Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Overview
We are an internally managed real estate investment trust, also known as a REIT, that owns, operates and to a lesser extent holds interest in joint ventures that own and operate multi family properties. At December 31, 2023, we: (i) wholly-own 21 multi-family properties with an aggregate of 5,420 units and a carrying value of $634.0 million, (ii) have ownership interests, through unconsolidated entities, in seven multi-family properties with an aggregate of 2,287 units, with a carrying value of $30.4 million and (iii) own other assets, through consolidated and unconsolidated entities, with a carrying value of $5.6 million. The 28 multi-family properties are located in 11 states; primarily in the Southeast United States and Texas.
During 2023:
•The unconsolidated joint venture that owned Chatham Court and Reflections, a 494 unit multi-family property located in Dallas, TX, and in which we had a 50% interest, sold such property. Our share of the (i) gain from this sale was $14.7 million, (ii) the related early extinguishment of debt charge was $212,000, and (iii) proceeds from the sale were $19.4 million. In 2023 and 2022, this property accounted for $54,000 and $753,000, respectively, of equity in earnings from unconsolidated joint ventures.
•We paid off our credit facility debt of $19.0 million - we accomplished this by using the proceeds of new mortgage debt of $21.2 million placed on our Silvana Oaks - North Charleston, SC multi-family property; such mortgage debt matures in March 2033, bears an interest rate of 4.45% and is interest only for the term of the mortgage.
•We repurchased 779,423 shares of our common stock for an aggregate purchase price of approximately $14.4 million (i.e., an average price per share of $18.47).
•Entered into an amendment (the "Amendment") to our amended and restated credit facility (the "Facility") with VNB New York, LLC, an affiliate of Valley National Bank (“VNB”), which converted the Facility's interest rate to one-month term SOFR plus 250 basis points, and increased the interest rate floor to 6%. Immediately prior to the amendment, the interest rate on the facility was 8.5%; immediately thereafter, the interest rate was 7.82%
From January 1, 2024 through March 1, 2024, we purchased 123,061 shares of our common stock for an aggregate purchase price of approximately $2.3 million (i.e., an average price of $18.43per share).
Challenges and Uncertainties as a Result of the Volatile Economic Environment; Impact of Development Property
During the past two years, there has been a significant economic uncertainty due, among other things, to volatile interest rates and the challenges presented by an inflationary/potential recessionary environment. Due to this uncertainty and our belief that pricing for acquisition opportunities did not appropriately reflect market conditions, we were especially cautious in pursuing acquisition opportunities in 2023 and may continue to be cautious in pursuing such opportunities in the near future. Further, the competitive environment in several of our markets as well as anticipated expense increases create uncertainty as to our ability to improve income from continuing operations.
We have a 17.45% interest in a 240-unit development property located in Johns Island, SC. As of December 31, 2023, this project is substantially complete and lease-up has begun. We estimate that for 2024, we will record approximately $350,000 to $500,000 of equity in loss from unconsolidated ventures related to this property because the venture will begin recognizing revenue and expenses (and in particular depreciation and interest which had been capitalized during the development phase).
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Results of Operations
Comparison of Years Ended December 31, 2023 and 2022
The term "same store properties" refers to ten multi-family properties with an aggregate of 2,576 units that were owned for all of 2023 and 2022. The term "unconsolidated same store properties" with an aggregate of 2,287 units refers to seven properties that were owned for all of 2023 and 2022. As used in the comparison of the year ended December 31, 2023 and 2022, the term "Partner Buyouts" refers to our purchase in 2022 of the interests of our joint venture partners at 11 properties.
Revenues
The following table compares our revenues for the years indicated:
(Dollars in thousands): 2023 2022 Change % Change
Rental and other revenue from real estate properties. The components of the increase include:
•$20.8 million from the Partner Buyouts; and
•$2.6 million from same store properties, substantially all of which is due to higher average rental rates.
Offsetting the increase is a $1.0 million decrease due to a decline in occupancy from 96.4% to 93.6% at same store properties, including $343,000 at Bells Bluff-West Nashville, TN, which experienced a decline in occupancy due to increased supply in the market and change in demand for certain unit types.
Other Income
The increase is due primarily to increased earnings on our cash balances due to higher interest rates.
Expenses
The following table compares our expenses for the periods indicated:
(Dollars in thousands) 2023 2022 Change % Change
Real estate operating expenses. The components of the increase include:
•$9.4 million from the Partner Buyouts; and
•$1.8 million from same store properties, including:
–$880,000 due to the master insurance program implemented in December 2022 and increases in insurance costs overall.;
–$295,000 in real estate taxes due to increases primarily at four properties; and
–general cost increases, including $228,000 in property level payroll costs, $201,000 in utilities costs and $211,000 across other expense categories.
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Interest expense
The components of the increase include:
•$5.2 million due to the Partner Buyouts;
•$1.3 million due to the increase in the interest rate on our floating rate junior subordinated notes; and
•$372,000 of interest expense on the Silvana Oaks mortgage which was obtained in February 2023.
