio vulnerable to adverse changes in local economic
conditions
A
substantial amount of our outstanding loans are secured by properties located
in
the New York metropolitan area (including New Jersey) Tennessee and Florida,
although we originate and hold for investment loans secured by real property
located anywhere in the United States and Puerto Rico. A lack of geographical
diversification may make our mortgage portfolio more sensitive to local or
regional economic conditions, which may result in higher default rates than
might be incurred if our portfolio were more geographically
diverse.
We
face intense competition in acquiring desirable mortgage
investments
We
encounter significant competition from other mortgage REITs, commercial banks,
savings and loan associations, specialty finance companies, conduits, pension
funds, public and private lending companies, investment funds, hedge funds,
mortgage bankers and others. Many of our competitors are larger than us, may
have greater access to capital and other resources and may have other advantages
over us in providing certain services to borrowers. Competition may result
in
higher prices for mortgage assets, unfavorable loan to value ratios, lower
yields and a narrower spread of yields over borrowing costs. In addition, an
increase in funds available to lenders, or a decrease in borrowing activity,
may
increase competition for making loans and may result in loans available to
us
having a greater risk.
Our
revenues and the value of our portfolio are affected by a number of factors
that
affect investments in real estate generally
We
are
subject to the general risks of the real estate market. These include adverse
changes in general and local economic conditions, demographics, retailing trends
and traffic patterns, competitive overbuilding, casualty losses and other
factors beyond our control. The value of the collateral underlying our loans,
as
well as the real estate owned by us and by joint ventures in which we are an
equity participant, also may be negatively affected by factors such as the
cost
of complying with environmental regulations and liability under applicable
environmental laws, interest rate changes and the availability of financing.
Income from a commercial or multifamily residential property will also be
adversely affected if a significant number of tenants are unable to pay rent,
if
tenants terminate or cancel leases or if available space cannot be rented on
favorable terms. Operating and other expenses of properties, particularly
significant expenses such as real estate taxes, maintenance costs and casualty
and liability insurance costs, generally do not decrease when income decreases
and even if revenues increase, operating and other expenses may increase faster
than revenues.
Changes
in interest rates may harm our results of operations
Our
results of operations are likely to be harmed during any period of unexpected
or
rapid changes in interest rates. A substantial or sustained increase in interest
rates could harm our ability to originate mortgage loans or acquire
participations in mortgage loans. Interest rate fluctuations may also harm
our
earnings by causing an increase in mortgage prepayments or by changing the
spread between the interest rates on our borrowings and the interest rates
on
our mortgage assets.
Our
revenues and the value of our portfolio may be negatively affected by casualty
events occurring on properties securing our loans
We
require our borrowers to obtain, for our benefit, comprehensive 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 comprehensive 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 insurable.
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 all loans collateralized
by
such property. As a result, our returns and the value of our investment may
be
reduced.
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 Fredric H. Gould, chairman of our board of trustees, Jeffrey
A. Gould, our president and chief executive officer, and other members of senior
management to carry out our business and investment strategies. In addition
to
Jeffrey A. Gould, only three other executive officers, Mitchell Gould, our
executive vice president, Lonnie Halpern, a vice president and George Zweier
our
vice president and chief financial officer, and three other executive personnel
devote 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. In
addition, Jeffrey A. Gould devotes a limited amount of his business time to
entities affiliated with us. As we grow our business, we will 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.
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 and we intend to continue the relationships with such
entities in the future. Although our policy is to ensure that we receive 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,
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.
We
will be adversely affected by a decrease in the market value of, or cash
distributions paid on, shares of Entertainment Properties
Trust
The
closing market value of the shares of EPR owned by us at September 30, 2007
and
November 30, 2007 was $31.7 million and $33.3 million, respectively, while
our
cost basis was $8.2 million. At September 30, 2007, our balance sheet reflects
as an asset $34.9 million of available-for-sale securities, of which $31.7
million represents the market value of the shares of EPR owned by us on
September 30, 2007 and $25.1 million, or 11% of our shareholders’ equity,
represents the difference between our cost basis for such shares and the market
value for such shares. In fiscal 2007 we sold 384,800 shares of EPR for a book
gain of $19.4 million. We have no business relationship, affiliation with or
influence over the business or operations of EPR. Any substantial decrease
in
the market value of EPR shares, whether resulting from activities of EPR, its
management, market forces or otherwise, could result in a material decrease
in
our total assets, shareholders’ equity and on cash distributions to
shareholders.
Our
ownership of shares of EPR resulted in the recognition by us for the fiscal
year
ended September 30, 2007 of cash dividends of $2.2 million. If there is a
decrease in the EPR dividend for any reason, it would reduce the amount of
cash
distributions available for our shareholders. In addition, if the stock price
of
EPR were to decline, our profit from the sale of these shares would decline
or
could be eliminated.
We
have
established margin lines of credit collateralized primarily by the EPR shares
owned by us. At September 30, 2007, approximately $17.4 million was available
under these margin lines of credit, of which zero was outstanding. If we have
amounts outstanding under these margin lines of credit, a significant decrease
in the value of the EPR shares could result in a margin call and, if cash is
not
available from other sources, a sale of EPR shares may be required at a time
when we would prefer not to sell EPR shares, resulting in the possibility that
such shares could be sold at a loss.
Risks
Related to the REIT Industry
Failure
to qualify as a REIT would result in material adverse tax consequences and
would
significantly reduce cash available for distributions
We
operate so as to qualify as a REIT under the Internal Revenue Code of 1986,
as
amended. Qualification as a REIT involves the application of technical and
complex legal provisions for which there are limited judicial and administrative
interpretations. The determination of various factual matters and circumstances
not entirely within our control may affect our ability to qualify as a REIT.
In
addition, no assurance can be given that legislation, new regulations,
administrative interpretations or court decisions will not significantly change
the tax laws with respect to qualification as a REIT or the Federal income
tax
consequences of such qualification. If we fail to qualify as a REIT, we will
be
subject to Federal, state and local income tax (including any applicable
alternative minimum tax) on our taxable income at regular corporate rates and
would not be allowed a deduction in computing our taxable income for amounts
distributed to shareholders. In addition, unless entitled to relief under
certain statutory provisions, we would be disqualified from treatment as a
REIT
for the four taxable years following the year during which qualification is
lost. The additional tax would reduce significantly our net income and the
cash
available for distributions to shareholders.
We
are subject to certain distribution requirements that may result in our having
to borrow funds at unfavorable rates
To
obtain
the favorable tax treatment associated with being a REIT, we are required,
among
other things, to
distribute
to our shareholders at least 90% of our ordinary taxable income (subject to
certain adjustments) each year. To the extent that we satisfy the distribution
requirement, but distribute less than 100% of our taxable income, we are subject
to Federal corporate income tax on our undistributed taxable income. In
addition, we are subject to a 4% nondeductible excise tax on the amount, if
any,
by which certain distributions paid by us with respect to any calendar year
are
less than the sum of 85% of our ordinary income, 95% of our capital gain net
income and 100% of our undistributed income from prior years.
As
a
result of differences in timing between the receipt of income and the payment
of
expenses, and the inclusion of such income and the deduction of such expenses
in
arriving at taxable income, and the effect of nondeductible capital
expenditures, the creation of reserves and the timing of required debt service
(including amortization) payments, we may need to borrow funds on a short-term
basis in order to make the distributions to our shareholders necessary to retain
the tax benefits associated with qualifying as a REIT, even if we believe that
then prevailing market conditions are not generally favorable for such
borrowings. Such borrowings could reduce our net income and the cash available
for distributions to our shareholders.
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.
We
cannot assure you of our ability to pay dividends in the
future
We
intend
to pay quarterly dividends and to make distributions to our shareholders in
amounts such that all or substantially all of our taxable income in each year,
subject to certain adjustments, is distributed. This, along with other factors,
should enable us to qualify for the tax benefits accorded to a REIT under the
Code. We have not established a minimum dividend payment level and our ability
to pay dividends may be adversely affected by the risk factors described in
this
Annual Report on Form 10-K. All distributions will be made at the discretion
of
our board of trustees and will depend on our earnings, our financial condition,
maintenance of our REIT status and such other factors as our board of trustees
may deem relevant from time to time. We cannot assure you that we will be able
to pay dividends in the future.
Item
1B. Unresolved Staff Comments.
None.
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, which are based on certain
beliefs and assumptions and describe our future plans, strategies and
expectations, are generally identifiable by use of words such as “may,” “will,”
“will likely result,” “shall,” “believe,” “expect,” “intend,” “anticipate,”
“estimate,” “project” or similar expressions or variations thereof. You should
not rely on forward-looking statements since they 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. We do not intend
to update our forward looking statements. Factors which may cause actual results
to differ materially from current expectations include, but are not limited
to:
|
·
|
defaults
by borrowers in paying debt service on outstanding
loans;
|
|
·
|
an
inability to originate loans on favorable
terms;
|
|
·
|
increased
competition from entities engaged in mortgage lending;
|
|
·
|
general
and local economic and business
conditions;
|
|
·
|
general
and local real estate conditions;
|
|
·
|
the
impairment in the value of real property securing our loans due to
general
and local real estate conditions, resulting in loan loss
allowances;
|
|
·
|
changes
in Federal, state and local governmental laws and
regulations;
|
|
·
|
an
inability to retain our REIT qualification;
and
|
|
·
|
the
availability of and costs associated with sources of
liquidity.
|
Accordingly,
there can be no assurance that our expectations will be realized.
Executive
Officers of Registrant
Set
forth
below is a list of our executive officers whose terms will expire at our 2008
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, 2008.
Name
|
|
Office
|
|
|
|
Fredric
H. Gould*
|
|
Chairman
of the Board of Trustees
|
|
|
|
Jeffrey
A. Gould*
|
|
President
and Chief Executive Officer; Trustee
|
|
|
|
Mitchell
K. Gould
|
|
Executive
Vice President
|
|
|
|
Matthew
J. Gould*
|
|
Senior
Vice President; Trustee
|
|
|
|
Simeon
Brinberg**
|
|
Senior
Vice President; Senior Counsel; and Secretary
|
|
|
|
David
W. Kalish
|
|
Senior
Vice President, Finance
|
|
|
|
Israel
Rosenzweig
|
|
Senior
Vice President
|
|
|
|
Mark
H. Lundy**
|
|
Senior
Vice President, General Counsel; and Assistant
Secretary
|
|
|
|
George
E. Zweier
|
|
Vice
President, Chief Financial Officer
|
|
|
|
Lonnie
Halpern
|
|
Vice
President
|
|
|
|
* |
Fredric
H. Gould is the father of Jeffrey A. and Matthew J.
Gould.
|
** |
Simeon
Brinberg is the father-in-law of Mark H.
Lundy.
|
Mitchell
K. Gould (age 35), employed by us since May 1998 has been a Vice President
since
March 1999 and Executive Vice President since March 2007. From January 1998
until May 1998, Mr. Gould was employed by Bear Stearns Companies, Inc. where
he
was engaged in originating and underwriting commercial real estate loans for
securitization.
Simeon
Brinberg (age 73) has been our Secretary since 1983, a Senior Vice President
since 1988, and Senior Counsel since March 2006. Mr. Brinberg has been a Vice
President of Georgetown Partners, Inc., the managing general partner of Gould
Investors L.P., since October 1988. Gould Investors L.P. is primarily engaged
in
the ownership and operation of real estate properties held for investment.
Since
June 1989, Mr. Brinberg has been a Vice President of One Liberty Properties,
Inc. (currently a Senior Vice President), a REIT engaged in the ownership of
income producing real properties leased to tenants under long term leases.
Mr.
Brinberg is a member of the New York Bar and was engaged in the private practice
of law for approximately 30 years prior to 1988.
David
W.
Kalish (age 60) has been our Senior Vice President, Finance since August 1998.
Mr. Kalish was our Vice President and Chief Financial Officer from June 1990
until August 1998. He has been Chief Financial Officer of One Liberty
Properties, Inc. and Georgetown Partners, Inc. since June 1990. For more than
five years prior to June 1990, Mr. Kalish, a certified public accountant, was
a
partner of Buchbinder Tunick & Company LLP and its
predecessors.
Israel
Rosenzweig (age 60) has been a Senior Vice President since April 1998. Mr.
Rosenzweig has been a Vice President of Georgetown Partners, Inc. since May
1997
and since 2000 has been President of GP Partners, Inc., an affiliate of Gould
Investors L.P. which is engaged in providing advisory services in the real
estate and financial services industries to an investment advisor. He also
has
been a Senior Vice President of One Liberty Properties, Inc. since May
1997.
Mark
H.
Lundy (age 45) has been our General Counsel and Assistant Secretary since March
2006 and a Senior Vice President since March 2005. Prior to March 2005 and
from
1993 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. Mr. Lundy has been a Vice President of Georgetown
Partners, Inc. (currently Senior Vice President) since July 1990. He is a member
of the bars of New York and Washington, D.C.
George
E.
Zweier (age 43) has been employed by us since June 1998 and was elected Vice
President, Chief Financial Officer in August 1998. For approximately five years
prior to joining us, Mr. Zweier, a certified public accountant, was an
accounting officer with the Bank of Tokyo--Mitsubishi Limited in its New York
office.
Lonnie
Halpern (age 32) has been employed by us since August 2005 and was elected
a
Vice President in March 2007. For approximately four years prior to joining
us,
Mr. Halpern, a member of the bars of New York and Massachusetts, was an
associate at Goodwin Procter LLP, New York, N.Y. from September 2001 to March
2004 and Hogan & Hartson LLP, New York, N.Y. from April 2004 to July
2005.
Item
2. Properties.
Our
executive offices are located at 60 Cutter Mill Road, Great Neck, New York,
where we currently occupy approximately 12,000 square feet with Gould Investors
L.P., REIT Management Corp., One Liberty Properties, Inc. and other related
entities. The building in which our executive offices are located is owned
by a
subsidiary of Gould Investors L.P. For the year ended September 30, 2007, we
contributed $81,000 to the annual rent of $420,000 paid by Gould Investors
L.P.,
REIT Management Corp., One Liberty Properties, Inc., and related entities.
We
also lease, under a direct lease with the Gould Investors L.P. subsidiary,
an
additional 1,800 square feet directly adjacent to the 12,000 square feet at
an
annual rental of $58,000.
At
September 30, 2007, we did not own any single real property asset with a book
value equal to or greater than 10% of our total assets. At September 30, 2007
we
owned three properties, with a book value of $9.4 million (after direct write
downs for impairment) acquired in foreclosure or deed in lieu of foreclosure.
These three properties are (i) 28 cooperative apartments located in the
Washington Heights section of Manhattan, N.Y., (ii) an 80,000 square foot
shopping center located in Stuart, Florida, and (iii) a 21,000 square foot
vacant industrial building located in South Plainfield, New Jersey. Since
September 30, 2007, we acquired title in foreclosure to 174 condominium units
in
a 240 unit condominium conversion property located in a suburb of Orlando,
Florida.
Item
3. Legal Proceedings.
We
are
not a defendant in any material pending legal proceedings nor, to our knowledge,
is any material litigation threatened against us, other than routine litigation
arising in the ordinary course of business, which collectively are not expected
to have a material affect on our business, financial condition or results of
operation.
Item
4. Submission of Matters to a Vote of Security Holders.
There
were no matters submitted to a vote of our security holders during the fourth
quarter of the year ended September 30, 2007.
PART
II
Item
5. Market for the Registrant's Common Equity and Related Stockholder Matters
and
Issuer Purchases of Equity Securities.
Our
common shares of beneficial interest, or Beneficial Shares, are listed on the
New York Stock Exchange, or the NYSE. The following table shows for the periods
indicated, the high and low sales prices of the Beneficial Shares on the NYSE
as
reported on the Composite Tape and the per share dividend paid for the periods
indicated:
|
|
|
|
|
|
Dividend
|
|
Fiscal
Year Ended September 30,
|
|
High
|
|
Low
|
|
Per
Share
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
31.25
|
|
$
|
27.06
|
|
$
|
.58
|
|
Second
Quarter
|
|
|
32.00
|
|
|
27.65
|
|
|
.62
|
|
Third
Quarter
|
|
|
31.63
|
|
|
25.72
|
|
|
.62
|
|
Fourth
Quarter
|
|
|
26.22
|
|
|
15.25
|
|
|
.62
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
24.75
|
|
$
|
21.90
|
|
$
|
.52
|
|
Second
Quarter
|
|
|
27.42
|
|
|
23.80
|
|
|
.52
|
|
Third
Quarter
|
|
|
27.65
|
|
|
25.00
|
|
|
.54
|
|
Fourth
Quarter
|
|
|
32.35
|
|
|
25.33
|
|
|
.56
|
|
As
of
December 5, 2007, there were approximately 1,340 holders of record of our
Beneficial Shares and approximately 7,100 shareholders.
We
qualify as a REIT for Federal income tax purposes. In order to maintain that
status, we are required to distribute to our shareholders at least 90% of our
annual ordinary taxable income. The amount and timing of future cash
distributions will be at the discretion of our Board of Trustees and will depend
upon our financial condition, earnings, business plan, cash flow and other
factors. Provided we are not in default of the affirmative and negative
covenants contained in our revolving credit facility with North Fork Bank,
VNB
New York Corp., Signature Bank, and Manufacturers and Traders Trust Company,
the
credit facility does not preclude the payment by us of the cash distributions
necessary to maintain our status as a REIT for Federal income tax
purposes.