The increase was offset by a $139,000 decrease in interest expense on our credit facility primarily due to the payoff of the facility in February 2023 in connection with the receipt of proceeds from the Silvana Oaks mortgage.
General and administrative.
The components of the increase include:
•$379,000 due to the amortization expense related to the restricted stock granted in January 2023 (as a result of the higher fair value of the shares granted in 2023 in comparison to the restricted stock granted in 2018); and
•$232,000 of cash compensation and related payroll expense due to higher levels of compensation and increased employee headcount.
Depreciation and amortization
The increase is due $5.8 million from the Partner Buyouts, offset by a $2.1 million decrease due to reduced depreciation related to lease intangibles resulting from such buyouts.
Equity in earnings (loss) of unconsolidated joint ventures and equity in earnings from sale of unconsolidated joint venture properties.
Please see a detailed explanation of these categories in the next section entitled "Unconsolidated Joint Ventures - Results of Operations".
Casualty loss
During the year ended December 31, 2023, we settled the Takakura Lawsuit for $323,000. During the year ended December 31, 2022, we settled a personal injury lawsuit for $850,000
Insurance recovery of casualty loss
During 2023, we received insurance proceeds of (i) $323,000 in connection with the settlement of the Takakura Lawsuit and (ii) $470,000 as reimbursement for expenses incurred related to a winter storm in December 2022. During 2022, we received $850,000 in insurance proceeds upon the settlement of a personal injury lawsuit.
Gain on Sale of Real Estate
In 2023, we sold a cooperative apartment in New York for a sales price of $785,000 and recognized a gain of $604,000.
Loss on extinguishment of debt
In 2022, we incurred $563,000 of loss on extinguishment of debt related to the mortgage refinancing affected in connection with the buyout of our joint venture partner's interest in Brixworth at Bridge Street - Huntsville, AL.
Income tax provision
Income tax provision in the year ended December 31, 2023, decreased $767,000 (i.e., from $821,000 in 2022 to $54,000 in 2023). The decrease reflects the inclusion, in 2022 of increased tax provision related to gains from the sale of properties by several joint ventures and the reversal, in 2023, of approximately $200,000 due to the over-accrual of taxes.
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Unconsolidated Joint Ventures - Results of Operations.
Equity in (loss) earnings of unconsolidated joint ventures
The table below reflects the condensed income statements of our unconsolidated properties included in note 6 of our consolidated financial statements. In accordance with US generally accepted accounting principles, each of the line items in the chart below is presented as if these properties are wholly owned by us, although as reflected under " Item 1. Business - Our Multi- Family Properties", our equity interests in these properties range from 32% to 80% (dollars in thousands):
Year EndedDecember 31,
Other equity in earnings from unconsolidated joint ventures 126 121 5 4.1 %
Insurance recoveries from unconsolidated joint ventures — 8,553 (8,553) N/A
Set forth below is on explanation of the most significant changes in the components of the equity in earnings of unconsolidated joint ventures and equity in earnings from sale of unconsolidated joint venture properties. Same store properties at Unconsolidated Properties represent seven properties that were owned for the entirety of the periods being compared.
Rental revenue from unconsolidated joint ventures
The decrease is due to:
•$18.4 million from the Partner Buyouts;
•$7.5 million primarily from the sale, in 2022, of Verandas at Shavano-San Antonio, TX, Cinco Ranch-Katy, TX, Vive at Kellswater-Kannapolis, NC and Water's Edge-Columbia, SC (collectively, the "2022 Sales"); and
•$4.4 million from the Chatham Sale.
The decrease was offset by a $2.7 million increase in rental revenue from unconsolidated same store properties, primarily due an increase in rental rates offset by a $729,000 decrease due to reduced occupancy.
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Real estate operating expenses from unconsolidated joint ventures
The components of the decrease include:
•$7.8 million from the Partner Buyouts;
•$4.2 million from the 2022 Sales;
•$1.8 million from the Chatham Sale.
The decrease was offset by an aggregate $1.2 million increase in such expenses including increases of $279,000 in utility costs, $260,000 in insurance costs, $245,000 in payroll and leasing commissions, and $191,000 in real estate taxes.
Interest expense from unconsolidated joint ventures.
The components of the decrease are:
•$4.5 million due to the Partner Buyouts;
•$1.8 million from the 2022 Sales; and
•$631,000 from the Chatham Sale.
Depreciation from unconsolidated joint ventures.
The components of the decrease are:
•$5.1 million due to the Partner Buyouts;
•$1.2 million from the 2022 Sales; and
•$878,000 from the Chatham Sale.
Impairment of assets from unconsolidated joint ventures. During 2022, the venture recognized $8.6 million of impairment charges related to a fire at Stono Oaks, a development project located in Johns Island, SC.
Insurance recoveries from unconsolidated joint ventures. During 2022, the venture recognized $8.6 million of insurance recoveries related to the Stono Oaks fire.
Gain on insurance recoveries from unconsolidated joint ventures
During 2022, we recognized $567,000 in gains primarily due to our receipt of insurance recoveries from claims on two properties located in Texas that were damaged in a February 2021 ice storm, which receipts exceeded the assets previously written off.
Gain on sale of real estate from unconsolidated joint ventures
During 2023, we recognized a gain on the sale of real estate of $38.4 million from the Chatham Sale. During 2022, we recognized gains on the sale of real estate of $118.3 million from the 2022 Sales.
Loss on extinguishment of debt from unconsolidated joint ventures
During 2023 and 2022, we recognized loss on the early extinguishment of debt in connection with the Chatham Sale and the 2022 Sales, respectively.
Comparison of Years Ended December 31, 2022 and 2021
As we are a smaller reporting company, this comparison is omitted in accordance with Instruction 1 to Item 303(a) of Regulation S-K.
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Funds from Operations; Adjusted Funds from Operations; Net Operating Income.
In view of our multi-family property activities, we disclose funds from operations ("FFO") ,adjusted funds from operations ("AFFO") and net operating income ("NOI") because we believe that such metrics are a widely recognized and appropriate measure of the performance of a multi-family REIT.
We compute FFO in accordance with the "White Paper on Funds From Operations" issued by the National Association of Real Estate Investment Trusts ("NAREIT") and NAREIT's related guidance. FFO is defined in the White Paper as net income (calculated in accordance with GAAP), excluding depreciation and amortization related to real estate, gains and losses from the sale of certain real estate assets, gains and losses from change in control, impairment write-downs of certain real estate assets and investments in entities where the impairment is directly attributable to decreases in the value of depreciable real estate held by the entity. Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect funds from operations on the same basis. In computing FFO, we do not add back to net income the amortization of costs in connection with our financing activities or depreciation of non-real estate assets.
We compute AFFO by adjusting FFO for loss on extinguishment of debt, our straight-line rent accruals, restricted stock and RSU compensation expense, fair value adjustment of mortgage debt, gain on insurance recovery, insurance recovery from casualty loss and deferred mortgage and debt costs (including, in each case as applicable, from our share from our unconsolidated joint ventures). Since the NAREIT White Paper does not provide guidelines for computing AFFO, the computation of AFFO may vary from one REIT to another.
We believe that FFO and AFFO are useful and standard supplemental measures of the operating performance for equity REITs and are used frequently by securities analysts, investors and other interested parties in evaluating equity REITs, many of which present FFO and AFFO when reporting their operating results. FFO and AFFO are intended to exclude GAAP historical cost depreciation and amortization of real estate assets, which assures that the value of real estate assets diminish predictability over time. In fact, real estate values have historically risen and fallen with market conditions. As a result, we believe that FFO and AFFO provide a performance measure that, when compared year-over-year, should reflect the impact to operations from trends in occupancy rates, rental rates, operating costs, interest costs and other matters without the inclusion of depreciation and amortization, providing a perspective that may not be necessarily apparent from net income. We also consider FFO and AFFO to be useful to us in evaluating potential property acquisitions.
FFO and AFFO do not represent net income or cash flows from operations as defined by GAAP. FFO and AFFO should not be considered to be an alternative to net income as a reliable measure of our operating performance; nor should FFO and AFFO be considered an alternative to cash flows from operating, investing or financing activities (as defined by GAAP) as measures of liquidity.
FFO and AFFO do not measure whether cash flow is sufficient to fund all of our cash needs, including principal amortization and capital improvements. FFO and AFFO do not represent cash flows from operating, investing or financing activities as defined by GAAP.
Management recognizes that there are limitations in the use of FFO and AFFO. In evaluating our performance, management is careful to examine GAAP measures such as net income (loss) and cash flows from operating, investing and financing activities. Management also reviews the reconciliation of net income (loss) to FFO and AFFO.
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The table below provides a reconciliation of net income determined in accordance with GAAP to FFO and AFFO for each of the indicated years (amounts in thousands):
GAAP Net income attributable to common stockholders $ 3,873 $ 49,955
Deduct: gain on sales of real estate and partnership interests (604) (6)
Adjustment for non-controlling interests (16) (16)
Adjust for: straight-line rent accruals 93 24
Add: loss on extinguishment of debt — 563
Add: amortization of restricted stock and RSU expense 4,768 4,487
Add: amortization of deferred mortgage and debt costs 1,072 628
Add: amortization of fair value adjustment for mortgage debt 613 148
Less: insurance recovery of casualty loss (323) (850)
Less: gain on insurance recovery (240) (62)
Adjustment for non-controlling interests (15) (4)
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The table below provides a reconciliation of net income per common share (on a diluted basis) determined in accordance with GAAP to FFO and AFFO.