Equity
Compensation Plan Information
The
table
below provides information as of September 30, 2007 with respect to our
Beneficial Shares that may be issued under the BRT Realty Trust 1996 Stock
Option Plan and the BRT Realty Trust 2003 Incentive Plan:
|
|
|
|
|
|
Number
of
|
|
|
|
|
|
|
|
securities
|
|
|
|
|
|
|
|
remaining
|
|
|
|
|
|
|
|
available-for
|
|
|
|
Number
of
|
|
|
|
future
|
|
|
|
securities
|
|
|
|
issuance
under
|
|
|
|
to
be issued
|
|
Weighted-
|
|
equity
|
|
|
|
upon
exercise
|
|
average
|
|
compensation
|
|
|
|
of
outstanding
|
|
exercise
price
|
|
plans
- excluding
|
|
|
|
options,
|
|
of
outstanding
|
|
securities
|
|
|
|
warrants
and
|
|
options,
warrants
|
|
reflected
in
|
|
|
|
rights
|
|
and
rights
|
|
column
(a)
|
|
|
|
(a)
|
|
(b)
|
|
(c)
|
|
Equity
compensation plans approved by security holders
|
|
|
23,750
(1
|
)
|
$
|
9.00
|
|
|
181,515
|
|
Equity
compensation plans not approved by security holders
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
|
23,750
(1
|
)
|
$
|
9.00
|
|
|
181,515
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Does
not include 157,985 shares of restricted stock issued to officers,
directors, employees and consultants. None of these restricted shares
vest
until 2008, unless vesting is accelerated by our Compensation Committee
and Board of Trustees under special
circumstances.
|
Item
6. Selected Financial Information.
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 periods in the five years ended September 30, 2007. This table should
be
read in conjunction with the detailed information and financial statements
appearing elsewhere herein.
|
|
Fiscal
Years Ended
|
|
|
|
September
30,
|
|
|
|
(In
thousands, except for per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
Operating
statement data
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
$
|
42,900
|
|
$
|
37,488
|
|
$
|
25,491
|
|
$
|
17,661
|
|
$
|
13,891
|
|
Total
expenses (3)
|
|
|
30,570
|
|
|
20,708
|
|
|
11,975
|
|
|
9,114
|
|
|
5,862
|
|
Gain
on sale of available-for-sale securities
|
|
|
19,455
|
|
|
—
|
|
|
680
|
|
|
1,641
|
|
|
4,332
|
|
Income
from continuing operations
|
|
|
34,702
|
|
|
19,279
|
|
|
14,441
|
|
|
10,347
|
|
|
12,797
|
|
Discontinued
operations
|
|
|
368
|
|
|
792
|
|
|
1,773
|
|
|
1,655
|
|
|
886
|
|
Net
income (1)
|
|
|
35,070
|
|
|
20,071
|
|
|
16,214
|
|
|
12,002
|
|
|
13,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
per beneficial share: (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$
|
3.30
|
|
$
|
2.43
|
|
$
|
1.86
|
|
$
|
1.36
|
|
$
|
1.71
|
|
Discontinued
operations
|
|
|
.04
|
|
|
.10
|
|
|
.23
|
|
|
.22
|
|
|
.12
|
|
Basic
earnings per share
|
|
$
|
3.34
|
|
$
|
2.53
|
|
$
|
2.09
|
|
$
|
1.58
|
|
$
|
1.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations (1)
|
|
$
|
3.29
|
|
$
|
2.42
|
|
$
|
1.85
|
|
$
|
1.34
|
|
$
|
1.68
|
|
Discontinued
operations
|
|
|
.04
|
|
|
.10
|
|
|
.23
|
|
|
.21
|
|
|
.12
|
|
Diluted
earnings per share
|
|
$
|
3.33
|
|
$
|
2.52
|
|
$
|
2.08
|
|
$
|
1.55
|
|
$
|
1.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
distribution per common share
|
|
$
|
2.44
|
|
$
|
2.14
|
|
$
|
1.96
|
|
$
|
1.79
|
|
$
|
1.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
sheet data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
328,109
|
|
|
368,426
|
|
|
264,837
|
|
|
196,796
|
|
|
138,541
|
|
Earning
real estate loans (2)
|
|
|
185,899
|
|
|
283,282
|
|
|
192,012
|
|
|
132,229
|
|
|
63,733
|
|
Non-earning
real estate loans (2)
|
|
|
63,627
|
|
|
1,346
|
|
|
1,617
|
|
|
3,096
|
|
|
3,145
|
|
Allowance
for possible losses
|
|
|
8,917
|
|
|
669
|
|
|
669
|
|
|
881
|
|
|
881
|
|
Investment
in unconsolidated ventures at equity
|
|
|
14,167
|
|
|
9,608
|
|
|
8,716
|
|
|
7,793
|
|
|
6,930
|
|
Available-for-sale
securities at market
|
|
|
34,936
|
|
|
53,252
|
|
|
48,453
|
|
|
41,491
|
|
|
36,354
|
|
Borrowed
funds
|
|
|
20,000
|
|
|
141,464
|
|
|
110,932
|
|
|
53,862
|
|
|
4,755
|
|
Junior
subordinated notes
|
|
|
56,702
|
|
|
56,702
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Mortgage
payable
|
|
|
2,395
|
|
|
2,471
|
|
|
2,542
|
|
|
2,609
|
|
|
2,680
|
|
Shareholders’
equity
|
|
|
235,175
|
|
|
154,435
|
|
|
142,655
|
|
|
132,063
|
|
|
125,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Includes
$19,455,000, $680,000, $1,641,000 and $4,332,000, or $1.85, $.09,
$.21 and
$.57 per share on a diluted basis for the fiscal years ended September
30,
2007, 2005 and 2004 and 2003, respectively, from gain on sale of
available-for-sale-securities. There were no gains from the sale
of
available-for-sale securities in
2006.
|
(2) |
Earning
and non-earning loans are presented without deduction of the related
allowance for possible losses and deferred fee
income.
|
(3) |
Includes
provision for loan loss in the amount of
$9,300,000.
|
Item
7. Management's Discussion and Analysis of Financial Condition and Results
of
Operations
General
Our
primary business operations involve the origination, holding for investment
and
servicing of mortgage loans. Our profitability in any year is most affected
by
(i) the principal amount of loans originated and the payoff and pay down of
outstanding mortgage loans (both factors significantly affecting the average
balance of loans outstanding during such year), (ii) non-earning loans during
such year, and (iii) the allowance for possible losses taken in any such year.
These factors impact, to a significant extent, the interest, fee income and
net
income earned during any year. We cannot project the principal amount or type
of
loans which will be originated in any year, those loan applications submitted
to
us which will be approved by our loan committee or Board of Trustees, as the
case may be, or the loans which become non-earning or impaired in any year.
Due
to the short term nature of our loan portfolio and our “no prepayment penalty”
policy, we also cannot project the rate of payoffs or paydowns against our
loan
portfolio in any year.
Both
the
2007 fiscal year and the 2006 fiscal year reflect an increase in interest and
fee income compared to the preceding fiscal year. The primary reason for these
increases is the increase in the average balance of loans outstanding during
fiscal 2007 compared to fiscal 2006 and fiscal 2006 compared to fiscal 2005.
We
experienced an increase in the average balance of loans outstanding in fiscal
2007 compared to fiscal 2006 even though there was a 61% decrease in the
principal amount of loans originated by us in fiscal 2007 as compared to 2006.
We attribute the decrease in originations to a weakened environment in the
real
estate and credit markets as many of our borrowers did not have a need for
our
short-term lending as their activity in the real estate market slowed or was
curtailed. Offsetting the decrease in loan originations in fiscal 2007 was
the
decrease in payoffs and paydowns of existing loans and a resulting increase
in
loan extensions as the weakened environment in the credit markets made it more
difficult for our borrowers to refinance. The increase in the average balance
of
loans outstanding in fiscal 2006 compared to fiscal 2005 was essentially the
result of a 19% increase in loan originations year over year caused primarily
by
the favorable real estate market which existed in 2006.
Beginning
in the third quarter of fiscal year 2007, we realized an increase in the number
of borrowers defaulting on their monetary obligations to us, primarily
non-payment of interest. We attribute these defaults to reduced liquidity in
the
markets for mortgage products. Although this reduction in liquidity has been
acute, primarily in the single family home and sub-prime mortgage lending
markets, markets in which we do not participate, there was an indirect effect
on
us. First, as a result of the weakness in the residential condominium sales
market, compounded by the problems in the sub-prime mortgage and the related
collateralized debt obligation markets, potential purchasers of individual
residential condominium units had difficulty in obtaining mortgage loans. As
a
result our borrowers engaged in the sale of residential condominium units in
connection with condominium conversions were unable to close on the sale of
units and in some cases unable to service their debt to us. Second, the
tightening of credit standards by institutions directly impacted the ability
of
our borrowers to refinance and repay loans due to us. At September 30, 2007
(a)
seven outstanding loans, aggregating $63,627,000 in principal amount (before
allowances), of which three loans aggregating $37.8 million involved condominium
conversions, were categorized as non-earning, (b) foreclosure actions were
pending concerning these loans, (c) we owned $9,355,000 of real estate assets
taken back in foreclosure and (d) in the current fiscal year we added $9,300,000
to our loan loss allowances. Since September 30, 2007, we have acquired an
additional property in foreclosure which will be reflected as real estate held
for sale with a book value of approximately $17,125,000 at December 31,
2007.
2007
vs. 2006
Interest
on real estate loans increased to $33,604,000 for the year ended September
30,
2007, as compared to $29,527,000 for the year ended September 30, 2006, an
increase of $4,077,000, or 14%. During the current fiscal year, we experienced
an increase in the average balance of loans outstanding from $216,400,000 in
the
prior fiscal year to $279,000,000. This resulted in an increase in interest
income of $8,359,000. A decline in the interest rate earned on our loan
portfolio from 13.62% to 13.34% resulted in a decline in interest income of
$623,000. Additionally during the current fiscal year we experienced an increase
in non-earning loans. These non-earning loans resulted in a decline in interest
income of $ 3,660,000 in fiscal 2007.
Fee
income increased by $1,417,000 in the fiscal year ended September 30, 2007.
Extension fee income increased by $1,074,000 as many borrowers exercised
extension options. Fee amortization increased by $151,000 primarily the result
of accelerated amortization from the early payoff of loans. The remaining
increase of $192,000
was
the
result of fee income earned on loans that did not close. Comparison of fee
income, period versus period, is not consistent with loan originations as fees
are amortized over the original term and are accelerated upon prepayment of
a
loan.
Operating
income from real estate properties increased by $272,000, or 22%, to $1,486,000
in the fiscal year ended September 30, 2007 from $1,214,000 in the fiscal year
ended September 30, 2006. This increase is the result of additional rental
income received on our Yonkers, New York property in the current fiscal year.
In
the prior fiscal year there was a vacancy at our Yonkers, New York property
for
a portion of the year due to the bankruptcy of one of the two tenants at this
property. This space was re-leased in July 2006 to a new tenant.
Other
income, primarily investment income, declined by $354,000, or 12%, from
$3,011,000 in the fiscal year ended September 30, 2006 to $2,657,000 in the
fiscal year ended September 30, 2007. This decline was primarily due to the
sale
of 384,800 shares of EPR in fiscal 2007, as a result of which we received less
dividend income of $732,000. This decline was offset by an increase in
investment income of $378,000 resulting from an increase in our invested
balances and an increase in the dividend rate paid on the remaining shares
of
EPR that we own.
Interest
expense on borrowed funds declined to $10,177,000 in the fiscal year ended
September 30, 2007 from $10,718,000 in the fiscal year ended September 30,
2006.
This decline of $541,000, or 5%, is due to a decline in the average balance
of
borrowed funds outstanding. The average balance of borrowed funds outstanding
declined by $20.7 million, from $135.1 million in the prior fiscal year to
$114.4 million in the current fiscal year. This resulted in a decrease in
interest expense of $1,338,000. This decline was offset in part by an increase
in the average rate paid (excluding fee amortization) on our borrowings from
7.41% to 7.91% causing a $362,000 increase in interest expense. In addition,
the
amortization of borrowing costs accounted for an increase in interest expense
of
$435,000.
The
advisor’s fee paid to REIT Management Corp., which is calculated pursuant to the
Advisory Agreement, was amended effective January 1, 2007 to provide for a
reduction in the fee paid by us to the Advisor. Accordingly, the fee paid to
the
Advisor decreased by $374,000 or 14% for the fiscal year ended September 30,
2007. The amendment to the Advisory Agreement caused a decline of $805,000
in
the advisor’s fee. The decline was offset by an increase in the fee of $431,000,
resulting from an increased level of invested assets, primarily loans, the
basis
upon which the fee is calculated.
The
aggregate provision for loan loss was $9,300,000 in the fiscal year ended
September 30, 2007. Management analyzed the loan portfolio and determined that
due to the current condition of the real estate and credit markets, a general
decline in the value of real estate in various regions of the country, including
Florida, where a portion of our collateral is located, and the financial
condition of some of our borrowers, it was necessary to record a loan loss
provision to reflect a decrease in the value of the collateral securing several
loans. The $9,300,000 loan loss provision was taken against six loans with
an
aggregate principal balance of $70,823,000 of which $61,648,000 was outstanding
at September 30, 2007. No provisions were taken in the fiscal year ended
September 30, 2006.
General
and administrative expenses increased to $6,709,000 in the fiscal year ended
September 30, 2007 from $5,809,000 in the fiscal year ended September 30, 2006.
This increase of $900,000, or 15%, was the result of several factors. We
incurred increased legal and professional expenses of $574,000 due to increased
foreclosure and loan workout activity, the renegotiation of our Advisory
Agreement, and the fees of an independent compensation consultant retained
by
the Compensation Committee of our Board of Trustees. We also recognized
increased payroll and related expenses of $257,000 due to increased staffing
and
salaries, and the amortization of restricted shares issued in January 2007.
Advertising, promotional and travel expense also increased by $183,000 as we
continued to increase our marketing efforts. The expenses allocated to us
pursuant to a shared services agreement among us and related entities for legal
and accounting services increased by $125,000 in the year ended September 30,
2007, primarily as the result of the increased level of foreclosure and workout
activity, and services related to the public offering which took place in
December 2006. The remaining increase in expense of $57,000 was due to higher
operating expenses in several categories, none of which was significant.
Offsetting these increases was the payment in the fiscal year ended September
30, 2006, of $296,000 in legal, professional and printing expenses related
to a
contemplated public offering which was cancelled due to adverse market
conditions.
Other
taxes increased by $687,000, or 122%, to $1,250,000 for the fiscal year ended
September 30, 2007 from $563,000 in the fiscal year ended September 30, 2006.
This was the result of an increase in the amount of
federal
excise tax recorded. The federal excise tax is based on taxable income generated
during the current fiscal year but not distributed.
Operating
expenses relating to real estate owned, declined by $125,000, or 16%, to
$666,000 for the fiscal year ended September 30, 2007 from $791,000 in the
fiscal year ended September 30, 2006. This was the result of reduced operating
expenses at our Yonkers property.
Equity
in
earnings (loss) of unconsolidated joint ventures increased by $1,179,000, from
a
loss of $7,000 in the fiscal year ended September 30, 2006 to income of
$1,172,000 in the fiscal year ended September 30, 2007. In the current fiscal
year we recognized $1,079,000 of income related to our joint venture with CIT.
This joint venture began operations in the current fiscal year and accounted
for
significantly all the earnings in this category. In the prior fiscal year we
recorded our share of a loss from the operations of a joint venture that owned
a
property located in Atlanta, Georgia, which was sold in December 2005. This
loss
was the result of increased interest expense of $882,000, resulting from the
prepayment of the first mortgage upon the sale of the property and a loss from
operations at the property. Our share of these items totaled $999,000.
Offsetting these declines was the receipt by us of $757,000, which was our
share
of an early termination fee paid by a tenant to our joint venture which owned
a
property located in Dover, Delaware and income from operations during the prior
fiscal year. This property was sold in the first fiscal quarter of
2007.
During
the fiscal year ended September 30, 2007, we realized a gain of $1,819,000
from
the disposition of real estate related to unconsolidated joint ventures which
represented our share of the gain from the sale in November 2006 of a corporate
and retail center located in Dover, Delaware. During the fiscal year ended
September 30, 2006, we realized a gain on disposition of real estate related
to
unconsolidated joint ventures, the result of the sale in December 2005 of a
multi-family apartment property located in Atlanta, Georgia. The venture
recognized a gain of approximately $5.1 million, of which we recorded $2,531,000
as our share.
Gain
on
sale of available-for-sale securities increased to $19,455,000 in the fiscal
year ended September 30, 2007. In the 2007 fiscal year, we sold 384,800 shares
of EPR and other miscellaneous securities which resulted in net proceeds of
$24,597,000 and had a cost basis of $5,142,000. There were no sales of
securities in fiscal 2006.
Income
from discontinued operations declined by $424,000 from $792,000 in the fiscal
year ended September 30, 2006 to $368,000 in the fiscal year ended September
30,
2007. The discontinued operations in the 2007 fiscal year represent the
operation of two properties acquired in foreclosure in the 2007 fiscal year
and
the operation of a property in Charlotte, North Carolina that was disposed
of in
the 2007 fiscal year. A gain of $352,000 was recognized on the sale of the
Charlotte, North Carolina property. Discontinued operations in the 2006 fiscal
year reflect the operations of the Charlotte, North Carolina property, acquired
in foreclosure in January 2005, and a $726,000 gain from the sale of two
cooperative apartment units. The remaining decline of $142,000 related to
several properties and included a prepayment penalty on a
refinance.
2006
vs. 2005
Interest
on real estate loans increased to $29,527,000 for the year ended September
30,
2006, as compared to $18,815,000 for the year ended September 30, 2005, an
increase of $10,712,000, or 57%. During the 2006 fiscal year we experienced
an
increase in the volume of loan originations that caused the average balance
of
loans outstanding to increase by 49% to $216,400,000 in the 2006 fiscal year
from $145,700,000 in the 2005 fiscal year. This resulted in an increase in
interest income of $9,541,000. Increases in the prime rate of interest caused
the interest rate earned on our portfolio to increase from 12.63% to 13.62%,
resulting in a $1,539,000 increase in interest income. We also realized $51,000
of additional interest income in fiscal 2006 from the collection of interest
on
a loan that was previously in default. Offsetting these increases was a decline
in interest income of $420,000 resulting from the collection of interest in
excess of the stated rate on a loan that went into default and was paid in
full
in the 2005 fiscal year.
Fee
income increased by $1,002,000 in the fiscal year ended September 30, 2006.
This
increase is consistent with the increased loan volume we experienced in the
2006
fiscal year.
Operating
income from real estate properties increased by $231,000, or 23%, to $1,214,000
in the fiscal year ended September 30, 2006 from $983,000 in the fiscal year
ended September 30, 2005. This increase is the result of the write off in the
2005 fiscal year of $370,000 of straight line rent related to a retail tenant
that filed for
bankruptcy
in October 2005. This was offset by the loss of rental income of $242,000 on
this space in the 2006 year. This space was re-leased in July 2006 to a new
tenant. Additionally, in fiscal 2006 we recorded $85,000 of additional income
from the refund of real estate taxes on a property that was sold in a prior
year.
Other
income, primarily investment income, increased by $52,000, or 2%, from
$2,959,000 in the fiscal year ended September 30, 2005 to $3,011,000 in the
fiscal year ended September 30, 2006. This increase was partially the result
of
a 10% increase in the annual dividend paid on the EPR shares we own and an
increase in the average balance of other investments. Offsetting these increases
was a decline of $365,000 from the payoff of a loan in fiscal 2005, a portion
of
which had been previously written off.
Interest
expense on borrowed funds increased to $10,718,000 in the fiscal year ended
September 30, 2006 from $4,324,000 in the fiscal year ended September 30, 2005.
This increase of $6,394,000, or 148%, is due to an increase in the average
balance of borrowed funds outstanding to fund our increased loan originations.
The average balance of borrowed funds outstanding increased by $68.9 million,
from $66.2 million in the prior fiscal year to $135.1 million in the current
fiscal year. This caused an increase in interest expense of $5,495,000. An
increase in the average rate paid on our borrowings from 6.44% to 7.93% caused
$899,000 of the increase in interest expense. The average interest rate includes
the amortization of deferred borrowing costs and a .3% annual fee, based on
the
value of the assets in the margin account, to maintain the margin
account.