Net income attributable to common stockholders $ 0.20 $ 2.66
Add: depreciation of properties 1.50 1.33
Add: our share of impairment charge in unconsolidated joint ventures — 0.08
Deduct: gain on sales of real estate and partnership interest (0.03) —
Adjustment for non-controlling interests — —
Funds from operations 1.19 1.24
Adjustment for: straight-line rent accruals — —
Add: loss on extinguishment of debt — 0.03
Add: amortization of restricted stock and RSU expense 0.25 0.25
Add: amortization of deferred mortgage and debt costs 0.06 0.03
Add: amortization of fair value adjustment for mortgage debt 0.03 0.01
Less: insurance recovery of casualty loss (0.02) (0.05)
Deduct: gain on insurance recovery (0.01) —
Adjustment for non-controlling interests — —
Adjusted funds from operations $ 1.52 $ 1.52
FFO for 2023 decreased $626,000, or 2.7%, to $22.6 million from $23.2 million in 2022. Contributing to the change was a:
• $1.5 million decrease in insurance recovery from a casualty loss at an unconsolidated joint venture;
• $1.2 million increase in interest expense (including $465,000 of amortization of mortgage fair value costs);
• $499,000 increase in general and administrative expense (excluding non cash-amortization of restricted stock
and RSU expense); and
• $402,000 decrease in gains from insurance proceeds.
The decrease was offset by a:
• $2.2 million decrease in early extinguishment of debt;
• $767,000 decrease in income tax expense; and
• $536,000 increase in other income.
AFFO increased $514,000 or 1.8%, to $28.9 million in 2023 from $28.4 million in 2022. Contributing to this increase was a:
• $767,000 decrease in income tax expense;
• $536,000 increase in other income; and
• $470,000 of insurance recoveries
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The increase was offset by a:
• $725,000 increase in interest expense; and
• $499,000 increase in general and administrative expense .
See “—Comparison of Years Ended December 31, 2023 and 2022” for further information regarding these changes.
NOI is a non-GAAP measure of performance. NOI is used by our management and many investors to evaluate and compare the performance of our properties to other comparable properties, to determine trends at our properties and to determine the estimated fair value of our properties. The usefulness of NOI may be limited in that it does not take into account, among other things, general and administrative expense, interest expense, loss on extinguishment of debt, casualty losses, insurance recoveries and gains or losses as determined by GAAP. NOI is a property specific performance metric and does not measure our performance as a whole. Same store NOI reflects the operations of seven of our ten wholly-owned properties.
We compute NOI by adjusting net income (loss) to (a) add back (1) interest expense, (2) general and administrative expenses, (3) depreciation expense, (4) impairment charges, (5) provision for taxes, (6) loss on extinguishment of debt, (7) equity in loss of unconsolidated joint ventures, (8) casualty loss and (9) the impact of non-controlling interests, and (b) deduct (1) other income, (2) gain on sale of real estate (3) gain on sale of partnership interest, (4) equity in earnings from sale of consolidated joint venture properties, (5) insurance recovery of casualty loss and (6) gain on insurance recoveries. Other REIT’s may use different methodologies for calculating NOI, and accordingly, our NOI may not be comparable to other REIT’s. We believe NOI provides an operating perspective not immediately apparent from GAAP operating income or net income (loss). NOI is one of the measures we use to evaluate our performance because it (i) measures the core operations of property performance by excluding corporate level expenses and other items unrelated to property operating performance and (ii) captures trends in rental housing and property operating expenses. However, NOI should only be used as an alternative measure of our financial performance.
The following table provides a reconciliation of net income attributable to common stockholders as computed in accordance with GAAP to NOI for the periods presented (dollars in thousands):
For the year ended December 31,
GAAP Net income attributable to common stockholders $ 3,873 $ 49,955
Less: Other Income (548) (12)
Provision for taxes 54 821
Less: Gain on sale of real estate (604) (6)
Add: Loss on extinguishment of debt — 563
Insurance recovery of casualty loss (793) (850)
Gain on insurance recovery (240) (62)
Add: Net income attributable to non-controlling interests 142 144
Less: Non same store and non multi family (1)
_____________________________________
(1) Prior year amounts have been adjusted to reflect the current year composition to reflect only those properties that were same store for both the current
and the prior year.
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In 2023, NOI increased by $11.3 million from 2022 primarily due to a $20.8 million increase in rental revenues resulting from the Partner Buyouts. The increase was offset by a $9.4 million increase, primarily due to the Partner Buyouts, in real estate operating expenses. Same store NOI remained flat in 2023 from 2022 due to a $1.8 million increase in rental revenues (and in particular, the increase in average rental rates) offset by a $1.8 million increase in real estate operating expenses. See "-Results of Operations - Year Ended December 31, 2023 Compared to the Year Ended December 31, 2022" for a discussion of these changes.