The
advisor’s fee paid to REIT Management Corp., which is calculated pursuant to the
Advisory Agreement and is based on invested assets, increased $820,000, or
44%,
in the fiscal year ended September 30, 2006 to $2,682,000 from $1,862,000 in
the
fiscal year ended September 30, 2005. The increase is a result of a larger
outstanding balance of invested assets, primarily loans, in the current fiscal
year, directly resulting in an increase in the fee.
General
and administrative expenses increased to $5,809,000 in the fiscal year ended
September 30, 2006 from $4,398,000 in the fiscal year ended September 30, 2005.
This increase of $1,411,000, or 32%, was the result of several factors. Payroll
and payroll related expenses increased by $730,000, as a result of staff
additions, increased commissions paid to loan originators as a result of the
increase in loan originations and restricted stock amortization. In the fiscal
year ended September 30, 2006, we incurred $296,000 in legal, professional
and
printing expenses related to a contemplated public offering which was cancelled
due to adverse market conditions. Professional fees also increased by $111,000
primarily due to foreclosure related legal expenses. The expenses allocated
to
us pursuant to a shared services agreement among us and related entities for
legal and accounting services increased by $73,000, in the year ended September
30, 2006, primarily as the result of professional services related to the
negotiation of our new credit facility (which closed in January 2006) and to
the
cancelled public offering. Advertising expense increased by $117,000, as we
continued to expand our marketing efforts. The remaining increase in expense
of
$84,000 was due to higher operating expenses in several categories, none of
which was significant.
Other
taxes increased by $146,000, or 35%, to $563,000 for the fiscal year ended
September 30, 2006 from $417,000 in the fiscal year ended September 30, 2005.
This was the result of an increase in the amount of federal excise tax recorded.
The federal excise tax is based on taxable income generated during the current
fiscal year but not distributed.
Equity
in
(loss) earnings of unconsolidated joint ventures decreased by $264,000, or
103%,
from $257,000 in the fiscal year ended September 30, 2005 to a loss of $7,000
in
the fiscal year ended September 30, 2006. In the fiscal year ended September
30,
2006, we experienced an increased operating loss of $557,000 from the operations
of a joint venture that owned a property located in Atlanta, Georgia, which
was
sold in December 2005. This increased loss was due to increased interest expense
of $882,000, resulting from the prepayment of the first mortgage upon the sale
of the property. Additionally, the 2005 fiscal year contains an increase in
income of $200,000 from another joint venture relating to the sale of
cooperative apartment units. Offsetting these declines was the receipt by us
of
$437,000, our share of an early termination fee paid by a tenant to our joint
venture which owned a property located in Dover, Delaware.
During
the fiscal year ended September 30, 2006, we realized a gain on disposition
of
real estate related to unconsolidated joint ventures, the result of the sale
in
December 2005 of a multi-family apartment property located in Atlanta, Georgia.
The venture recognized a gain of approximately $5.1 million, of which we
recorded $2,531,000 as our share.
Gain
on
sale of available-for-sale securities declined $680,000, or 100%, to zero in
the
fiscal year ended September 30, 2006. In the prior fiscal year, we sold 23,900
shares of EPR and other miscellaneous securities which resulted in net proceeds
of $1,059,000 and had a cost basis of $379,000. There were no securities sales
in the current year.
Income
from discontinued operations declined $981,000 from $1,773,000 in the fiscal
year ended September 30, 2005 to $792,000 in the fiscal year ended September
30,
2006. Discontinued operations in the current fiscal year reflect the operations
of a property located in Charlotte, North Carolina, acquired in foreclosure
in
January 2005, and a $726,000 gain from the sale of two cooperative apartment
units. The discontinued operations in the prior fiscal year reflect the results
of operations of the Charlotte property and the operations and gain on sale
from
a property located in Rock Springs, Wyoming, which we sold in July
2005.
Liquidity
and Capital Resources
We
are
primarily engaged in originating and holding for investment senior and junior
commercial mortgage loans secured by real property in the United States. From
time to time, we also participate as both an equity investor in, and as a
mortgage lender to, joint ventures which acquire income-producing real property.
Our focus is to originate loans secured by real property, which generally have
high yields and are short term or bridge loans, with an average duration ranging
from six months to three years. Repayments to us of real estate loans in the
amount of $243.2 million are due during the twelve months ending September
30,
2008, including $65.1 million due on demand. The availability of mortgage
financing secured by real property and the market for buying and selling real
estate is cyclical. In addition, the sale of condominium units by borrowers
involved in converting multi-family residential properties and hotel properties
to condominium ownership is dependent on market conditions for such product
in
the geographic area in which the property is located and mortgage availability
for buyers of this product. Since approximately June 2007 there has been a
tightening of credit standards by institutions and a resulting decrease in
mortgage originations. Since mortgage refinancing, and sale of properties
(including the sale of individual residential condominium units by borrowers
engaged in condominium conversions) are the principal sources for the generation
of funds by our borrowers to repay our outstanding real estate loans, we cannot
project the portion of loans maturing during the next twelve months which will
be paid or the portion of loans which will be extended for a fixed term or
on a
month to month basis.
Credit
Facilities
We
have a
revolving credit facility with a group of banks consisting of North Fork Bank,
VNB New York Corp., Signature Bank and Manufacturers and Traders Trust Company.
Under the revolving credit facility, North Fork Bank, VNB New York Corp.,
Signature Bank and Manufacturers and Traders Trust Company make available to
us
up to an aggregate of $185 million on a revolving basis. The credit facility
matures on February 1, 2008 and may be extended for two one year periods for
a
fee of $462,500 for each extension. We recently extended the credit facility
to
February 1, 2009 by exercising our extension option and paid the fee for such
extension. Under the credit facility, we are required to maintain cash or
marketable securities at all times of not less than $15 million. Borrowings
under the credit facility are secured by specific receivables and the facility
provides that the amount borrowed will not exceed (1) 65% of first mortgages,
plus (ii) 50% of second mortgages plus (iii) the fair market value of certain
owned real estate pledged to the participating banks and the sum of (ii) and
(iii) may not exceed $22.5 million and 15% of the borrowing base. At September
30, 2007, $81.9 million was available to be drawn based on the lending formula
under our credit facility and $20 million 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 September
30,
2007, $17.4 million was available under the margin lines of credit, of which
zero was outstanding. If the value of the EPR shares (our principal securities
investment) were to decline, the available funds under the margin lines of
credit would decline.
Trust
Preferred Securities
On
March
21, 2006, we issued 30-year subordinated notes to BRT Realty Trust Statutory
Trust I, an unconsolidated affiliate of our company. The Statutory Trust was
formed to issue $774,000 worth of common securities (all of the Statutory
Trust's common securities) to us and to sell $25 million of preferred securities
to third party investors. The notes pay interest quarterly at a fixed rate
of
8.23% per annum for ten years at which time they
convert
to a floating rate of LIBOR plus 300 basis points. The Statutory Trust remits
dividends to the common and preferred security holders on the same terms as
the
subordinated notes. The subordinated notes and trust preferred securities mature
in April 2036 and may be redeemed in whole or in part anytime after five years,
without penalty, at our option. To the extent we redeem subordinated notes,
the
Statutory Trust is required to redeem a corresponding amount of trust preferred
securities.
On
April
27, 2006, we issued 30-year subordinated notes to BRT Realty Trust Statutory
Trust II, an unconsolidated affiliate of our company. The Statutory Trust was
formed to issue $928,000 worth of common securities (all of the Statutory
Trust’s common securities) to us and to sell $30 million of preferred securities
to third party investors. The notes pay interest quarterly at a fixed rate
of
8.49% per annum for ten years at which time they convert to a floating rate
of
LIBOR plus 290 basis points. The Statutory Trust remits dividends to common
and
preferred security holders on the same terms as the subordinated notes. The
subordinated notes and trust preferred securities mature in April 2036 and
may
be redeemed in whole or in part anytime after five years, without penalty,
at
our option. To the extent we redeem subordinated notes, the Statutory Trust
is
required to redeem a corresponding amount of trust preferred
securities.
The
trust
preferred securities are treated as debt for financial statement purposes.
The
net proceeds to us from the sale of the subordinated notes has been used, and
will continue to be used by us to provide capital to fund our loan originations.
The obligations relating to the trust preferred securities are subordinate
and
junior in right of payment to all of our present and future non-affiliated
senior indebtedness, including our revolving credit facility, and are considered
as equity for the purpose of calculating the covenants under our revolving
credit facility.
Cash
from Operations
During
the twelve months ended September 30, 2007, we generated cash of $21.2 million
from operating activities, $152.1 million from collections from real estate
loans, $24.6 million from the sale of available for sale securities and $77.1
million from the issuance of 2.9 million shares of beneficial interest in an
underwritten public offering. These funds, in addition to cash on hand were
used
primarily to fund real estate loan originations of $120.3 million, to reduce
bank borrowings by $121.4 million, to make equity investments totaling $12.9
million in joint ventures, and to pay cash distributions to our shareholders
of
$22.9 million.
We
will
satisfy our liquidity needs in the year ending September 30, 2008 from cash
and
cash investments on hand, the credit facility with North Fork Bank, VNB New
York
Corp., Signature Bank and Manufacturers and Traders Trust Company, availability
from our margin lines of credit, interest and principal payments received on
outstanding real estate loans, net cash flow generated from the operation and
sale of real estate assets and any funds generated from our sale of available
for sale securities.
We
have
no off-balance sheet arrangements.
Disclosure
of Contractual Obligations
The
following table sets forth as of September 30, 2007 our known contractual
obligations:
|
|
Payment
due by Period
|
|
|
|
|
|
Less
than
|
|
1-3
|
|
3-5
|
|
More
than
|
|
|
|
Total
|
|
1
Year
|
|
Years
|
|
Years
|
|
5
Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term
Debt Obligations
|
|
$
|
59,097,000
|
|
$
|
80,000
|
|
$
|
177,000
|
|
$
|
2,138,000
|
|
$
|
56,702,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
Lease Obligations
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Lease Obligation
|
|
|
987,000
|
|
|
58,000
|
|
|
116,000
|
|
|
116,000
|
|
|
697,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
Obligations
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Long-Term Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reflected
on Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet Under GAAP
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
60,084,000
|
|
$
|
138,000
|
|
$
|
293,000
|
|
$
|
2,254,000
|
|
$
|
57,399,000
|
|
Outlook
The
real
estate business is cyclical and to a large extent depends, among other factors,
upon national and local business and economic conditions, government economic
policies and the level and volatility of interest rates. A difficult or
declining real estate market in the New York metropolitan area, in the states
of
Tennessee and Florida, or in other parts of the country and a recessionary
economy could potentially have the following adverse effects on our business:
(i) an increase in loan defaults which will result in decreased interest and
fees on our outstanding real estate loans; (ii) an increase in loan loss
reserves; (iii) an increase in expenses incurred in foreclosures and
restructurings; (iv) a decrease in loan originations; (v) a decrease in rental
income from properties owned by us or joint ventures in which we are a venture
participant; and (vi) an increase in operating expenses related to real estate
properties. As the result of a more difficult real estate environment
(particularly in the State of Florida) and the disruptions in the credit markets
in the second half of 2007, we experienced an increase in loan defaults, an
increase in loan loss reserves, an increase in foreclosure actions and the
expenses related to such actions, and a decrease in loan originations. We cannot
project if or when these trends will stabilize or reverse.
Since
approximately 99% of our loan portfolio at September 30, 2007 provides for
adjustable interest rates with stated minimum interest rates, an increase or
decrease in interest rates should not have a material adverse effect on our
revenues and net income. Interest on our mortgage loans is payable to us
monthly.
Cash
Distribution Policy
We
have
elected to be taxed as a REIT under the Internal Revenue Code since our
organization. To qualify as a REIT, we must meet a number of organizational
and
operational requirements, including a requirement that we distribute currently
to our shareholders at least 90% of our adjusted ordinary taxable income. It
is
the current intention of our management to comply with these requirements and
maintain our REIT status. As a REIT, we generally will not be subject to
corporate Federal income tax on taxable income we distribute currently in
accordance with the Code and applicable regulations to shareholders. If we
fail
to qualify as a REIT in any taxable year, we will be subject to Federal income
taxes at regular corporate rates and may not be able to qualify as a REIT for
four subsequent tax years. Even if we qualify for Federal taxation as a REIT,
we
may be subject to certain state and local taxes on our income and to Federal
income and excise taxes on undistributed taxable income, i.e., taxable income
not distributed in the amounts and in the time frames prescribed by the Code
and
applicable regulations thereunder.
For
tax
purposes, we report on a calendar year basis. For financial reporting purposes
our fiscal year is September 30th.
We
distributed substantially all of our taxable income for calendar 2006 by October
2007. We estimate taxable income for calendar 2007 will be approximately $39.7
million, of which approximately $20.6 million is expected to represent capital
gain income. To comply with the time frames prescribed by the Code and the
applicable regulations thereunder, at least 90% of our calendar 2007 ordinary
taxable income is required to be declared by September 15, 2008 and, assuming
we
continue to pay quarterly dividends on or about the 1st
business
day of each calendar quarter (January, April, July and October), distributed
by
the first business day in October 2008.
It
is our
intention to pay to our shareholders within the time periods prescribed by
the
Code substantially all of our annual taxable income, including gains from the
sale of real estate and recognized gains on sale of available-for-sale
securities.
Significant
Accounting Policies
Our
significant accounting policies are more fully described in Note 1 to our
consolidated financial statements. The preparation of financial statements
and
related disclosure in conformity with accounting principles generally accepted
in the United States requires management to make certain judgments and estimates
that affect the amounts reported in the consolidated financial statements and
accompanying notes. Certain of our accounting policies are particularly
important to understand our financial position and results of operations and
require the application of significant judgments and estimates by our
management; as a result they are subject to a degree of uncertainty. These
significant accounting policies include the following:
Allowance
for Possible Losses
We
review
our mortgage portfolio, real estate assets underlying our mortgage portfolio
and
owned by us and real estate assets owned by joint ventures in which we are
an
equity participant on a quarterly basis to ascertain if there has been any
impairment in the value of the real estate assets underlying our loans or any
impairment in the value of any owned real estate assets, in order to determine
if there is a need for a provision for an allowance for possible losses against
our real estate loans or an impairment allowance against owned real estate
assets.
In
reviewing the value of the collateral underlying our loan portfolio, our real
estate assets, and the real estate assets owned by joint ventures in which
we
are an equity participant, we seek to arrive at the fair value of the underlying
collateral of such real estate on an individual basis by using one or more
valuation techniques, such as comparable sales, discounted cash flow analysis
or
replacement cost analysis. Determination of the fair value of the underlying
collateral of the real estate requires significant judgment, estimates and
discretion by management. Real estate assets held for use and real estate assets
owned by joint ventures are evaluated for indicators of impairment using an
undiscounted cash flow analysis. If that analysis suggests that the undiscounted
cash flows to be generated by the property will be insufficient to recover
our
investment, an impairment provision will be calculated based upon the excess
of
the carrying amount of the property over its fair value. Real estate assets
which are held for sale are valued at the lower of the recorded cost or
estimated fair value, less the cost to sell. We do not obtain any independent
appraisals of either the real property underlying our loans or the real estate
assets which are owned by us and by the joint ventures in which we are an equity
participant, but we rely on our own “in-house” analysis and valuations. Any
valuation allowances taken with respect to our loan portfolio or real estate
assets reduces our net income, assets and shareholders’ equity to the extent of
the amount of the valuation allowance, but it will not affect our cash flow
until such time as the property is sold. For the fiscal year ended September
30,
2007, $9.3 million of additional allowances for loan losses were recorded
against our mortgage portfolio.
Revenue
Recognition
We
recognize interest income and rental income on an accrual basis, unless we
make
a judgment that impairment of a loan or of real estate owned renders doubtful
collection of interest or rent in accordance with the applicable loan documents
or lease. In making a judgment as to the collectibility of interest or rent,
we
consider, among other factors, the status of the loan or property, the
borrower’s or tenant’s financial condition, payment history and anticipated
events in the future. Income recognition is suspended for loans when, in the
opinion of management, a full recovery of income and principal becomes doubtful.
Income recognition is resumed when the loan becomes contractually current and
continued performance is demonstrated. Accordingly, management must make a
significant judgment as to whether to treat a loan or real estate owned as
impaired. If we make a decision to treat a “problem” loan or real estate asset
as not impaired and therefore continue to recognize the interest and rent as
income on an accrual basis, we could overstate income by recognizing income
that
will not be collected and the uncollectible amount will ultimately have to
be
written off. The period in which the uncollectible amount is written off could
adversely affect taxable income for a specific year and our ability to pay
cash
distributions.
Item
7A.
Quantitative and Qualitative Disclosure About Market Risk.
Our
primary component of market risk is interest rate sensitivity. Our interest
income, and to a lesser extent our interest expense, are subject to changes
in
interest rates. We seek to minimize these risks by originating loans that are
indexed to the prime rate, with a stated minimum interest rate, and borrowing,
when necessary, from our available revolving bank credit lines which are indexed
to LIBOR. At September 30, 2007, approximately 99% of our portfolio was
comprised of variable rate loans tied primarily to the prime rate. Accordingly,
changes in the prime interest rate would affect our net interest income. When
determining interest rate sensitivity, we assume that any change in interest
rates is immediate and that the interest rate sensitive assets and liabilities
existing at the beginning of the period remain constant over the period being
measured. We assessed the market risk for our variable rate mortgage receivables
and variable rate debt and believe that a one percent increase in interest
rates
would cause an increase in income before taxes of $1.6 million and a one percent
decline in interest rates would cause a decrease in income before taxes of
approximately $400,000 based on line of credit balance, margin account balance
and loan portfolio as of September 30, 2007. In addition, we originate loans
with short maturities and maintain a strong capital position. As of September
30, 2007, a majority of our loan portfolio was secured by properties located
in
the New York metropolitan area, Tennessee and Florida, and it is therefore
subject to risks associated with the economies of these
localities.
Item
8. Financial Statements and Supplementary Data.
This
information appears in a separate section of this Report following Part
IV.
Item
9. Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure.
None.
Item
9A. Controls and Procedures.
A
review
and evaluation was performed by our management, including our Chief Executive
Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the
design and operation of our disclosure controls and procedures as of the end
of
the period covered by this Annual Report on Form 10-K. Based on that review
and
evaluation, the CEO and CFO have concluded that our current disclosure controls
and procedures, as designed and implemented, were effective. There have been
no
significant changes in our internal controls or in other factors that could
significantly affect our internal controls subsequent to the date of their
evaluation. There were no significant material weaknesses identified in the
course of such review and evaluation and, therefore, we took no corrective
measures.