Liquidity and Capital Resources
We require funds to pay operating expenses and debt service obligations, acquire properties, make capital and other improvements, fund capital contributions, pay dividends and repurchase shares of our common stock. Generally, in 2023, our primary sources of capital and liquidity were the operations of our multi-family properties (including distributions of $6.3 million from the operations of our unconsolidated joint ventures), our $19.4 million share of the net proceeds from the Chatham Sale, and our available cash. Excluding funds held at our unconsolidated subsidiaries, at December 31, 2023 and March 1, 2024, our available liquidity was approximately $83.5 million and $81.2 million, respectively, including $23.5 million and $21.2 million, respectively, of cash and cash equivalents, and subject to compliance with borrowing base and other requirements, up to $60 million and $60 million, respectively, available under our credit facility. A significant amount of our cash and cash equivalents is maintained at our properties for general working capital purposes.
We anticipate that for the four years beginning January 1, 2024, our operating expenses, $127.8 million of mortgage amortization and interest expense (including $50.4 million from unconsolidated joint ventures) and $204.4 million of balloon payments due with respect to mortgages maturing through 2027 (including $76.7 million from unconsolidated joint ventures), anticipated capital expenditures (for 2024 only) of $10.1 million for both consolidated and unconsolidated properties (including an estimated $2.7 million for our value add program), estimated cash dividend payments of at least $74.0 million (assuming (i) the current quarterly dividend rate of $0.25 per share and (ii) 18.5 million shares outstanding) will be funded from cash generated from operations (including distributions from unconsolidated joint ventures), mortgage financings and re-financings, sales of properties, the issuance of additional equity and, if available, our $60 million credit facility. Our operating cash flow and available cash is insufficient to fully fund the $204.4 million of balloon payments, and if we are unable to refinance such debt on acceptable terms, we may need to issue additional equity or dispose of properties, in each case on potentially unfavorable terms.
Our ability to acquire multi-family properties and implement value-add projects is limited by our available cash and our ability to (i) draw on our credit facility, (ii) obtain, on acceptable terms, mortgage debt and (iii) raise capital from the sale of our common stock. Further, if and to the extent we generate ordinary taxable income, we will be required to make distributions to stockholders to maintain our REIT status and as a result, will be limited in our ability to use gains, if any, from property sales, as a source of funds for operating expenses, debt service and property acquisitions.
Disclosure of Known Material Contractual Obligations
The following table sets forth as of December 31, 2023 our known material contractual obligations:
Payment Due by Period
____________________________
(1) Reflects payments of principal (including amortization payments) and interest and excludes deferred costs. Includes all of the debt of unconsolidated joint ventures. See the following table for information regarding same. Assumes that the interest rate on the junior subordinated notes will be 7.65% per annum , which was the rate in effect at December 31, 2023.
(2) Assumes that $966,000 will be paid annually for the next five years pursuant to the shared services agreement and $1.6 million will be paid annually through December 31, 2027 for the Services. See "Item 1. Business—Our Structure."
(3) Assumes that approximately $2.5 million of property management fees will be paid annually to the property managers of our multi-family properties, including $1.5 million related to unconsolidated joint ventures. Such sum reflects the amount we anticipate paying in 2024 on the multi-family properties we own at December 31, 2023. These fees are typically charges based on a percentage of rental revenues from a property. No amount has been reflected as payable pursuant thereto after five years as such amount is not determinable. Excludes $10.1 million of anticipated capital expenditures in 2024,including $2.7 million in connection with our value add program. Such expenditures subsequent to 2024 are not determinable.
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The following table sets forth as of December 31, 2023 information regarding the components of our long-term debt obligations:
Payment due by Period
___________________________
(1) Includes payments of principal (including amortization payments), and interest and excludes deferred financing costs.
(2) Assumes that the interest rate on the junior subordinated notes will be 7.65% per annum.
Corporate Level Financing Arrangements
Junior Subordinated Notes
As of December 31, 2023, $37.4 million (excluding deferred costs of $257,000) in principal amount of our junior subordinated notes is outstanding. These notes mature in April 2036, contain limited covenants (including covenants prohibiting us from paying dividends or repurchasing capital stock if there is an event of default (as defined therein) on these notes), are redeemable at our option and bear an interest rate, which resets and is payable quarterly, of three-month term SOFR plus 226 basis points. At December 31, 2023 and 2022, the interest rate on these notes was 7.65% and 6.41%, respectively.
Credit Facility
Our credit facility with VNB New York, LLC, an affiliate of Valley National Bank (collectively, "VNB"), allows us to borrow, subject to compliance with borrowing base requirements and other conditions, up to $60 million, (i) for the acquisition of, and investment in, multi-family properties, (ii) to repay mortgage debt secured by multi-family properties and (iii) for Operating Expenses (i.e., working capital (including dividend payments) and operating expenses); provided, that not more than $25 million may be used for Operating Expenses. The credit facility is secured by cash accounts maintained by us at VNB (and we are required to maintain substantially all of our bank accounts at VNB), and the pledge of our interests in the entities that own three unencumbered multi-family properties used in calculating the borrowing base. The credit facility bears an annual interest rate, which resets monthly, equal to one-month term SOFR plus 250 basis points, with a floor of 6.00%. The interest rate at December 31, 2023 and March 1, 2024, was 7.85% and 7.82% respectively. There is an annual fee of 0.25% on the total amount committed by VNB and unused by us. The credit facility matures in September 2025. As of March 1, 2024, there was no balance outstanding and up to $60 million was available to be borrowed thereunder.