Management
Report on Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial reporting
is
defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Securities
Exchange Act of 1934, as amended, as a process designed by, or under the
supervision of, a company’s principal executive and principal financial officers
and effected by a company’s board, management and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
GAAP and includes those policies and procedures that:
|
·
|
pertain
to the maintenance of records that in reasonable detail accurately
and
fairly reflect the transactions and dispositions of the assets of
a
company;
|
|
·
|
provide
reasonable assurance that transactions are recorded as necessary
to permit
preparation of financial statements in accordance with GAAP, and
that
receipts and expenditures of a company are being made only in accordance
with authorizations of management and directors of a company;
and
|
|
·
|
provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of a company’s assets that
could have a material effect on the financial
statements.
|
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Projections of any evaluation of effectiveness
to future periods are subject to the risks that controls may become inadequate
because of changes in conditions or that the degree of compliance with the
policies or procedures may deteriorate.
Our
management assessed the effectiveness of our internal control over financial
reporting as of September 30, 2007. In making this assessment, our management
used criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control-Integrated
Framework.
Based
on
its assessment, our management believes that, as of September 30, 2007, our
internal control over financial reporting was effective based on those
criteria.
Our
independent auditors, Ernst & Young, LLP, have issued an audit report on the
effectiveness of internal control over financial reporting. This report appears
on page F1 of this Annual Report on Form 10-K.
Item
9B. Other Information.
None.
PART
III
Item
10. Directors, Executive Officers and Corporate
Governance.
Apart
from certain information concerning our executive officers which is set forth
in
Part I of this report, the other information required by this Item is
incorporated herein by reference to the applicable information in the proxy
statement for our 2008 Annual Meeting of Shareholders, including the information
set forth under the captions “Election of Trustees,” “Section 16(a) Beneficial
Ownership Reporting Compliance,” “Corporate Governance of Our Company - Code of
Business Conduct and Ethics,” “Corporate Governance of Our Company - Audit
Committee” and “Corporate Governance of Our Company - Nominating and Corporate
Governance Committee.”
Item
11. Executive Compensation.
The
information concerning our executive compensation required by Item 11 shall
be
included in the proxy statement to be filed relating to our 2008 Annual Meeting
of Shareholders and is incorporated herein by reference.
Item
12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
The
information concerning our beneficial owners required by Item 12 shall be
included in the proxy statement to be filed relating to our 2008 Annual Meeting
of Shareholders and is incorporated herein by reference.
Item
13. Certain
Relationships and Related Transactions.
The
information concerning relationships and certain transactions required by Item
13 shall be included in the proxy statement to be filed relating to our 2008
Annual Meeting of Shareholders and is incorporated herein by
reference.
Item
14. Principal
Accounting Fees and Services.
The
information concerning our principal accounting fees required by Item 14 shall
be included in the proxy statement to be filed relating to our 2008 Annual
Meeting of Shareholders and is incorporated herein by reference.
PART
IV
Item
15. Exhibits,
Financial Statement Schedules.
(a)
|
|
1.
|
All
Financial Statements.
|
|
|
|
The
response is submitted in a separate section of this report following
Part
IV.
|
|
|
2.
|
Financial
Statement Schedules.
|
|
|
|
The
response is submitted in a separate section of this report following
Part
IV.
|
|
3.1 |
Third
Amended and Restated Declaration of Trust (incorporated by reference
to
Exhibit 3.1 to the Form 10-K of BRT Realty Trust for the year ended
September 30, 2005).
|
|
3.2 |
By-laws
of BRT Realty Trust, formerly known as Berg Enterprise Realty Group
(incorporated by reference to Exhibit 3.2 to the Form 10-K of BRT
Realty
Trust for the year ended September 30, 2005).
|
|
3.3
|
|
Amendment
to By-laws, dated December 10, 2007 (incorporated by reference to
Exhibit
3.1 to the Form 8-K of BRT Realty Trust filed December 11,
2007).
|
|
4.1
|
|
Junior
Subordinated Indenture between JPMorgan Chase Bank, National Association,
as trustee, dated March 21, 2006 (incorporated by reference to Exhibit
4.1
to the Form 8-K of BRT Realty Trust filed March 22, 2006).
|
|
4.2
|
|
Amended
and Restated Trust Agreement among BRT Realty Trust, JPMorgan Chase
Bank,
National Association, Chase Bank USA, National Association and the
Administrative Trustees named therein, dated March 21, 2006 (incorporated
by reference to Exhibit 4.2 to the Form 8-K of BRT Realty Trust filed
March 22, 2006).
|
|
4.3
|
|
Junior
Subordinated Indenture between BRT Realty Trust and JPMorgan Chase
Bank,
National Association, as trustee, dated as of April 27, 2006 (incorporated
by reference to Exhibit 4.1 to the Form 8-K of BRT Realty Trust filed
May
1, 2006).
|
|
4.4
|
|
Amended
and Restated Trust Agreement among BRT Realty Trust, JPMorgan Chase
Bank,
National Association, Chase Bank USA, National Association and The
Administrative Trustees named therein, dated as of April 27, 2006
(incorporated by reference to Exhibit 4.2 to the Form 8-K of BRT
Realty
Trust filed May 1, 2006).
|
|
10.1 |
Amended
and Restated Advisory Agreement, effective as of January 1, 2007,
between
BRT Realty Trust and REIT Management Corp. (incorporated by reference
to
Exhibit 10.1 to the Form 8-K of BRT Realty Trust filed November 27,
2006).
|
|
10.2 |
Shared
Services Agreement, dated as of January 1, 2002, by and among Gould
Investors L.P., BRT Realty Trust, One Liberty Properties, Inc., Majestic
Property Management Corp., Majestic Property Affiliates, Inc. and
REIT
Management Corp. (incorporated by reference to Exhibit 10(c) to the
Form
10-K of BRT Realty Trust for the year ended September 30,
2002).
|
|
10.3
|
Revolving
Credit Agreement, dated as of January 9, 2006, between by BRT Realty
Trust
and North Fork Bank (incorporated by reference to Exhibit 10.1 to
the Form
8-K of BRT Realty Trust filed January 11,
2006).
|
|
10.4 |
Second
Consolidated and Restated Secured Promissory Note, dated October
31, 2006,
by BRT Realty Trust in favor of North Fork Bank, in the aggregate
principal amount of $185,000,000. (incorporated by reference to Exhibit
10.2 to the Form 8-K of BRT Realty Trust filed November 2,
2006).
|
|
10.5
|
|
Letter,
dated January 13, 2006, by North Fork Bank to BRT Realty Trust
(incorporated by reference to Exhibit 10.2 to the Form 8-K of BRT
Realty
Trust filed January 17, 2006).
|
|
10.6 |
Second
Amendment to Revolving Credit Agreement, dated as of October 31,
2006,
between BRT Realty Trust and North Fork Bank (incorporated by reference
to
Exhibit 10.1 to the Form 8-K of BRT Realty Trust filed November 2,
2006).
|
|
10.7
|
|
Purchase
Agreement among BRT Realty Trust, BRT Realty Trust Statutory Trust
I and
Merrill Lynch International, dated March 21, 2006 (incorporated by
reference to Exhibit 10.1 to the Form 8-K of BRT Realty Trust filed
March
22, 2006).
|
|
10.8
|
|
Purchase
Agreement among BRT Realty Trust, BRT Realty Trust Statutory Trust
II, and
Bear, Stearns & Co. Inc., dated as of April 27, 2006 (incorporated by
reference to Exhibit 10.1 to the Form 8-K of BRT Realty Trust filed
May 1,
2006).
|
|
10.9
|
|
Limited
Liability Company Agreement of BRT Funding LLC, dated as of November
2,
2006, by and among BRT Funding LLC, CIT Capital USA, Inc. and BRT
Joint
Venture No. 1 LLC (incorporated by reference to Exhibit 1 to the
Form 8-K
of BRT Realty Trust filed November 8,
2006).
|
|
14.1 |
Revised
Code of Business Conduct and Ethics of BRT Realty Trust, adopted
June 12,
2006 (incorporated by reference to Exhibit 14.1 to the Form 8-K of
BRT
Realty Trust filed June 14, 2006).
|
|
21.1 |
Subsidiaries
(filed herewith).
|
|
23.1 |
Consent
of Ernst & Young, LLP (filed
herewith).
|
|
31.1 |
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 (the “Act”) (filed
herewith).
|
|
31.2 |
Certification
of Senior Vice President - Finance pursuant to Section 302 of the
Act
(filed herewith).
|
|
31.3 |
Certification
of Chief Financial Officer pursuant to Section 302 of the Act (filed
herewith).
|
|
32.1 |
Certification
of Chief Executive Officer pursuant to Section 906 of the Act (filed
herewith).
|
|
32.2 |
Certification
of Senior Vice President-Finance pursuant to Section 906 of the Act
(filed
herewith).
|
|
32.3 |
Certification
of Chief Financial Officer pursuant to Section 906 of the Act (filed
herewith).
|
See
Item
15(a)(3) above.
|
(c)
|
|
Financial
Statements.
|
See
Item
15(a)(2) above.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf
by
the undersigned thereunto duly authorized.
|
|
|
|
BRT
REALTY
TRUST |
|
|
|
Date: December
13, 2007 |
By: |
/s/ Jeffrey
A. Gould |
|
|
|
Name:
Jeffrey A. Gould
Title:
Chief Executive Officer, President and
Trustee
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the Registrant and in the
capacity and on the dates indicated.
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/
Fredric H. Gould
|
|
Chairman
of the Board
|
|
December
13, 2007
|
Fredric
H. Gould
|
|
|
|
|
|
|
|
|
|
/s/
Jeffrey A. Gould
|
|
Chief
Executive Officer, President and Trustee
|
|
December
13, 2007
|
Jeffrey
A. Gould
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Kenneth Bernstein
|
|
Trustee
|
|
December
13, 2007
|
Kenneth
Bernstein
|
|
|
|
|
|
|
|
|
|
/s/
Alan Ginsburg
|
|
Trustee
|
|
December
13, 2007
|
Alan
Ginsburg
|
|
|
|
|
|
|
|
|
|
/s/
Louis C. Grassi
|
|
Trustee
|
|
December
13, 2007
|
Louis
C. Grassi
|
|
|
|
|
|
|
|
|
|
/s/
Matthew J. Gould
|
|
Trustee
|
|
December
13, 2007
|
Matthew
J. Gould
|
|
|
|
|
|
|
|
|
|
/s/
Gary Hurand
|
|
Trustee
|
|
December
13, 2007
|
Gary
Hurand
|
|
|
|
|
|
|
|
|
|
/s/
Jeffrey Rubin
|
|
Trustee
|
|
December
13, 2007
|
Jeffrey
Rubin
|
|
|
|
|
|
|
|
|
|
/s/
Jonathan Simon
|
|
Trustee
|
|
December
13, 2007
|
Jonathan
Simon
|
|
|
|
|
|
|
|
|
|
/s/
George E. Zweier
|
|
Chief
Financial Officer, Vice President
|
|
December
13, 2007
|
George
E. Zweier
|
|
(Principal
Financial and Accounting Officer)
|
|
|
|
|
|
|
|
Annual
Report on Form 10-K
Item
8, Item 15(a)(1) and (2)
Index
to
Consolidated Financial Statements and Consolidated Financial Statement Schedules
|
Page
No.
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F-1
|
|
|
Consolidated
Balance Sheets as of September 30, 2007 and 2006
|
F-3
|
|
|
Consolidated
Statements of Income for the years ended September 30, 2007, 2006
and
2005
|
F-4
|
|
|
Consolidated
Statements of Shareholders' Equity for the years ended September
30, 2007,
2006 and 2005
|
F-5
|
|
|
Consolidated
Statements of Cash Flows for the years ended September 30, 2007,
2006 and
2005
|
F-6
|
|
|
Notes
to Consolidated Financial Statements
|
F-8
|
|
|
Consolidated
Financial Statement Schedules for the year ended September 30,
2007:
|
|
|
|
III
- Real Estate and Accumulated Depreciation
|
F-24
|
|
|
IV
- Mortgage Loans on Real Estate
|
F-26
|
All
other
schedules are omitted because they are not applicable or the required
information is shown in the consolidated financial statements or the notes
thereto.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board
of Trustees and Shareholders of
BRT
Realty Trust and Subsidiaries
We
have
audited BRT Realty Trust and Subsidiaries’ (the “Trust”) internal control over
financial reporting as of September 30, 2007, based on criteria established
in
Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). The Trust’s
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of Internal
Control Over Financial Reporting included in the accompanying Management
Report
on Internal Control Over Financial Reporting. Our responsibility is to express
an opinion on the Trust’s internal control over financial reporting based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control
over
financial reporting, assessing the risk that a material weakness exists,
testing
and evaluating the design and operating effectiveness of internal control
based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary
to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company
are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention or
timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In
our
opinion, BRT Realty Trust and Subsidiaries maintained, in all material respects,
effective internal control over financial reporting as of September 30, 2007,
based on the
COSO
criteria.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of BRT Realty
Trust and Subsidiaries as of September 30, 2007 and 2006, and the related
consolidated statements of income, shareholders’ equity, and cash flows for each
of the three years in the period ended September 30, 2007 of the Trust and
our
report dated December 12, 2007 expressed an unqualified opinion
thereon.
/s/
Ernst
& Young LLP
New
York,
New York
December
12, 2007
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board
of Trustees and Shareholders of
BRT
Realty Trust and Subsidiaries
We
have
audited the accompanying consolidated balance sheets of BRT Realty Trust
and
Subsidiaries (the “Trust”) as of September 30, 2007 and 2006, and the related
consolidated statements of income, shareholders’ equity, and cash flows for each
of the three years in the period ended September 30, 2007. Our audits also
included the financial statement schedules listed in the Index at Item 15(a).
These financial statements and schedules are the responsibility of the Trust’s
management. Our responsibility is to express an opinion on these financial
statements and schedules based on our audits.
We
conducted our audits in accordance with auditing standards of the Public
Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the
accounting principles used and significant estimates made by management,
as well
as evaluating the overall financial statement presentation. We believe that
our
audits provide a reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of BRT Realty Trust
and
Subsidiaries at September 30, 2007 and 2006, and the consolidated results
of
their operations and their cash flows for each of the three years in the
period
ended September 30, 2007, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedules,
when considered in relation to the basic financial statements taken as a
whole,
present fairly in all material respects the information set forth
therein.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), BRT Realty Trust and Subsidiaries’ internal
control over financial reporting as of September 30, 2007, based on criteria
established in Internal Control - Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission and our report dated
December 12, 2007 expressed an unqualified opinion thereon.
/s/ ERNST
& YOUNG LLP
New
York,
New York
December
12, 2007
BRT
REALTY TRUST AND SUBSIDIARIES
Consolidated
Balance Sheets
(Amounts
in thousands except per share amounts)
ASSETS
|
|
September
30,
|
|
|
|
2007
|
|
2006
|
|
Real
estate loans
|
|
|
|
|
|
Earning
interest, including $550
|
|
|
|
|
|
|
|
from
related parties at September 30, 2006
|
|
$
|
185,899
|
|
$
|
283,282
|
|
Non-earning
interest
|
|
|
63,627
|
|
|
1,346
|
|
|
|
|
249,526
|
|
|
284,628
|
|
Deferred
fee income
|
|
|
(1,268
|
)
|
|
(2,616
|
)
|
Allowance
for possible losses
|
|
|
(8,917
|
)
|
|
(669
|
)
|
|
|
|
239,341
|
|
|
281,343
|
|
Real
estate properties net of accumulated
|
|
|
|
|
|
|
|
depreciation
of $782 and $670
|
|
|
3,336
|
|
|
3,342
|
|
Investment
in unconsolidated
|
|
|
|
|
|
|
|
ventures
at equity
|
|
|
14,167
|
|
|
9,608
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
17,103
|
|
|
8,393
|
|
Available-for-sale
securities at market
|
|
|
34,936
|
|
|
53,252
|
|
Real
estate properties held for sale
|
|
|
9,355
|
|
|
2,833
|
|
Other
assets
|
|
|
9,871
|
|
|
9,655
|
|
Total
Assets
|
|
$
|
328,109
|
|
$
|
368,426
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
Borrowed
funds
|
|
$
|
20,000
|
|
$
|
141,464
|
|
Junior
subordinated notes
|
|
|
56,702
|
|
|
56,702
|
|
Mortgage
payable
|
|
|
2,395
|
|
|
2,471
|
|
Accounts
payable and accrued liabilities including deposits
|
|
|
|
|
|
|
|
payable
of $3,250 and $5,061
|
|
|
6,881
|
|
|
8,863
|
|
Dividends
payable
|
|
|
6,956
|
|
|
4,491
|
|
Total
liabilities
|
|
|
92,934
|
|
|
213,991
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
—
|
|
|
—
|
|
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, issued
|
|
|
—
|
|
|
—
|
|
12,249
and 9,065 shares
|
|
|
36,746
|
|
|
27,194
|
|
Additional
paid-in capital
|
|
|
160,162
|
|
|
85,498
|
|
Accumulated
other comprehensive income - net
|
|
|
|
|
|
|
|
unrealized
gain on available-for-sale securities
|
|
|
25,097
|
|
|
38,319
|
|
Retained
earnings
|
|
|
23,191
|
|
|
13,510
|
|
Cost
of 1,163 and 1,171 treasury shares
|
|
|
|
|
|
|
|
of
beneficial interest
|
|
|
(10,021
|
)
|
|
(10,086
|
)
|
Total
Shareholders’ Equity
|
|
|
235,175
|
|
|
154,435
|
|
Total
Liabilities and Shareholders’ Equity
|
|
$
|
328,109
|
|
$
|
368,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
BRT
REALTY TRUST AND SUBSIDIARIES
Consolidated
Statements of Income
(Dollar
amounts in thousands except per share amounts)
|
|
Year
Ended September 30,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Revenues:
|
|
|
|
|
|
|
|
Interest
on real estate loans, including $15,
$109 and $651 from related parties
|
|
$
|
33,604
|
|
$
|
29,527
|
|
$
|
18,815
|
|
Loan
fee income
|
|
|
5,153
|
|
|
3,736
|
|
|
2,734
|
|
Operating
income from real estate properties
|
|
|
1,486
|
|
|
1,214
|
|
|
983
|
|
Other,
primarily investment income
|
|
|
2,657
|
|
|
3,011
|
|
|
2,959
|
|
Total
Revenues
|
|
|
42,900
|
|
|
37,488
|
|
|
25,491
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
Interest
- borrowed funds
|
|
|
10,177
|
|
|
10,718
|
|
|
4,324
|
|
Advisor's
fees, related party
|
|
|
2,308
|
|
|
2,682
|
|
|
1,862
|
|
Provision
for loan loss
|
|
|
9,300
|
|
|
—
|
|
|
—
|
|
General
and administrative - including $907, $782 and $708 to related
party
|
|
|
6,709
|
|
|
5,809
|
|
|
4,398
|
|
Other
taxes
|
|
|
1,250
|
|
|
563
|
|
|
417
|
|
Operating
expenses relating to real estate properties
|
|
|
|
|
|
|
|
|
|
|
including
interest on mortgages payable of $154, $159 and $174
|
|
|
666
|
|
|
791
|
|
|
833
|
|
Amortization
and depreciation
|
|
|
160
|
|
|
145
|
|
|
141
|
|
Total
Expenses
|
|
|
30,570
|
|
|
20,708
|
|
|
11,975
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before equity in earnings of unconsolidated ventures,
|
|
|
|
|
|
|
|
|
|
|
gain
on sale of available-for-sale securities, minority interest
and
|
|
|
|
|
|
|
|
|
|
|
discontinued
operations
|
|
|
12,330
|
|
|
16,780
|
|
|
13,516
|
|
Equity
in earnings (loss) of unconsolidated ventures
|
|
|
1,172
|
|
|
(7
|
)
|
|
257
|
|
Gain
on disposition of real estate related to unconsolidated
ventures
|
|
|
1,819
|
|
|
2,531
|
|
|
—
|
|
Income
before gain on sale of available-for-sale securities,
minority
|
|
|
|
|
|
|
|
|
|
|
interest
and discontinued operations
|
|
|
15,321
|
|
|
19,304
|
|
|
13,773
|
|
Net
gain on sale of available-for-sale securities
|
|
|
19,455
|
|
|
—
|
|
|
680
|
|
Minority
interest
|
|
|
(74
|
)
|
|
(25
|
)
|
|
(12
|
)
|
Income
from continuing operations
|
|
|
34,702
|
|
|
19,279
|
|
|
14,441
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
Operations:
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
16
|
|
|
66
|
|
|
204
|
|
Gain
on sale of real estate assets
|
|
|
352
|
|
|
726
|
|
|
1,569
|
|
Income
from discontinued operations
|
|
|
368
|
|
|
792
|
|
|
1,773
|
|
Net
income
|
|
$
|
35,070
|
|
$
|
20,071
|
|
$
|
16,214
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share of beneficial interest:
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$
|
3.30
|
|
$
|
2.43
|
|
$
|
1.86
|
|
Income
from discontinued operations
|
|
|
.04
|
|
|
.10
|
|
|
.23
|
|
Basic
earnings per share
|
|
$
|
3.34
|
|
$
|
2.53
|
|
$
|
2.09
|
|
Income
from continuing operations
|
|
$
|
3.29
|
|
$
|
2.42
|
|
$
|
1.85
|
|
Income
from discontinued operations
|
|
|
.04
|
|
|
.10
|
|
|
.23
|
|
Diluted
earnings per share
|
|
$
|
3.33
|
|
$
|
2.52
|
|
$
|
2.08
|
|
Cash
distributions per common share
|
|
$
|
2.44
|
|
$
|
2.14
|
|
$
|
1.96
|
|
Weighted
average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
10,501,738
|
|
|
7,931,734
|
|
|
7,747,804
|
|
Diluted
|
|
|
10,518,297
|
|
|
7,959,955
|
|
|
7,811,483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
BRT
REALTY TRUST AND SUBSIDIARIES
Consolidated
Statements of Shareholders' Equity
Years
Ended September 30, 2007, 2006, and 2005
(Amounts
in thousands except share and per share data)
|
|
Shares
of
Beneficial
Interest
|
|
Additional
Paid-In
Capital
|
|
Accumulated
Other
Comprehensive
Income
|
|
Unearned
Compensation
|
|
Retained
Earnings
|
|
Treasury
Shares
|
|
Total
|
|
Balances,
September 30, 2004
|
|
$
|
26,650
|
|
$
|
81,769
|
|
$
|
26,162
|
|
$
|
(900
|
)
|
$
|
9,482
|
|
$
|
(11,100
|
)
|
$
|
132,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued - dividend reinvestment and stock
purchase plan (63,666 shares)
|
|
|
191
|
|
|
1,247
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,438
|
|
Distributions
- common share ($1.96
per share)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(15,231
|
)
|
|
—
|
|
|
(15,231
|
)
|
Exercise
of stock options
|
|
|
—
|
|
|
3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
534
|
|
|
537
|
|
Issuance
of restricted stock
|
|
|
—
|
|
|
870
|
|
|
—
|
|
|
(870
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Forfeiture
of restricted stock
|
|
|
—
|
|
|
(166
|
)
|
|
—
|
|
|
166
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Compensation
expense - restricted stock
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
293
|
|
|
—
|
|
|
—
|
|
|
293
|
|
Net
income
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
16,214
|
|
|
—
|
|
|
16,214
|
|
Other
comprehensive income - Net
unrealized gain on available-for-sale
securities (net of reclassification adjustment
of $589 for realized gains included in net income)
|
|
|
—
|
|
|
—
|
|
|
7,341
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7,341
|
|
Comprehensive
income
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
23,555
|
|
Balances,
September 30, 2005
|
|
|
26,841
|
|
|
83,723
|
|
|
33,503
|
|
|
(1,311
|
)
|
|
10,465
|
|
|
(10,566
|
)
|
|
142,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification
upon the adoption of
FASB No 123(R)
|
|
|
—
|
|
|
(1,311
|
)
|
|
—
|
|
|
1,311
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Shares
issued - dividend reinvestment and stock
purchase plan (117,731 shares)
|
|
|
353
|
|
|
2,524
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,877
|
|
Distributions
- common share ($2.14
per share)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(17,026
|
)
|
|
—
|
|
|
(17,026
|
)
|
Exercise
of stock options
|
|
|
—
|
|
|
5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
448
|
|
|
453
|
|
Restricted
stock vesting
|
|
|
—
|
|
|
(32
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
32
|
|
|
—
|
|
Compensation
expense - stock option and
restricted stock
|
|
|
—
|
|
|
589
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
589
|
|
Net
income
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
20,071
|
|
|
—
|
|
|
20,071
|
|
Other
comprehensive income net unrealized gain
on sale of available-for-sale securities
|
|
|
—
|
|
|
—
|
|
|
4,816
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,816
|
|
Comprehensive
income
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
24,887
|
|
Balances,
September 30, 2006
|
|
|
27,194
|
|
|
85,498
|
|
|
38,319
|
|
|
—
|
|
|
13,510
|
|
|
(10,086
|
)
|
|
154,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued - dividend reinvestment and stock
purchase plan (251,440 shares)
|
|
|
754
|
|
|
5,648
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6,402
|
|
Shares
issued - underwritten public
offering (2,932,500 shares)
|
|
|
8,798
|
|
|
68,296
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
77,094
|
|
Distributions
- common share ($2.44
per share)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(25,389
|
)
|
|
—
|
|
|
(25,389
|
)
|
Exercise
of stock options
|
|
|
—
|
|
|
(2
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
22
|
|
|
20
|
|
Restricted
stock vesting
|
|
|
—
|
|
|
(43
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
43
|
|
|
—
|
|
Compensation
expense - restricted stock
|
|
|
—
|
|
|
765
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
765
|
|
Net
income
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
35,070
|
|
|
—
|
|
|
35,070
|
|
Other
comprehensive loss net unrealized loss
on available-for-sale securities (net
of reclassification adjustment of $13,918 for
realized gains included in net income)
|
|
|
—
|
|
|
—
|
|
|
(13,222
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(13,222
|
)
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,848
|
|
Balances,
September 30, 2007
|
|
$
|
36,746
|
|
$
|
160,162
|
|
$
|
25,097
|
|
$
|
—
|
|
$
|
23,191
|
|
$
|
(10,021
|
)
|
$
|
235,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
BRT
REALTY TRUST AND SUBSIDIARIES
Consolidated
Statements of Cash Flows
(Dollar
amounts in thousands)
|
|
Year
Ended September 30,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Cash
flows from operating activities:
|
|
$
|
35,070
|
|
$
|
20,071
|
|
$
|
16,214
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
9,300
|
|
|
—
|
|
|
—
|
|
Provision
for loan loss
|
|
|
|
|
|
|
|
|
|
|
Amortization
and depreciation
|
|
|
990
|
|
|
608
|
|
|
421
|
|
Amortization
of deferred fee income
|
|
|
(4,993
|
)
|
|
(3,669
|
)
|
|
(2,665
|
)
|
Amortization
of restricted stock and stock options
|
|
|
765
|
|
|
589
|
|
|
293
|
|
Net
gain on sale of real estate assets from discontinued
operations
|
|
|
(352
|
)
|
|
(726
|
)
|
|
(1,569
|
)
|
Payoff
of loan in excess of carrying amount
|
|
|
—
|
|
|
—
|
|
|
(365
|
)
|
Net
gain on sale of available-for-sale securities
|
|
|
(19,455
|
)
|
|
—
|
|
|
(680
|
)
|
Equity
in (earnings) loss of unconsolidated ventures
|
|
|
(1,172
|
)
|
|
7
|
|
|
(257
|
)
|
Gain
on disposition of real estate related to unconsolidated
venture
|
|
|
(1,819
|
)
|
|
(2,531
|
)
|
|
—
|
|
Distributions
of earnings of unconsolidated ventures
|
|
|
5,952
|
|
|
681
|
|
|
546
|
|
(Increase)
decrease in straight line rent
|
|
|
(128
|
)
|
|
(57
|
)
|
|
223
|
|
Decrease
(increase) in interest and dividends receivable
|
|
|
1,191
|
|
|
(1,418
|
)
|
|
(927
|
)
|
(Increase)
decrease in prepaid expenses
|
|
|
(1,584
|
)
|
|
(19
|
)
|
|
60
|
|
(Decrease)
increase in accounts payable and accrued liabilities
|
|
|
(1,982
|
)
|
|
4,058
|
|
|
216
|
|
Increase
in deferred costs
|
|
|
(309
|
)
|
|
(2,523
|
)
|
|
(130
|
)
|
Other
|
|
|
(278
|
)
|
|
(146
|
)
|
|
10
|
|
Net
cash provided by operating activities
|
|
|
21,196
|
|
|
14,925
|
|
|
11,390
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
Collections
from real estate loans
|
|
|
152,129
|
|
|
157,540
|
|
|
160,274
|
|
Proceeds
from sale of participation interests
|
|
|
1,110
|
|
|
61,188
|
|
|
38,475
|
|
Repurchase
of participation interest
|
|
|
(5,750
|
)
|
|
—
|
|
|
—
|
|
Additions
to real estate loans
|
|
|
(120,349
|
)
|
|
(309,727
|
)
|
|
(259,346
|
)
|
Net
costs capitalized to real estate owned
|
|
|
(106
|
)
|
|
(244
|
)
|
|
(457
|
)
|
Collections
of loan fees
|
|
|
3,646
|
|
|
4,924
|
|
|
2,817
|
|
Additions
to real estate
|
|
|
—
|
|
|
—
|
|
|
(1,548
|
)
|
Proceeds
from sale of real estate owned
|
|
|
625
|
|
|
778
|
|
|
5,529
|
|
Purchase
of available-for-sale securities
|
|
|
(49
|
)
|
|
—
|
|
|
(1,000
|
)
|
Proceeds
from sale of available-for-sale securities
|
|
|
24,597
|
|
|
—
|
|
|
1,059
|
|
Contributions
to unconsolidated ventures
|
|
|
(12,948
|
)
|
|
(40
|
)
|
|
(1,303
|
)
|
Distributions
of capital of unconsolidated ventures
|
|
|
5,557
|
|
|
987
|
|
|
94
|
|
Net
cash provided by (used in) investing activities
|
|
|
48,462
|
|
|
(84,594
|
)
|
|
(55,406
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from borrowed funds
|
|
|
145,000
|
|
|
255,000
|
|
|
215,909
|
|
Repayment
of borrowed funds
|
|
|
(266,464
|
)
|
|
(224,468
|
)
|
|
(158,839
|
)
|
Proceeds
from sale of junior subordinated notes
|
|
|
—
|
|
|
55,000
|
|
|
—
|
|
Mortgage
amortization
|
|
|
(76
|
)
|
|
(71
|
)
|
|
(67
|
)
|
Exercise
of stock options
|
|
|
20
|
|
|
453
|
|
|
537
|
|
Cash
distribution - common shares
|
|
|
(22,924
|
)
|
|
(16,438
|
)
|
|
(14,999
|
)
|
Issuance
of shares- dividend reinvestment and stock purchase plan
|
|
|
6,402
|
|
|
2,877
|
|
|
1,438
|
|
Net
proceeds from secondary offering
|
|
|
77,094
|
|
|
—
|
|
|
—
|
|
Net
cash (used in) provided by financing activities
|
|
|
(60,948
|
)
|
|
72,353
|
|
|
43,979
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
8,710
|
|
|
2,684
|
|
|
(37
|
)
|
Cash
and cash equivalents at beginning of year
|
|
|
8,393
|
|
|
5,709
|
|
|
5,746
|
|
Cash
and cash equivalents at end of year
|
|
$
|
17,103
|
|
$
|
8,393
|
|
$
|
5,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
BRT
REALTY TRUST AND SUBSIDIARIES
Consolidated
Statements of Cash Flows
(Dollar
amounts in thousands)
(Continued)
|
|
Year
Ended September 30,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
Cash
paid during the year for interest expense
|
|
$
|
10,135
|
|
$
|
9,389
|
|
$
|
3,992
|
|
Cash
paid during the year for income and excise taxes
|
|
$
|
703
|
|
$
|
396
|
|
$
|
329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Non
cash investing and financing activity:
|
|
|
|
|
|
|
|
|
|
|
Reclassification
of loan to real estate held for sale upon foreclosure
|
|
$
|
9,469
|
|
$
|
—
|
|
$
|
2,446
|
|
Accrued
distributions
|
|
$
|
6,956
|
|
$
|
4,491
|
|
$
|
3,903
|
|
Junior
subordinated notes issued to purchase statutory trust common securities
|
|
$
|
—
|
|
$
|
1,702
|
|
$
|
—
|
|
Seller
financing provided for sale of real estate
|
|
$
|
2,560
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
BRT
REALTY TRUST AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
September
30, 2007
NOTE
1 -ORGANIZATION,
BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES
Organization
and Background
BRT
Realty Trust is a real estate investment trust organized as a business trust
in
1972 under the laws of the Commonwealth of Massachusetts. Our principal business
activity is to generate income by originating and holding for investment,
for
our own account, senior and junior real estate mortgage loans secured by
real
property. The Trust may also participate as both an equity investor in, and
as a
mortgage lender to, joint ventures which acquire income producing properties.
Principles
of Consolidation; Basis of Preparation
The
consolidated financial statements include the accounts of BRT Realty Trust
and
its wholly-owned subsidiaries. Many wholly-owned subsidiaries were organized
to
take title to various properties acquired by BRT Realty Trust. BRT Realty
Trust
and its subsidiaries are hereinafter referred to as the “Trust” or the
“Company.”
The
Trust
is also a managing member in one joint venture where it exercises substantial
operating control and accordingly, the accounts of this venture are consolidated
with the Trust.
Income
Tax Status
The
Trust
qualifies as a real estate investment trust under Sections 856-860 of the
Internal Revenue Code of 1986 as amended.
The
Trustees may, at their option, elect to operate the Trust as a business trust
not qualifying as a real estate investment trust.
Income
Recognition
Income
and expenses are recorded on the accrual basis of accounting for financial
reporting purposes. The Trust does not accrue interest on impaired loans
where,
in the judgment of management, collection of interest according to the
contractual terms is considered doubtful. Among the factors the Trust considers
in making an evaluation of the amount of interest that is collectable, are
the
financial condition of the borrower, the status of the underlying collateral
and
anticipated future events. The Trust accrues interest on performing impaired
loans and records cash receipts as a reduction of the recorded investment
leaving the valuation allowance constant throughout the life of the loan.
For
impaired non-accrual loans, interest is recognized on a cash basis.
Loan
commitment and extension fee income on loans held in our portfolio is deferred
and recorded as loan fee income over the life of the commitment and loan.
Commitment fees are generally non-refundable. When a commitment expires or
the
Trust no longer has any other obligation to perform, the remaining fee is
recognized into income.
Rental
income includes the base rent that each tenant is required to pay in accordance
with the terms of their respective leases reported on a straight line basis
over
the initial term of the lease.
The
basis
on which the cost was determined in computing the realized gain or loss on
available-for-sale securities is average historical cost.
Allowance
for Possible Losses
A
loan
evaluated for impairment is deemed to be impaired when based on current
information and events, it is probable that the Trust will not be able to
collect all amounts due according to the contractual terms of the loan
agreement. When making this evaluation numerous factors are considered,
including, market evaluations of the underlying collateral, estimated operating
cash flow from the property during the projected holding period, and estimated
sales value computed by applying an estimated capitalization rate to the
projected stabilized net operating income of the specific property, less
selling
costs, discounted at market discount rates. If upon completion of the
valuations, the value of the underlying collateral securing the loan is less
than the recorded investment in the loan, an allowance is created with a
corresponding charge to expense.
Real
Estate Properties and Real Estate Properties Held For Sale
Real
estate properties, shown net of accumulated depreciation, is comprised of
real
property in which the Trust has invested directly and properties acquired
by
foreclosure or by deed in lieu of foreclosure.
When
real
estate is acquired by foreclosure or by a deed in lieu of foreclosure, it
is
recorded at the lower of the recorded investment of the loan or estimated
fair
value at the time of foreclosure. The recorded investment is the face amount
of
the loan that has been increased or decreased by any accrued interest,
acquisition costs and may also reflect a previous valuation adjustment of
the
loan. Real estate assets, including assets acquired through foreclosure or
by
deed in lieu of foreclosure, are operated for the production of income and
are
depreciated over their estimated useful lives. Costs incurred in connection
with
the foreclosure of the properties collateralizing the real estate loans and
costs incurred to extend the life or improve the assets subsequent to
foreclosure are capitalized. Real estate assets operated for the production
of
income are evaluated for impairment in accordance with SFAS
No. 144 “Accounting for the Impairment or Disposal of long-lived
assets.”
Real
estate is classified as held for sale when management has determined that
it has
met the criteria established within SFAS
No. 144.
Properties which are held for sale are not depreciated.
The
Trust
accounts for the sale of real estate when title passes to the buyer, sufficient
equity payments have been received and when there is reasonable assurance
that
the remaining receivable, if any, will be collected.
Investments
in Unconsolidated Ventures at Equity
With
respect to its joint ventures, where the Trust (1) is primarily the managing
member but does not exercise substantial operating control over these entities
pursuant to EITF 04-5, Determining Whether a Partner of the General Partners
as
a Group Controls a Limited Partnership or Similar Entity When the Limited
Partners Have Certain Rights and (2) such entities are not variable-interest
entities pursuant to FASB Interpretation No. 46, “Consolidation of Variable
Interest Entities,” it has determined that such joint ventures should be
accounted for under the equity method of accounting for financial statement
purposes.
Investments
in ventures in which the Trust does not have the ability to exercise operational
or financial control, are accounted for using the equity method. Accordingly,
the Trust reports its pro rata share of net profits and losses from its
investments in unconsolidated ventures in the accompanying consolidated
financial statements.