The terms of the credit facility include certain restrictions and covenants which, among other things, limit the incurrence of liens, require that we maintain and include in the collateral securing the facility at least three unencumbered properties with an aggregate value(as calculated pursuant to the facility) of at least $75 million, and require compliance with financial ratios relating to, among other things maintaining a minimum tangible net worth of $140 million, the minimum amount of debt service coverage with respect to the properties (and amounts drawn on the credit facility) used in calculating the borrowing base. Net proceeds received from the sale, financing or refinancing of wholly-owned properties are generally required to be used to repay amounts outstanding under the credit facility.
As of December 31, 2023, we were in compliance in all material respects with the requirements of the facility.
Other Financing Sources and Arrangements
At December 31, 2023, we are joint venture partners in unconsolidated joint ventures which own seven multi-family properties which distributed $5.2 million to us in 2023. We may be required to make capital contributions with respect to these properties. At December 31, 2023, our investment in these joint venture properties have a net equity carrying value of $30.4 million and are subject to mortgage debt, which is not reflected on our consolidated balance sheet, of $247.0 million. Although BRT Apartments Corp. is not the obligor with respect to such mortgage debt, the loss of any of these properties due to mortgage foreclosure or similar proceedings would have a material adverse effect on our results of operations and financial condition. See note 6 to our consolidated financial statements.
See Item 1. "Business-Mortgage Debt" for information regarding our mortgage debt at consolidated and unconsolidated subsidiaries.
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Inflation
Substantially all of our multi-family property leases are for periods of one-year or less. The short-term nature of these leases generally serves to reduce our risk to adverse effects of inflation on our revenue. During 2023, we experienced inflationary pressures that drove higher operating expenses, primarily in personnel, repairs and maintenance, insurance and real estate taxes; such increases may continue in 2024 and thereafter, which would adversely affect our operating results.
Inflation affects the overall cost of our debt. We mitigate the risks presented by inflation through the use of long-term fixed interest rate debt and interest rate hedges and by paying down, when we deem appropriate, our credit facility debt. However, increasing interest rates, which generally correlates to increasing inflation, increases the interest expense on our junior subordinated notes and may make it less attractive to obtain mortgage debt or use our credit facility in connection with acquisition, refinancing and value add activities.
Cash Distribution Policy
We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended. Accordingly, we must, among other things, meet a number of organizational and operational requirements, including a requirement that we distribute currently at least 90% of our ordinary taxable income to our stockholders. It is our current intention to comply with these requirements and maintain our REIT status. As a REIT, we generally will not be subject to corporate federal, state or local income taxes on taxable income we distribute currently (in accordance with the Internal Revenue Code and applicable regulations) to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to federal, state and local 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 taxes on our undistributed taxable income (i.e., taxable income not distributed in the amounts and in the time frames prescribed by the Internal Revenue Code and applicable regulations thereunder) and are subject to Federal excise taxes on our undistributed taxable income.
It is our intention to pay to our stockholders within the time periods prescribed by the Internal Revenue Code no less than 90%, and, if possible, 100% of our annual taxable income, including taxable gains from the sale of real estate. It will continue to be our policy to make sufficient distributions to stockholders in order for us to maintain our REIT status under the Internal Revenue Code.
We anticipate that if we do not sell any multi-family properties this year, that a significant amount of the dividends we will pay in 2024 will be treated for federal income tax purposes as a return of capital.
Our board of directors will continue to evaluate, on a quarterly basis, the amount of dividend payments based on its assessment of, among other things, our short and long-term cash and liquidity requirements, prospects, debt maturities, net income, funds from operations, and adjusted funds from operations.
Critical Accounting Estimates
Our discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. On an ongoing basis, we reconsider and evaluate our estimates and assumptions.
We base our estimates on historical experience, current trends and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could materially differ from any of our estimates under different assumptions or conditions. Our significant accounting policies are discussed in Note 1 of our consolidated financial statements in this report. We believe the accounting estimates listed below are the most critical to aid in fully understanding and evaluating our reported financial results, and they require our most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain.
Equity method investments
We report our investments in unconsolidated entities, over whose operating and financial policies we do not control, under the equity method of accounting. Under this method of accounting, our pro rata share of the applicable entity's earnings or losses is included in our consolidated statements of operations. We initially record our investments based on either the carrying value for properties contributed or the cash invested.