Valuation
Allowance on Real Estate Assets
The
Trust
reviews each real estate asset owned, including investments in real estate
ventures, for which indicators of impairment are present to determine whether
the carrying amount of the asset can be recovered. Recognition of impairment
is
required if the undiscounted cash flows estimated to be generated by the
assets
are less than the assets’ carrying amount. Measurement is based upon the fair
value of the asset. Real estate assets held for sale are valued at the lower
of
cost or fair value, less costs to sell, on an individual asset basis. Upon
evaluating a property, many factors are considered, including estimated current
and expected operating cash flow from the property during the projected holding
period, costs necessary to extend the life or improve the asset, expected
capitalization rates, projected stabilized net operating income, selling
costs,
and the ability to hold and dispose of such real estate owned in the ordinary
course of business. Valuation adjustments may be necessary in the event that
effective interest rates, rent-up periods, future economic conditions, and
other
relevant factors vary
significantly
from those assumed in valuing the property. If future evaluations result
in a
diminution in the value of the property, the reduction will be recognized
as an
addition to the valuation allowance.
Loan
Participations
SFAS
No.
140 “Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities” allows
the recognition of transfers of financial assets as sales, provided control
has
been relinquished. Control is deemed to be relinquished only when all of
the
following conditions have been met: (i) the assets have been isolated from
the
transferor, even in bankruptcy or other receivership (true sale opinions
are
required), (ii) the transferee has the right to pledge or exchange the assets
received and (iii) the transferor has not maintained effective control over
the
transferred assets. In accordance with this standard, the Trust only recognizes
its retained interests of loan participations in the financial
statements.
Fair
Value of Financial Instruments
The
following methods and assumptions were used to estimate the fair value of
each
class of financial instruments:
Cash
and
cash equivalents, accounts receivable (included in Other assets), accounts
payable and accrued liabilities: The carrying amounts reported in the balance
sheet for these instruments approximate their fair values due to the short
term
nature of these accounts.
Available-for-sale
securities: Investments
in securities are considered “available-for-sale,” and are reported on the
balance sheet based upon quoted market prices.
Real
estate loans: The earning mortgage loans of the Trust have either variable
interest rate provisions, which are based upon a margin over the prime rate,
or
are currently fixed at effective interest rates which approximate market
rates
for similar types of loans. Accordingly, the carrying amounts of the earning,
non-impaired mortgage loans approximate their fair values. For loans which
are
impaired, the Trust has valued such loans based upon the estimated fair value
of
the underlying collateral.
Borrowed
funds, junior subordinated notes and mortgage payable: There is no material
difference between the carrying amounts and fair value because interest rates
approximate current market rates for similar types of debt
instruments.
Equity
Based Compensation
In
fiscal
2006, the Trust adopted SFAS No. 123R “Share-Based Payment” applying the
modified prospective method of accounting in stock options. FAS 123R, among
other things, eliminated the alternative to use the intrinsic value method
of
accounting for stock based compensation and requires entities to recognize
the
cost of employee services received in exchange for awards of equity instruments
based on the grant date fair value of those awards (with limited exceptions).
Prior to the adoption of FAS 123R, the Trust accounted for its stock based
award
in accordance with APB Opinion No. 25 “Accounting for Stock Issued to
Employees.” The Trust estimates fair value of its stock options using the
Black-Scholes option valuation model.
Pursuant
to FAS 123R the Trust’s compensation expense for restricted stock awards is
amortized over the vesting period of such awards, based upon the estimated
fair
value of such restricted stock at the grant date.
Per
Share Data
Basic
earnings per share was determined by dividing net income applicable to common
shareholders for each year by the weighted average number of shares of
beneficial interest outstanding during each year. 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 then shared in the earnings of the Trust. Diluted
earnings per share was determined by dividing net income applicable to common
shareholders for each year 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 using the treasury stock
method.
Cash
Equivalents
Cash
equivalents consist of highly liquid investments, primarily direct United
States
treasury obligations and money market type U.S. Government obligations, with
maturities of three months or less when purchased.
Use
of Estimates
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 financial statements
and
accompanying notes. Actual results could differ from those estimates.
Segment
Reporting
SFAS
No.
131, “Disclosure
About Segments of an Enterprise and Related Information,”
established standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments
in
interim financial reports. SFAS No. 131 also established standards for related
disclosures about products and services, geographical areas, and major
customers. As the Trust operates predominantly in one industry segment,
management has determined it has one reportable segment and believes it is
in
compliance with the standards established by SFAS No. 131.
New
Accounting Pronouncements
In
July
2006, the FASB issued Interpretation No. 48, “Accounting
for Uncertainty in Income Taxes”
(“FIN
48”). This interpretation, among other things, creates a two step approach for
evaluating uncertain tax positions. Recognition (step one) occurs when an
enterprise concludes that a tax position, based solely on its technical merits,
is more-likely-than-not to be sustained upon examination. Measurement (step
two)
determines the amount of benefit that more-likely-than-not will be realized
upon
settlement. Derecognition of a tax position that was previously recognized
would
occur when a company subsequently determines that a tax position no longer
meets
the more-likely-than-not threshold of being sustained. FIN 48 specifically
prohibits the use of a valuation allowance as a substitute for derecognition
of
tax positions, and it has expanded disclosure requirements. FIN 48 is effective
for fiscal years beginning after December 15, 2006, in which the impact of
adoption should be accounted for as a cumulative-effect adjustment to the
beginning balance of retained earnings. The Trust has early adopted FIN 48
and
its adoption did not have an effect on earnings or the financial position
of the
Trust.
In
September 2006, the FASB issued Statement No. 157, “Fair
Value Measurements” (“SFAS
No. 157”). SFAS No. 157 provides guidance for using fair value to measure assets
and liabilities. This statement clarifies the principle that fair value should
be based on the assumptions that market participants would use when pricing
the
asset or liability. SFAS No.157 establishes a fair value hierarchy, giving
the
highest priority to quoted prices in active markets and the lowest priority
to
unobservable data. SFAS No. 157 applies whenever other standards require
assets
or liabilities to be measured at fair value. This statement is effective
in
fiscal years beginning after November 15, 2007 and interim periods within
those
fiscal years. The Trust is evaluating this statement and believes that the
adoption of this standard on October 1, 2008 will not have a material effect
on
the Trust’s consolidated financial statements.
In
February 2007, the FASB issued FAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities” (FAS 159.) FAS 159 permits entities to elect
to measure many financial instruments and certain other items at fair value.
Unrealized gains and losses on items for which the fair value option has
been
elected will be recognized in earnings at each subsequent reporting date.
FAS
159 is effective for the Company commencing October 1, 2008 on a prospective
basis, as the Company did not elect to early adopt FAS 159. A decision to
elect
the fair value option for an eligible financial instrument, which can be
made on
an instrument by instrument basis, is irrevocable. The Company is currently
evaluating the impact that the adoption of FAS 159 will have on its consolidated
financial statements.
Reclassification
Certain
amounts reported in previous financial statements have been reclassified
in the
accompanying consolidated financial statements to conform to the current
year's
presentation.
NOTE
2 - REAL ESTATE LOANS
At
September 30, 2007, information as to real estate loans is summarized as
follows
(dollar amounts in thousands):
|
|
Total
|
|
Earning
Interest
|
|
Not
Earning
Interest
|
|
First
mortgage loans:
|
|
|
|
|
|
|
|
Short-term
(five years or less):
|
|
|
|
|
|
|
|
Condominium
units (existing multi family and commercial
units)
|
|
$
|
65,716
|
|
$
|
27,869
|
|
$
|
37,847
|
|
Multi-family
residential
|
|
|
86,731
|
|
|
73,168
|
|
|
13,563
|
|
Hotel
Condominium units
|
|
|
4,550
|
|
|
4,550
|
|
|
—
|
|
Land
|
|
|
43,766
|
|
|
37,602
|
|
|
6,164
|
|
Shopping
centers/retail
|
|
|
27,879
|
|
|
26,741
|
|
|
1,138
|
|
Office
|
|
|
3,500
|
|
|
3,500
|
|
|
—
|
|
Residential
|
|
|
3,396
|
|
|
3,396
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Second
mortgage loans and
mezzanine loans:
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
|
7,915
|
|
|
3,000
|
|
|
4,915
|
|
Multi-family
residential
|
|
|
6,073
|
|
|
6,073
|
|
|
—
|
|
|
|
|
249,526
|
|
|
185,899
|
|
|
63,627
|
|
Deferred
fee income
|
|
|
(1,268
|
)
|
|
(1,146
|
)
|
|
(122
|
)
|
Allowance
for possible losses
|
|
|
(8,917
|
)
|
|
(3,000
|
)
|
|
(5,917
|
)
|
Real
estate loans, net
|
|
$
|
239,341
|
|
$
|
181,753
|
|
$
|
57,588
|
|
A
summary
of loans at September 30, 2006 is as follows (dollar amounts in
thousands):
|
|
Total
|
|
Earning
Interest
|
|
Not
Earning
Interest
|
|
First
mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
Short-term
(five years or less):
|
|
|
|
|
|
|
|
|
|
|
Condominium
units (existing multi family and commercial units)
|
|
$
|
105,257
|
|
$
|
105,257
|
|
$
|
—
|
|
Multi-family
residential
|
|
|
57,623
|
|
|
57,623
|
|
|
—
|
|
Hotel
Condominium units
|
|
|
5,738
|
|
|
5,738
|
|
|
—
|
|
Land
|
|
|
35,074
|
|
|
35,074
|
|
|
—
|
|
Shopping
centers/retail
|
|
|
25,689
|
|
|
25,689
|
|
|
—
|
|
Office
|
|
|
20,803
|
|
|
20,803
|
|
|
—
|
|
Industrial
buildings
|
|
|
6,221
|
|
|
4,875
|
|
|
1,346
|
|
Residential
|
|
|
5,598
|
|
|
5,598
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Second
mortgage loans and mezzanine loans:
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
|
19,225
|
|
|
19,225
|
|
|
—
|
|
Multi-family
residential
|
|
|
2,850
|
|
|
2,850
|
|
|
—
|
|
Office
|
|
|
550
|
|
|
550
|
|
|
—
|
|
|
|
|
284,628
|
|
|
283,282
|
|
|
1,346
|
|
Allowance
for possible losses
|
|
|
(669
|
)
|
|
(644
|
)
|
|
(25
|
)
|
Deferred
fee income
|
|
|
(2,616
|
)
|
|
(2,596
|
)
|
|
(20
|
)
|
Real
estate loans, net
|
|
$
|
281,343
|
|
$
|
280,042
|
|
$
|
1,301
|
|
At
September 30, 2007 seven non-performing loans were outstanding to seven separate
unaffiliated borrowers, having an aggregate principal balance of $63,627,000,
which is before loan loss allowances, and represented 25.5% of total gross
loans
and 19.3% of total assets.
Included
within non-performing loans are five loans which were reclassified to
non-performing at September 30, 2007 with an aggregate principal balance
of
$52,548,000, three of which are represented by existing multi-family condominium
developments in Florida and aggregated $37,847,000. The two remaining loans
that
were transferred to non-performing at September 30, 2007 with principal balances
of $13,563,000 and $1,138,000 are secured by a multi-family apartment complex
in
Fort Wayne, Indiana and a retail building in New York City respectively.
One of
the loans noted above is secured by an existing multi family condominium
development in Florida, with an aggregate principal balance of $19,422,000,
was
acquired by foreclosure subsequent to September 30, 2007.
Four
of
the non-performing loans are deemed impaired as it is probable that the Trust
will not be able to collect all amounts due according to their contractual
terms
and allowances of $5,917,000 have been established for them.
Of
the
real estate loans that were earning interest at September 30, 2007 and 2006,
$16,000,000 and $24,770,000, respectively, were deemed impaired and are subject
to loan loss allowances of $3,000,000 and $644,000, respectively. During
the
years ended September 30, 2007, 2006 and 2005, respectively, an average of
$33,416,000, $3,122,000 and $3,770,000 of real estate loans were deemed
impaired, on which $3,038,000, $137,000 and $460,000 of interest income was
recognized.
Loans
originated by the Trust generally provide for interest rates, which are indexed
to the prime rate. The weighted average contractual interest rate on all
loans
was 12.74% and 13.06% at September 30, 2007 and 2006, respectively.
Included
in real estate loans at September 30, 2006 was one second mortgage to a related
party, a venture in which the Trust (through a wholly owned subsidiary) holds
a
50% interest. The balance of the mortgage loan was $550,000 which was repaid
in
full in December 2006. Interest received on loans to related parties totaled
$15,000 and $109,000 for the years ended September 30, 2007 and 2006,
respectively.
At
September 30, 2007, five separate unaffiliated borrowers each had loans
outstanding in excess of 6% of the total loan portfolio. Information regarding
these loans is set forth in the table below:
Gross
Loan Balance
|
|
#
Of Loans
|
|
%
Of Gross Loans
|
|
%
Of Assets
|
|
Type/(Number)
|
|
State/(Number)
|
|
$63,999,000
|
|
|
6
|
|
|
25.65
|
%
|
|
19.51
|
%
|
|
Multi-family
(5) residential (1)
|
|
|
TN
(5) NY (1
|
)
|
28,879,000
|
|
|
14
|
|
|
11.57
|
|
|
8.80
|
|
|
Existing
office with retail/assemblage
|
|
|
NJ
(14
|
)
|
26,075,000
|
|
|
1
|
|
|
10.45
|
|
|
7.95
|
|
|
Existing
office/condo conversion
|
|
|
NY
(1
|
)
|
19,422,000
|
|
|
1
|
|
|
7.78
|
|
|
5.92
|
|
|
Existing
multi-family/condo conversion
|
|
|
FL
(1
|
)
|
16,000,000
|
|
|
1
|
|
|
6.41
|
|
|
4.88
|
|
|
Land
|
|
|
FL
(1
|
)
|
No
other
borrower or single loan accounted for more than 6% of the Trust’s loan portfolio
or 5% of the Trust’s assets.
Annual
maturities of real estate loans receivable before allowances for possible
losses
during the next five years and thereafter are summarized as follows (dollar
amounts in thousands):
Year
Ending September 30,
|
|
Amount
|
|
2008
|
|
$
|
243,200
|
|
2009
|
|
|
6,298
|
|
2010
|
|
|
—
|
|
2011
|
|
|
28
|
|
2012
and thereafter
|
|
|
—
|
|
Total
|
|
$
|
249,526
|
|
The
Trust’s portfolio consists primarily of senior and junior mortgage loans,
secured by residential and commercial property, 43% of which are located
in the
New York metropolitan area which includes New Jersey, 25% in the state of
Tennessee, 24% in the state of Florida, and 8% in seven other
states.
If
a loan
is not repaid at maturity, in addition to foreclosing on the property, the
Trust
may either extend the loan or consider the loan past due. The Trust analyzes
each loan separately to determine the appropriateness of an extension. In
analyzing each situation, management examines many aspects of the loan
receivable, including the value of the collateral, the financial strength
of the
borrower, past payment history and plans of the owner of the property. There
were $269,609,000 of real estate loans receivable which matured in fiscal
2007,
of which, $190,314,000 were extended.
At
September 30, 2007, the three largest real estate loans had principal balances
outstanding of approximately $26,075,000, $24,836,000 and $19,422,000
respectively. Of the total interest and fees earned on real estate loans
during
the year ended September 30, 2007, 9%, 2% and 7% related to these loans,
respectively.
During
the year ended September 30, 2007, the Trust sold participation interests
totaling $1,110,000 of which $475,000 was to BRT Funding LLC, a related party.
All of these participations were sold at par, and accordingly no gain or
loss
was recognized on the sales.
Included
within the real estate loans at September 30, 2007 are two loan participations
that were purchased from BRT Funding LLC, at par. These loan participations
totaled $10,009,000 and were purchased pursuant to the joint venture agreement
with CIT Group Inc.
NOTE
3 - REAL ESTATE PROPERTIES
A
summary
of real estate properties for the year ended September 30, 2007 is as follows
(dollar amounts in thousands):
|
|
September
30, 2006
Amount
|
|
Costs
Capitalized
|
|
Amortization
|
|
September
30, 2007
Amount
|
|
Residential
units-shares of cooperative
corporations
|
|
$
|
—
|
|
$
|
65
|
|
$
|
—
|
|
$
|
65
|
|
Shopping
centers/retail
|
|
|
4,012
|
|
|
41
|
|
|
—
|
|
|
4,053
|
|
|
|
|
4,012 |
|
|
106 |
|
|
— |
|
|
4,118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
Leasehold Amortization
|
|
|
(670
|
)
|
|
—
|
|
|
(112
|
)
|
|
(782
|
)
|
Total
real estate properties
|
|
$
|
3,342
|
|
$
|
106
|
|
$
|
(112
|
)
|
$
|
3,336
|
|
The
Trust
holds, with a minority partner, a leasehold interest in a portion of a retail
shopping center located in Yonkers, New York. The leasehold interest is for
approximately 28,500 square feet and, including all option periods, expires
in
2045. This leasehold interest requires future minimum rent payments totaling
$987,000 over the lease term and requires annual payments of $58,000. The
minority equity interest, which equals 10%, amounted to $222,000 at September
30, 2007 and $146,000 at September 30, 2006, is included as a component of
accounts payable and accrued liabilities on the consolidated balance sheet.
Future
minimum rentals to be received by the Trust, pursuant to noncancellable
operating leases in excess of one year, from properties on which the Trust
has
title at September 30, 2007 are as follows (dollar amounts in thousands):
Year
Ending September 30,
|
|
Amount
|
|
2008
|
|
$
|
1,544
|
|
2009
|
|
|
1,360
|
|
2010
|
|
|
1,283
|
|
2011
|
|
|
1,314
|
|
2012
|
|
|
1,305
|
|
Thereafter
|
|
|
6,502
|
|
Total
|
|
$
|
13,308
|
|
NOTE
4 - INVESTMENT IN UNCONSOLIDATED JOINT VENTURES AT EQUITY
BRT
Funding LLC
On
November 2, 2006, BRT Joint Venture I LLC, a wholly owned subsidiary of the
Trust which is referred to as the BRT member, entered into a joint venture
agreement with CIT Capital USA, Inc., which is referred to herein as the
CIT
member and which is a wholly owned subsidiary of CIT Group, Inc. to form
BRT
Funding LLC, a limited liability company established under the laws of the
State
of Delaware, which is referred to as “the Joint Venture.” The Joint Venture
engages in the business of investing in short-term commercial real estate
loans
for terms of six months to three years, commonly referred to as bridge loans.
The BRT member is the managing member of the Joint Venture. The initial
capitalization of the Joint Venture will be up to $100 million of which 25%
is
being funded by the BRT member and 75% is being funded by the CIT
member.
The
BRT
member is responsible for the payment of a fee to a merchant bank for arranging
the transaction and securing capital from the CIT member. One of the managing
directors of the merchant bank is an independent director of One Liberty
Properties, Inc. which is an affiliate of BRT. The merchant banking firm
is
otherwise unrelated to BRT. The fee, which will total $3 million provided
that
the CIT member contributes its entire $75 million in capital, is being amortized
over five years. The CIT member has contributed $35,299,000 in capital as
of
September 20, 2007 and a fee of $1,412,000 has been paid or accrued.
Amortization of the fee totaled $200,000 for the period from November 2,
2006 to
September 30, 2007 and is shown as a reduction in equity in earnings of
unconsolidated joint ventures. The Trust’s equity investment in this
unconsolidated joint venture totaled $12,054,000 at September 30,
2007.
Condensed
financial information regarding the Joint Venture is shown below (dollar
amounts
in thousands):
Condensed
Balance Sheet
|
|
September
30, 2007
|
|
|
|
|
|
Cash
|
|
$
|
484
|
|
Real
estate loans, net of deferred fees
|
|
|
48,230
|
|
Accrued
interest receivable
|
|
|
680
|
|
Other
assets
|
|
|
149
|
|
Total
assets
|
|
$
|
49,543
|
|
Other
liabilities
|
|
|
410
|
|
Equity
|
|
|
49,133
|
|
Total
liabilities and equity
|
|
$
|
49,543
|
|
|
|
For
the Period from
November
2, 2006 to
September
30, 2007
|
|
Condensed
Statement of Operations
|
|
|
|
Interest
and fees on real estate loans
|
|
$
|
4,121
|
|
Operating
expenses
|
|
|
1
|
|
Net
income attributable to members
|
|
$
|
4,120
|
|
Company
share of net income
|
|
$
|
1,279
|
|
Amount
recorded in income statement (1)
|
|
$
|
1,079
|
|
|
|
|
|
|
|
(1) |
The
amount recorded in the income statement is net of $200,000 amortization
of
the fee that the Trust paid to a merchant bank for arranging the
transaction and securing the capital from the CIT member. The amount
being
paid to the merchant bank is being amortized over five years.
|
Real
Estate Ventures
The
Trust
is also a partner in unconsolidated joint ventures which own and operate
six
properties. These real estate ventures generated $93,000 and ($7,000) in
equity
earnings (loss) for the year ended September 30, 2007 and 2006, respectively.
The Trust’s equity investment in these unconsolidated joint ventures totaled
$2,113,000 and $9,608,000 at September 30, 2007 and 2006
respectively.
In
December 2006, one of the joint ventures sold a corporate office center,
with a
retail component, located in Dover, Delaware for $17,400,000. The Trust
recognized a gain on the sale of the property of $1,819,000. The Trust also
received a cash distribution of $9,000,000 from the venture.
NOTE
5 - ALLOWANCE FOR POSSIBLE LOAN LOSSES
During
the fiscal year ended September 30, 2007, the Trust recorded an additional
provision for possible loan losses of $9,300,000. There was no provision
for
loan losses recorded in the years ended September 30, 2006 and
2005.
For
the
years ended September 30, 2007, 2006 and 2005 the Trust did not record any
valuation adjustments on owned real estate.
An
analysis of the allowance for possible losses is as follows (dollar amounts
in
thousands):
|
|
Year
Ended September 30,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Balance
at beginning of year
|
|
$
|
669
|
|
$
|
669
|
|
$
|
881
|
|
Provision
for loan loss
|
|
|
9,300
|
|
|
—
|
|
|
—
|
|
Charge-offs
|
|
|
(1,052
|
)
|
|
—
|
|
|
(212
|
)
|
Balance
at end of year
|
|
$
|
8,917
|
|
$
|
669
|
|
$
|
669
|
|
The
allowance for possible losses applies to five loans aggregating $61,648,000,
at
September 30, 2007, two loans aggregating $26,116,000 at September 30, 2006
and
two loans aggregating $3,065,000 at September 30, 2005.
NOTE
6 - AVAILABLE-FOR-SALE SECURITIES
The
cost
of available-for-sale securities at September 30, 2007 was $9,839,000. The
fair
value of these securities was $34,936,000 at September 30, 2007. Gross
unrealized gains at September 30, 2007 were $25,100,000 and are reflected
as
accumulated other comprehensive income on the accompanying consolidated balance
sheets. Gross unrealized losses totaled $3,000 at September 30,
2007.
Included
in available-for-sale securities are 624,800 shares of Entertainment Properties
Trust (NYSE:EPR), which have a cost basis of $8,207,000 and a fair value
at
September 30, 2007 of $31,740,000. The fair value of the Trust's investment
in
Entertainment Properties Trust at November 30, 2007 was $33,296,000. During
the
year ended September 30, 2007 the Trust sold 384,800 shares of Entertainment
Properties Trust and other miscellaneous securities with a cost basis of
$5,142,000 for $24,597,000, which resulted in a gain of
$19,455,000.
NOTE
7 -REAL ESTATE PROPERTIES HELD FOR SALE
At
September 30, 2007, real estate properties held-for-sale consists of two
properties that were acquired by foreclosure or deed in lieu of foreclosure
during the current fiscal year. The first is an 80,000 square foot retail
center
and 1.8 acre adjacent land parcel located in Stuart, Florida and the second
is a
22,000 square foot industrial building
located in South Plainfield, New Jersey. At September 30, 2006 real estate
properties held for sale consisted of a multi family property in Charlotte,
North Carolina that was sold during the current fiscal year for a gain of
$352,000. In connection with the sale, BRT provided a purchase money mortgage
in
the amount of $2,560,000. This loan was repaid in May 2007.
NOTE
8 -DEBT OBLIGATIONS
Debt
obligations consist of the following (dollar amounts in thousands):
|
|
September
30,
|
|
|
|
2007
|
|
2006
|
|
Notes
payable - credit facility
|
|
$
|
20,000
|
|
$
|
122,000
|
|
Margin
accounts
|
|
|
—
|
|
|
19,464
|
|
Borrowed
funds
|
|
|
20,000
|
|
|
141,464
|
|
|
|
|
|
|
|
|
|
Junior
subordinated notes
|
|
|
56,702
|
|
|
56,702
|
|
|
|
|
|
|
|
|
|
Mortgage
payable
|
|
|
2,395
|
|
|
2,471
|
|
|
|
|
|
|
|
|
|
Total
debt obligations
|
|
$
|
79,097
|
|
$
|
200,637
|
|
The
Trust
has a $185 million credit facility with North Fork Bank, VNB New York Corp.,
Signature Bank and Manufacturers and Traders Trust Company. The facility
bears
interest at Libor + 225 basis points. The credit facility was increased from
$155 million to $185 million effective October 31, 2006. The credit facility
matures on February 1, 2008 and may be extended for two one-year period for
a
fee of $462,500 for each extension. Subsequent to September 30, 2007 the
Trust
extended the facility for one year and paid the required fee. Under the credit
facility, the Trust is required to maintain cash or marketable securities
at all
times of not less than $15 million. Borrowings under the credit facility
are
secured by specific receivables and the facility provides that the amount
borrowed will not exceed (a) 65% of first mortgages, plus (b) 50% of second
mortgages and certain owned real estate pledged to the participating banks
(collectively referred to as the “Borrowing Base”.) The portion represented by
second mortgage loans and certain real owned real estate pledged may not
exceed
15% of the borrowing base. Borrowings under the facility bear interest at
30 day
LIBOR plus 225 basis points. At September 30, 2007, $82 million was available
to
be drawn based on the lending formula under the credit facility and at November
30, $88 million was available to be drawn and $12,000,000 was outstanding.
The
following is summary information relating to the credit facility.
|
|
For
the Year Ended September 30,
|
|
|
|
2007
|
|
2006
|
|
Average
balance
|
|
$
|
54,041,000
|
|
$
|
88,527,000
|
|
Outstanding
balance at year end
|
|
$
|
20,000,000
|
|
$
|
122,000,000
|
|
Weighted
average interest rate during the year
|
|
|
7.58
|
%
|
|
7.28
|
%
|
Weighted
average interest rate at year end
|
|
|
7.37
|
%
|
|
7.58
|
%
|
The
interest rates do not reflect deferred fee amortization of $654,000 and $357,000
for the years ended September 30, 2007 and 2006 respectively which is a
component of interest expense. These fees are being amortized over the life
of
the credit facility. At September 30, 2007, there was $226,000 of unamortized
deferred fees which is included in other assets.
In
addition to the credit facility, the Trust has the ability to borrow funds
through its two margin accounts. In order to maintain one of the accounts
an
annual fee equal to .3% of the market value of the pledged securities, which
is
included in interest expense, is paid. Marketable securities with a fair
market
value at September 30, 2007 of $34,936,000 were pledged as collateral. The
following is summary information relating to the margin accounts:
|
|
For
the Year Ended September 30,
|
|
|
|
2007
|
|
2006
|
|
Average
balance
|
|
$
|
3,691,000
|
|
$
|
19,933,000
|
|
Outstanding
balance at year end
|
|
$
|
—
|
|
$
|
19,464,000
|
|
Weighted
average interest rate during the year
|
|
|
7.51
|
%
|
|
6.88
|
%
|
Weighted
average interest rate at year end
|
|
|
—
|
|
|
7.50
|
%
|
The
interest rates do not include a fee of .3% which totaled $144,000 and $98,000
for the year ended September 30, 2007 and 2006 respectively of the account
value
which is a component of interest expense.
BRT
issued $30,928,000 principal amount 30-year subordinated notes to BRT Realty
Trust Statutory Trust II, an unconsolidated affiliate of BRT. The Statutory
Trust was formed to issue $928,000 worth of common securities (all of the
Statutory Trust's common securities) to BRT and to sell $30 million of preferred
securities to third party investors. The notes pay interest quarterly at
a fixed
rate of 8.49% per annum for ten years at which time they convert to a floating
rate of LIBOR plus 290 basis points. The Statutory Trust remits dividends
to the
common and preferred security holders under the same terms as the subordinated
notes. The notes and preferred securities mature in April 2036 and may be
redeemed in whole or in part anytime after five years (April 2011), without
penalty, at BRT's option. To the extent BRT redeems notes, the Statutory
Trust
is required to redeem a corresponding amount of preferred securities. Issuance
costs of $944,500 were incurred in connection with this transaction and are
included in other assets. These costs are being amortized over the intended
10-year holding period of the notes. At September 30, 2007 unamortized issuance
costs totaled $809,000.
BRT
issued $25,774,000 principal amount 30-year subordinated notes to BRT Realty
Trust Statutory Trust I, an unconsolidated affiliate of BRT. The Statutory
Trust
was formed to issue $774,000 worth of common securities (all of the Statutory
Trust's common securities) to BRT and to sell $25 million of preferred
securities to third party investors. The notes pay interest quarterly at
a fixed
rate of 8.23% per annum for ten years at which time they convert to a floating
rate of LIBOR plus 300 basis points. The Statutory Trust remits dividends
to the
common and preferred security holders under the same terms as the subordinated
notes. The notes and preferred securities mature in May 2036 and may be redeemed
in whole or in part anytime after five years (May 2011), without penalty,
at
BRT's option. To the extent BRT redeems notes, the Statutory Trust is required
to redeem a corresponding amount of preferred securities. Issuance costs
of
$822,000 were incurred in connection with this transaction and are included
in
other assets. These costs are being amortized over the intended 10 year holding
period of the notes. At September 30, 2007 unamortized issuance costs totaled
$696,000.
BRT
Realty Trust Statutory Trusts I and II are variable interest entities under
FIN
46R. Under the provisions of FIN 46, BRT has determined that the holders
of the
preferred securities are the primary beneficiaries of the two Statutory Trusts.
Accordingly, BRT does not consolidate the Statutory Trusts and has reflected
the
obligations of the Statutory Trusts under the caption "Junior Subordinated
Notes." The investment in the common securities of the Statutory Trusts is
reflected in other assets and is accounted under the equity method of
accounting.
The
mortgage payable was placed on a shopping center in which the Trust, through
a
subsidiary, is a joint venture partner and holds a majority interest in a
leasehold position. The mortgage with an original principal balance of
$2,850,000 bears interest at a fixed rate of 6.25% for the first five years
and
has a maturity of October 1, 2011. There is an option to extend the mortgage
to
October 1, 2016. At September 30, 2007, the outstanding balance was
$2,395,000.
Scheduled
principal repayments on the mortgage during the initial and extended maturity
are as follows (dollar amounts in thousands):
Years
Ending September 30,
|
|
Amount
|
|
2008
|
|
$
|
80
|
|
2009
|
|
|
86
|
|
2010
|
|
|
91
|
|
2011
|
|
|
97
|
|
2012
and thereafter
|
|
|
2,041
|
|
|
|
$
|
2,395
|
|
NOTE
9 - INCOME TAXES
The
Trust
has elected to be taxed as a real estate investment trust ("REIT”), as defined
under the Internal Revenue Code of 1985, 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 90% of its REIT taxable income, as defined, to its
shareholders. 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.
During
the years ended September 30, 2007 and 2006, the Trust recorded $1,250,000
and
$563,000, respectively, of corporate tax expense which included (i) $1,253,000
and $574,000, respectively, for the payment of Federal excise tax which is
based
on taxable income generated but not yet distributed; and (ii) ($3,000) and
($11,000), respectively, for state and local taxes relating to the 2007 and
2006
tax years.
Earnings
and profits, which determine the taxability of dividends to shareholders,
differs from net income reported for financial statement purposes due to
various
items among which are timing differences related to loan loss provision,
depreciation methods and carrying values.
Taxable
income is expected to be approximately $8,200,000 higher than financial
statement income during calendar 2007, primarily due to approximately $6,000,000
of the loan loss provision which is not deductible for tax purposes until
a
direct write down is recorded.
NOTE
10 -SHAREHOLDERS' EQUITY
Distributions
During
the year ended September 30, 2007, BRT declared cash distributions in the
amount
of $2.44 per share. It is estimated that 15% of the distribution or $.37
will be
capital gain distributions and the remaining $2.07 will be ordinary
income.
Underwritten
Public Offering
On
December 11, 2006, the Trust sold 2,800,000 shares of beneficial interest,
par
value $3.00 per share pursuant to an underwritten public offering and on
December 13, 2006, the underwriters exercised their over allotment option
to the
extent of 132,500 shares. The net proceeds to the Trust, after deducting
the
underwriting discount and offering expenses incurred by the Trust, were $77.1
million which were used to pay down the revolving credit facility by $58
million
and to pay off in full our outstanding balance of $19 million on the margin
line.
Stock
Options
On
December 6, 1996, the Board of Trustees adopted the BRT 1996 Stock Option
Plan
(Incentive/Nonstatutory Stock Option Plan), whereby a maximum of 450,000
shares
of beneficial interest are reserved for issuance to the Trust’s officers,
employees, trustees and consultants or advisors to the Trust. Incentive stock
options are granted at per share amounts at least equal to the fair value
at the
date of grant, whereas for nonstatutory stock options, the exercise price
may be
any amount determined by the Board, but not less than the par value of a
share.
In December 2001, the 1996 stock option plan was amended to allow for an
additional 250,000 shares to be issued.
In
December 2000, the Board of Trustees granted under the 1996 Stock Option
Plan,
options to purchase 165,500 shares of beneficial interest at $7.75 per share
to
a number of officers, employees and consultants of the Trust. The options
are
cumulatively exercisable at a rate of 25% per annum, commencing after two
years
and expire ten years after grant date. During the current year, 2,500 of
the
options were exercised. At September 30, 2007, options to purchase 12,750
shares
are remaining, all of which are exercisable.
In
December 2001 the Board of Trustees granted, under the 1996 Stock Option
Plan,
options to purchase 89,000 shares of beneficial interest at $10.45 per share
to
a number of officers, employees and consultants of the Trust. The options
are
cumulatively exercisable at a rate of 25% per annum, commencing after one
year
and expiring ten years after grant date. During the current year
noneof
the
options were exercised. At September 30, 2007, options to purchase 11,000
shares
are remaining, all of which are exercisable.
The
Trust
recorded $17,000 of compensation expense during the year ended September
30,
2006 using the fair value method related to options which all vested in the
prior year. No further compensation expense has been recorded as all stock
options were fully vested as of December 31, 2005.
Changes
in the number of shares under all option arrangements are summarized as
follows:
|
|
Year
Ended September 30,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Outstanding
at beginning of period
|
|
|
26,250
|
|
|
83,186
|
|
|
149,124
|
|
Cancelled |
|
|
— |
|
|
(5,000 |
) |
|
(4,000 |
) |
Exercised |
|
|
(2,500 |
) |
|
(51,936 |
) |
|
(61,938 |
) |
Outstanding
at end of period
|
|
|
23,750
|
|
|
26,250
|
|
|
83,186
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at end of period
|
|
|
23,750
|
|
|
26,250
|
|
|
23,561
|
|
|
|
|
|
|
|
|
|
|
|
|
Option
prices per share outstanding
|
|
$
|
7.75-$10.45
|
|
$
|
7.75-$10.45
|
|
$
|
5.9375-$10.45
|
|
As
of
September 30, 2007 and 2006, the outstanding options had a weighted average
remaining contractual life of approximately 3.6 and 4.6 years and a weighted
average exercise price of $9.00 and $8.88 respectively.
Restricted
Shares
On
December 16, 2002, the Board of Trustees adopted and on March 24, 2003 the
shareholders of The Trust approved the 2003 BRT Incentive Plan, whereby a
maximum of 350,000 shares of beneficial interest may be issued in the form
of
options or restricted shares to the Trust’s officers, employees, trustees and
consultants.
During
the years ended September 30, 2007, 2006 and 2005, the Trust issued 45,175,
42,450 and 36,950 restricted shares under the Plan, respectively. The shares
vest five years from the date of issuance and under certain circumstances
may
vest earlier. For accounting purposes, the restricted stock is not included
in
the outstanding shares shown on the balance sheet until they vest. For the
years
ended September 30, 2007, 2006 and 2005, the Trust recognized $765,000, $572,000
and $293,000 of compensation expense respectively. At September 30, 2007,
$2,204,000 has been deferred as unearned compensation and will be charged
to
expense over the remaining vesting periods. As of September 30, 2007 and
2006
the outstanding restricted shares had a weighted average grant date fair
value
of $23.99 and $22.36 per share respectively and the weighted average vesting
period is 2.72 and 3.14 years, respectively.
Changes
in number of shares under the 2003 BRT Incentive Plan is shown
below:
|
|
Years
Ended September 30,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Outstanding
at beginning of the year
|
|
|
125,010
|
|
|
86,310
|
|
|
57,080
|
|
Issued
|
|
|
45,175
|
|
|
42,450
|
|
|
36,950
|
|
Cancelled
|
|
|
(7,200
|
)
|
|
—
|
|
|
(7,720
|
)
|
Vested
|
|
|
(5,000
|
)
|
|
(3,750
|
)
|
|
—
|
|
Outstanding
at the end of the year
|
|
|
157,985
|
|
|
125,010
|
|
|
86,310
|
|
Earnings
Per Share
The
following table sets forth the computation of basic and diluted earnings
per
share (dollar amounts in thousands):
|
|
2007
|
|
2006
|
|
2005
|
|
Numerator
for basic and diluted earnings per share: |
|
|
|
|
|
|
|
Net
income
|
|
$
|
35,070
|
|
$
|
20,071
|
|
$
|
16,214
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for basic earnings per share -
weighted average shares
|
|
|
10,501,738
|
|
|
7,931,734
|
|
|
7,747,804
|
|
Effect
of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
Employee
stock options
|
|
|
16,559
|
|
|
28,221
|
|
|
63,679
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for diluted earnings per share -
adjusted weighted average shares and assumed conversions
|
|
|
10,518,297
|
|
|
7,959,955
|
|
|
7,811,483
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
3.34
|
|
$
|
2.53
|
|
$
|
2.09
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$
|
3.33
|
|
$
|
2.52
|
|
$
|
2.08
|
|
Treasury
Shares
During
the year ended September 30, 2007 and 2006, no shares were purchased by the
Trust.