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We evaluate our equity-method investments for impairment whenever events or changes in circumstances indicate that the carrying value of our investments may exceed the fair value. If it is determined that a decline in the fair value of our investments is not temporary, and if such reduced fair value is below its carrying value, an impairment is recorded. Determining fair value involves significant judgment. Our estimates consider available evidence including the present value of the expected future cash flows discounted at market rates, general economic conditions and other relevant factors.
Carrying Value of Real Estate Portfolio
We conduct a quarterly review of each real estate asset owned by us and through our joint ventures. This review is conducted in order to determine if indicators of impairment are present on the real estate.
In reviewing the value of the real estate assets owned, if there is an indicator of impairment and the carrying value of the real estate asset is determined to be unrecoverable, we seek to arrive at the fair value of each real estate asset by using one or more valuation techniques, such as comparable sales, discounted cash flow analysis or replacement cost analysis. A real estate asset is considered to be unrecoverable when an analysis suggests that the undiscounted cash flows to be generated by the property will be insufficient to recover our investment. Any impairment taken with respect to our real estate assets reduces our net income, assets and stockholders' equity to the extent of the amount of the allowance, but it will not affect our cash flow until such time as the property is sold.
Purchase Price Allocations
We allocate the purchase price of properties, including acquisition costs and assumed debt, when appropriate, to the tangible and identified intangible assets and liabilities acquired based on their relative fair values. In making estimates of fair values for purposes of allocating purchase price, we use a number of sources, including independent appraisals that may be obtained in connection with the acquisition or financing of the respective property, our own analysis of recently acquired and existing comparable properties in our portfolio and other market data. We also consider information obtained about each property as a result of its pre-acquisition due diligence, marketing and leasing activities in estimating the fair value of the tangible and intangible assets acquired.
Equity-Based Compensation
We grant shares of restricted stock and restricted stock units ("RSUs") to eligible plan participants, subject to the recipient's continued service over a specified period and, with respect to the RSUs, the satisfaction of specified conditions over a specified period. A portion of the RSUs vest based upon satisfaction of specified metrics with respect to (i) total stockholder return(“TSR Awards”) and (ii) adjusted funds from operations(“AFFO Awards”), in each case as calculated pursuant to the applicable award agreement. We account for the restricted stock awards and RSUs in accordance with ASC 718, Compensation - Stock Compensation, which requires that such compensation be recognized in the financial statements based on its estimated grant-date fair value. The value of such awards is recognized as compensation expense in general and administrative expenses in the accompanying consolidated statements of operations over the applicable service periods. Grant date fair value is determined with respect to the (i) the restricted stock awards, by the closing stock price on the date of grant, (ii) TSR Awards, by using a Monte Carlo simulation relying upon various assumptions and (iii) AFFO Awards, by using the closing stock price on the grant date, subject to quarterly adjustment based upon management’s projection as to the achievability of the specified metrics related to the AFFO Awards. See Note 9 to our consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
All of our mortgage debt bears interest at fixed rates. Our credit facility bears interest at 30 day term SOFR plus 250 basis points, with an interest rate floor of 6%. At December 31, 2023, no amounts were drawn on the facility. Our junior subordinated notes bear interest at the rate of three-month term SOFR plus 226 basis points. At December 31, 2023, the interest rate on these notes was 7.65%. A 100 basis point increase in the rate would result in an increase in interest expense in 2023 of $374,000 (all of which would be due to the change in rate on the junior subordinated notes) and a 100 basis point decrease in the rate would result in a $374,000 decrease (all of which would be due to the change in rate on the junior subordinated notes) in interest expense in 2023.
Item 8. Financial Statements and Supplementary Data.
The information required by this item appears in a separate section of this Report following Part IV.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not applicable.
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Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
A review and evaluation was performed by our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of the end of the period covered by this Annual Report on Form 10-K. Based on that review and evaluation, our CEO and CFO have concluded that our disclosure controls and procedures, as designed and implemented as of December 31, 2023, were effective.
Management's 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 Exchange Act 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 the board of 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 transactions.
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, with the participation of our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2023. In making this assessment, our management used criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013).
Based on its assessment, our management concluded that, as of December 31, 2023, our internal control over financial reporting was effective based on these criteria.
Changes in Internal Controls over Financial Reporting
There have been no changes in our internal controls over financial reporting, as defined in in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act, that occurred during the three months ended December 31, 2023 that materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
Item 9B. Other Information.
None of our officers or directors had any contract, instruction, or written plan for the purchase or sale of our securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any "non-Rule 10b5-1 trading arrangement" in effect at any time during the three months ended December 31, 2023.”
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable
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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 Item 10 will be incorporated herein by reference to the applicable information to be in the proxy statement to be filed by April 29, 2024 for our 2024 Annual Meeting of Stockholders.
Item 11. Executive Compensation.
The information concerning our executive compensation required by Item 11 is incorporated herein by reference to the proxy statement to be filed by April 29, 2024 with respect to our 2024 Annual Meeting of Stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Except as set forth below, the information required by Item 12 is incorporated herein by reference to the proxy statement to be filed by April 29, 2024 with respect to our 2024 Annual Meeting of Stockholders.