During
the year ended September 30, 2007, 47,675 treasury shares were issued in
connection with the exercise of stock options and restricted stock issuance
under the Trust’s plans. In the year ended September 30, 2006, the Trust issued
94,386 Treasury shares in connection with the exercise of stock options under
the Trust’s existing stock option plan. As of September 30, 2007, the Trust owns
1,163,216 treasury shares of beneficial interest at an aggregate cost of
$10,021,000.
NOTE
11 - ADVISOR'S COMPENSATION AND RELATED PARTY TRANSACTIONS
Certain
of the Trust's officers and trustees are also officers, directors of REIT
Management Corp. ("REIT"), to which the Trust pays advisory fees for
administrative services and investment advice. Fredric H. Gould, Chairman
of the
Board, is the sole shareholder of REIT Management Corp. The agreement, which
expires on December 31, 2010, provides that directors and officers of REIT
may
serve as trustees, officers and employees of the Trust, but shall not be
compensated for services rendered in such latter capacities. Advisory fees
are
currently charged to operations at a rate of .6% on invested assets. Prior
to
January 1, 2007 advisory fees were charged to operations at a rate of 1%
on real
estate loans and ½ of 1% on other invested assets. Advisory fees amounted to
$2,308,000, $2,682,000 and $1,862,000 for the years ended September 30, 2007,
2006, and 2005, respectively.
The
Trust’s borrowers pay fees directly to REIT based on their loans, which
generally are one-time fees payable upon funding of the loan commitment,
in the
amount of ½ of 1% of the total commitment. Prior to January 1, 2007, this fee
was 1%. These fees, which are permitted under the advisory agreement, on
loans
arranged on behalf of the Trust amounted to $775,000, $3,200,000 and $2,697,000
for the years ended September 30, 2007, 2006 and 2005,
respectively.
Management
of certain properties for the Trust is provided by Majestic Property Management
Corp., a corporation in which the chairman of the trust is the sole shareholder,
under renewable year-to-year agreements. Certain of the Trust’s officers and
Trustees are also officers and directors of Majestic Property Management
Corp.
Majestic Property Management Corp. provides real property management, real
estate brokerage and construction supervision services to the Trust and its
joint venture properties. For the years ended September 30, 2007, 2006 and
2005
fees for these services aggregated $209,000, $322,000 and $387,000,
respectively.
The
Chairman of the Trust is also Chairman of the Board and Chief Executive Officer
of One Liberty Properties, Inc., a related party, and is an executive officer
and sole shareholder of Georgetown Partners Inc., the managing general partner
of Gould Investors L.P. and the sole member of Gould General LLC, a general
partner of Gould Investors L.P., a related party. Certain of the Trust’s
officers and Trustees are also officers and directors of Georgetown Partners
Inc.
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, which we refer to as the Shared Services Agreement.
During the years ended September 30, 2007, 2006 and 2005, allocated general
and
administrative expenses reimbursed by the Trust to Gould Investors L.P. pursuant
to the Shared Services Agreement, aggregated $907,000, $782,000 and $708,000,
respectively. At September 30, 2007, $154,000 remains unpaid and is included
in
accounts payable and accrued liabilities on the consolidated balance
sheet.
NOTE
12 -COMMITMENT
The
Trust
maintains a non-contributory defined contribution pension plan covering eligible
employees and officers. Contributions by the Trust are made through a money
purchase plan, based upon a percent of qualified employees' total salary
as
defined therein. Pension expense approximated $240,000, $237,000 and $202,000
during the years ended September 30, 2007, 2006 and 2005, respectively. At
September 30, 2007, $182,000 remains unpaid and is included in accounts payable
and accrued liabilities on the consolidated balance sheet.
NOTE
13 -SUBSEQUENT EVENTS
On
October 23, 2007 The Trust acquired by foreclosure 174 unsold units in a
condominium complex in Apopka, Florida. At September 30, 2007 the loan had
an
outstanding principal balance of $19,422,000 and a valuation allowance of
$2,297,000. At December 31, 2007 The Trust will reclassify this asset to
real
estate properties at a anticipated carrying value of approximately
$17,125,000.
NOTE
14 -QUARTERLY FINANCIAL DATA (Unaudited)
|
|
1st
Quarter
Oct.-Dec
|
|
2nd
Quarter
Jan.-March
|
|
3rd
Quarter
April-June
|
|
4th
Quarter
July-Sept.
|
|
Total
For
Year
|
|
|
|
2007
|
|
Revenues |
|
|
12,745 |
|
|
10,994 |
|
|
10,544 |
|
|
8,617 |
|
|
42,900 |
|
Income
before equity in earnings of unconsolidated
real estate ventures, gain on
sale of available-for-sale securities, minority
interest and discontinued operations
|
|
|
6,044
|
|
|
5,484
|
|
|
4,830
|
|
|
(4,028
|
)
|
|
12,330
|
|
Discontinued
operations
|
|
|
358
|
|
|
—
|
|
|
—
|
|
|
10
|
|
|
368
|
|
Net
income
|
|
|
8,289
|
|
|
20,864
|
|
|
9,406
|
|
|
(3,489
|
)
|
|
35,070
|
|
Income
per beneficial share |
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
|
.91
|
|
|
1.88
|
|
|
.85
|
|
|
(.31
|
)
|
|
3.30
|
|
Discontinued
operations
|
|
|
.04
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
.04
|
|
Basic
earnings per share
|
|
|
.95
|
|
|
1.88
|
|
|
.85
|
|
|
(.31
|
)
|
|
3.34
(a
|
)
|
|
|
1st
Quarter
Oct.-Dec
|
|
2nd
Quarter
Jan.-March
|
|
3rd
Quarter
April-June
|
|
4th
Quarter
July-Sept.
|
|
Total
For
Year
|
|
|
|
2006
|
|
Revenues |
|
$
|
7,400
|
|
$
|
8,121
|
|
$
|
10,106
|
|
$
|
11,861
|
|
$
|
37,488
|
|
Income
before equity in earnings of unconsolidated
real estate ventures, gain on
sale of available-for-sale securities, minority
interest and discontinued operations
|
|
|
3,131
|
|
|
3,653
|
|
|
4,336
|
|
|
5,660
|
|
|
16,780
|
|
Discontinued
operations
|
|
|
(62
|
)
|
|
345
|
|
|
48
|
|
|
461
|
|
|
792
|
|
Net
income
|
|
|
4,715
|
|
|
4,119
|
|
|
4,950
|
|
|
6,287
|
|
|
20,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
per beneficial share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
|
.61
|
|
|
.48
|
|
|
.61
|
|
|
.73
|
|
|
2.43
|
|
Discontinued
operations
|
|
|
(.01
|
)
|
|
.04
|
|
|
.01
|
|
|
.06
|
|
|
.10
|
|
Basic
earnings per share
|
|
$
|
.60
|
|
$
|
.52
|
|
$
|
.62
|
|
$
|
.79
|
|
$
|
2.53
(a
|
)
|
|
(a) |
Calculated
on weighted average shares outstanding for the fiscal
year.
|
May
not
foot due to rounding.
BRT
REALTY TRUST
AND SUBSIDIARIES
SCHEDULE
III - REAL ESTATE PROPERTIES, REAL
ESTATE PROPERTIES HELD FOR SALE AND ACCUMULATED
DEPRECIATION
SEPTEMBER
30, 2007
(Dollar
amounts in thousands)
|
|
|
|
Initial
Cost to Company
|
|
Costs
Capitalized Subsequent
to Acquisition
|
|
Gross
Amount At Which Carried at
September
30, 2007
|
|
|
|
|
|
|
|
|
|
Description
|
|
Encumbrances
|
|
Land
|
|
Buildings
and
Improvements
|
|
Improvements
|
|
Carrying
Costs
|
|
Land
|
|
Buildings
and
Improvements
|
|
Total
|
|
Accumulated
Amortization
|
|
Date
of
Construction
|
|
Date
Acquired
|
|
Depreciation
Life
For
Latest
Income
Statement
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yonkers,
New York
|
|
$
|
2,395
|
|
|
—
|
|
$
|
4,000
|
|
$
|
53
|
|
|
—
|
|
|
—
|
|
$
|
4,053
|
|
$
|
4,053
|
|
$
|
782
|
|
|
—
|
|
|
Aug-00
|
|
|
39
years
|
|
South
Plainfield, New Jersey
|
|
|
—
|
|
|
275
|
|
|
1,098
|
|
|
—
|
|
|
—
|
|
$
|
275
|
|
|
1,098
|
|
|
1,373
|
|
|
—
|
|
|
—
|
|
|
Aug-07
|
|
|
N/A
|
|
Stuart,
Florida
|
|
|
—
|
|
|
2,984
|
|
|
4,998
|
|
|
—
|
|
|
—
|
|
|
2,984
|
|
|
4,998
|
|
|
7,982
|
|
|
—
|
|
|
—
|
|
|
July-07
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New
York, NY
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
65
|
|
|
—
|
|
|
—
|
|
|
65
|
|
|
65
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
N/A
|
|
Total
|
|
$
|
2,395
|
|
$
|
3,259
|
|
$
|
10,096
|
|
$
|
118
|
|
$
|
—
|
|
$
|
3,259
|
|
$
|
10,214
|
|
$
|
13,473
|
|
$
|
782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
|
|
|
|
|
BRT
REALTY TRUST AND SUBSIDIARIES
SCHEDULE
III - REAL ESTATE PROPERTIES, REAL ESTATE PROPERTIES HELD FOR
SALE
AND
ACCUMULATED DEPRECIATION
SEPTEMBER
30, 2007
(Dollar
amounts in thousands)
(continued)
Notes
to
the schedule:
(a)
|
|
Total
real estate properties (including properties held for sale)
|
$ |
13,473
|
|
|
Less:
Accumulated depreciation and amortization
|
|
782
|
|
|
Net
real estate properties
|
$ |
12,691
|
(b) |
|
Amortization
of the Trust’s leasehold interests is over the shorter of estimated useful
life or the term of the respective land lease. |
|
|
(c) |
|
Information
not readily obtainable. |
|
|
A
reconciliation of real estate properties (including real estate properties
held
for
sale)
is as follows:
|
|
Year
Ended September 30,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Balance
at beginning of year
|
|
$
|
6,175
|
|
$
|
6,117
|
|
$
|
5,887
|
|
Additions:
|
|
|
|
|
|
|
|
|
|
|
Acquisitions
|
|
|
9,355
|
|
|
—
|
|
|
3,994
|
|
Capitalization
of expenses
|
|
|
106
|
|
|
244
|
|
|
457
|
|
|
|
|
15,636
|
|
|
6,361
|
|
|
10,338
|
|
|
|
|
|
|
|
|
|
|
|
|
Deductions:
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
2,833
|
|
|
74
|
|
|
3,960
|
|
Depreciation/amortization
|
|
|
112
|
|
|
112
|
|
|
261
|
|
|
|
|
2,945
|
|
|
186
|
|
|
4,221
|
|
Balance
at end of year
|
|
$
|
12,691
|
|
$
|
6,175
|
|
$
|
6,117
|
|
|
|
|
|
|
|
|
|
|
|
|
The
aggregate cost of investments in real estate assets for Federal income tax
purposes approximates book value.
BRT
REALTY TRUST AND SUBSIDIARIES
SCHEDULE
IV - MORTGAGE LOANS ON REAL ESTATE
SEPTEMBER
30, 2007
(Dollar
amounts in thousands)
Description
|
|
#
of
Loans
|
|
Interest
Rate
|
|
Final
Maturity
Date
|
|
Periodic
Payment Terms
|
|
Prior
Liens
|
|
|
Face
Amount of Mortgages
|
|
|
Carrying
Amount
Of
Mortgages
|
|
Principal
Amount of Loans subject to delinquent principal or
interest
|
First
Mortgage Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short
Term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family/Condo
conversion
New
York, NY
|
|
1
|
|
Prime+4.00%
|
|
Dec-07
|
|
Interest
monthly, principal at maturity
|
|
—
|
|
$ |
26,075
|
|
$ |
26,075
|
|
—
|
Multi-family
Apartments
Chatanooga,
TN
|
|
1
|
|
Prime+4.00%
|
|
Aug-08
|
|
Interest
monthly, principal at maturity
|
|
—
|
|
|
24,836
|
|
|
24,525
|
|
—
|
Multi-family/Condo
conversion
Apopka,
FL
|
|
1
|
|
Prime+5.00%
|
|
Demand
|
|
Interest
monthly, principal at maturity
|
|
—
|
|
|
19,422
|
|
|
17,125
|
|
19,422
|
Land,
Daytona
Beach, FL
|
|
1
|
|
Prime+5.25%
|
|
Aug-08
|
|
Interest
monthly, principal at maturity
|
|
—
|
|
|
16,000
|
|
|
12,867
|
|
—
|
Multi-family/Condo
conversion
Miami
Beach, FL
|
|
1
|
|
Prime+4.75%
|
|
Demand
|
|
Interest
monthly, principal at maturity
|
|
—
|
|
|
11,927
|
|
|
11,927
|
|
11,927
|
Multi-family,
Madison, TN
|
|
1
|
|
Prime+5.00%
|
|
Apr-08
|
|
Interest
monthly, principal at maturity
|
|
—
|
|
|
11,500
|
|
|
11,439
|
|
—
|
Multi-family,
Madison, TN
|
|
1
|
|
Prime+4.00%
|
|
Apr-08
|
|
Interest
monthly, principal at maturity
|
|
—
|
|
|
11,162
|
|
|
11,075
|
|
—
|
Multi-family,
Fort Wayne, IN
|
|
1
|
|
Prime+5.00%
|
|
Demand
|
|
Interest
monthly, principal at maturity
|
|
—
|
|
|
13,563
|
|
|
11,033
|
|
13,563
|
Land,
New York, NY
|
|
1
|
|
Prime+4.00%
|
|
June-08
|
|
Interest
monthly, principal at maturity
|
|
—
|
|
|
8,871
|
|
|
8,738
|
|
—
|
Multi-family,
Nashville, TN
|
|
1
|
|
Prime+5.00%
|
|
Apr-08
|
|
Interest
monthly, principal at maturity
|
|
—
|
|
|
7,400
|
|
|
7,400
|
|
—
|
Multi-family,
Smyrna, TN
|
|
1
|
|
Prime+4.00%
|
|
Feb-08
|
|
Interest
monthly, principal at maturity
|
|
—
|
|
|
6,400
|
|
|
6,359
|
|
—
|
Misc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0
- 99
|
|
10
|
|
|
|
|
|
|
|
|
|
|
4,952
|
|
|
4,919
|
|
—
|
$1000
- 1,999
|
|
9
|
|
|
|
|
|
|
|
|
|
|
12,690
|
|
|
12,608
|
|
1,138
|
$2,000
- 2,999
|
|
7
|
|
|
|
|
|
|
|
|
|
|
17,288
|
|
|
17,158
|
|
—
|
$3,000
- 2,999
|
|
2
|
|
|
|
|
|
|
|
|
|
|
7,150
|
|
|
7,134
|
|
—
|
$4,000
- 4,999
|
|
4
|
|
|
|
|
|
|
|
|
|
|
19,120
|
|
|
18,580
|
|
6,164
|
$5,000
- 5,999
|
|
3
|
|
|
|
|
|
|
|
|
|
|
17,182
|
|
|
16,456
|
|
6,498
|
Junior
Mortgage loans and Mezzanine
loans
Short
term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Misc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$1,000
- 1,999
|
|
2
|
|
|
|
|
|
|
|
11,495
|
|
|
2,998
|
|
|
2,986
|
|
—
|
$3,000
- 3,999
|
|
2
|
|
|
|
|
|
|
|
17,700
|
|
|
6,075
|
|
|
6,022
|
|
—
|
$4,000
- 4,999
|
|
1
|
|
|
|
|
|
|
|
12,060
|
|
|
4,915
|
|
|
4,915
|
|
4,915
|
|
|
51
|
|
|
|
|
|
|
|
41,255
|
|
|
249,526
|
|
|
239,341
|
|
63,627
|
BRT
REALTY TRUST AND SUBSIDIARIES
SCHEDULE
IV - MORTGAGE LOANS ON REAL ESTATE
SEPTEMBER
30, 2007
(Dollar
amounts in thousands)
(Continued)
Notes
to
the schedule:
(a) |
The
following summary reconciles mortgage loans at their carrying
values:
|
|
|
Year
Ended September 30,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Balance
at beginning of year
|
|
$
|
281,343
|
|
$
|
191,599
|
|
$
|
133,235
|
|
Additions:
|
|
|
|
|
|
|
|
|
|
|
Advances
under real estate loans
|
|
|
122,909
|
|
|
309,727
|
|
|
259,346
|
|
Amortization
of deferred fee income
|
|
|
4,993
|
|
|
3,669
|
|
|
2,665
|
|
Repurchase
of participation interest
|
|
|
5,750
|
|
|
—
|
|
|
—
|
|
|
|
|
133,652
|
|
|
313,396
|
|
|
262,011
|
|
Deductions:
|
|
|
|
|
|
|
|
|
|
|
Collections
of principal
|
|
|
152,129
|
|
|
157,540
|
|
|
159,909
|
|
Sale
of participation interests
|
|
|
1,110
|
|
|
61,188
|
|
|
38,475
|
|
Provision
for loan loss
|
|
|
9,300
|
|
|
—
|
|
|
—
|
|
Collection
of loan fees
|
|
|
3,646
|
|
|
4,924
|
|
|
2,817
|
|
Transfer
to real estate upon foreclosure
|
|
|
9,469
|
|
|
—
|
|
|
2,446
|
|
|
|
|
175,654
|
|
|
223,652
|
|
|
203,647
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at end of year
|
|
$
|
239,341
|
|
$
|
281,343
|
|
$
|
191,599
|
|
(b) |
Carrying
amount of mortgage loans are net of allowances for loan losses
in the
amount of $8,917, $669 and $669 in 2007, 2006 and 2005 respectively.
|
(c) |
Carrying
amount of mortgage loans are net of deferred fee income in the
amount of
$1,268, $2,616 and $3,871 in 2007, 2006 and 2005
respectively.
|
(d) |
The
aggregate cost of mortgage loans for Federal income tax purposes
in
$249,526.
|