Equity Compensation Plan Information
The following table provides information as of December 31, 2023 about shares of our common stock that may be issued upon the exercise of options, warrants and rights under our 2018 Amended and Restated Incentive Plan (the “2018 Plan”), our 2020 Amended and Restated Incentive Plan (the “2020 Plan”; and together with the 2018 Plan, the “Prior Plans”) and our 2022 Incentive Plan (the “2022 Plan”; and together with the Prior Plans, the “Incentive Plans”).No further awards may be granted under the Prior Plans.
Equity compensation plans approved by security holders 634,490 (1) — 411,488 (2)
Equity compensation plans not approved by security holders — — —
_______________________________________________________________________________
(1) Includes up to 209,322 shares, 211,417 and 213,751 shares of common stock issuable pursuant to restricted stock units (“RSUs”) that vest as of March 31, 2024, June 30, 2025 and June 30, 2026, respectively, if and to the extent specified conditions are satisfied by such vesting dates. RSUs granted pursuant to the 2020 Plan and the 2022 Plan account for 209,322 shares and 425,168 shares, respectively. Excludes 951,839 shares of restricted stock issued pursuant to the Incentive Plans as such shares, although subject to forfeiture, are outstanding. See Note 10 to our consolidated financial statements.
(2) Does not give effect to 166,439 shares of restricted stock granted January 11, 2024 pursuant to the 2022 Plan.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information concerning relationships and certain transactions required by Item 13 is incorporated herein by reference to the proxy statement to be filed by April 29, 2024 with respect to our 2024 Annual Meeting of Stockholders.
Item 14. Principal Accounting Fees and Services.
The information concerning our principal accounting fees required by Item 14 is incorporated herein by reference to the proxy statement to be filed by April 29, 2024 with respect to our 2024 Annual Meeting of Stockholders.
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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. Exhibits:
In reviewing the agreements included as exhibits to this Annual Report on Form10-K, please remember they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about us or the other parties to the agreements. Certain agreements contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the other parties to the applicable agreement and:
•should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate;
•have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement;
•may apply standards of materiality in a way that is different from what may be viewed as material to you or other investors; and
•were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments. Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time.
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Exhibit No. Title of Exhibits
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ExhibitNo. Title of Exhibits
21.1 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young, LLP.
97.1 Registrant's Clawback Policy effective October 2, 2023.
_______________________________________________________________________________
* Indicates management contract or compensatory plan or arrangement.
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(b) Exhibits.
See Item 15(a)(3) above. Except as otherwise indicated with respect to a specific exhibit, the file number for all of the exhibits incorporated by reference is: 001-07172.
(c) Financial Statements.
See Item 15(a)(2) above.
Item 16. Form 10-K Summary
Not applicable.
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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 APARTMENTS CORP.
Date: March 14, 2024 By: /s/ Jeffrey A. Gould
Jeffrey A. Gould Chief Executive Officer and President
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 capacities and on the dates indicated.
Signature Title Date
/s/ Israel Rosenzweig Chairman of the Board March 14, 2024
Israel Rosenzweig
Jeffrey A. Gould
/s/ Carol Cicero Director March 14, 2024
Carol Cicero
/s/ Alan Ginsburg Director March 14, 2024
Alan Ginsburg
/s/ Fredric H. Gould Director March 14, 2024
Fredric H. Gould
/s/ Matthew J. Gould Director March 14, 2024
Matthew J. Gould
/s/ Louis C. Grassi Director March 14, 2024
Louis C. Grassi
/s/ Gary Hurand Director March 14, 2024
Gary Hurand
/s/ Jeffrey Rubin Director March 14, 2024
Jeffrey Rubin
/s/ Jonathan Simon Director March 14, 2024
Jonathan Simon
/s/ Elie Weiss Director March 14, 2024
Elie Weiss
George E. Zweier
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Index
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 (PCAOB ID: 42) F-2
Consolidated Balance Sheets as of December 31, 2023 and 2022 F-4
Notes to Consolidated Financial Statements F-10
III—Real Estate Properties and Accumulated Depreciation F-31
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.
F-1
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Index
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of BRT Apartments Corp.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of BRT Apartments Corp. and subsidiaries (the Company) as of December 31, 2023 and 2022, the related consolidated statements of operations, stockholders' equity and cash flows for each of the two years in the period ended December 31, 2023 and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2023, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosuresto which it relates.
F-2
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Index
Valuation of Investments in Real Estate
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2020
New York, New York
March 14, 2024
F-3
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Index
BRT APARTMENTS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except per share data)
December 31,
ASSETS
Investment in unconsolidated joint ventures 34,242 42,576
LIABILITIES AND EQUITY
Liabilities:
Accounts payable and accrued liabilities 21,948 22,631
Commitments and contingencies
Equity:
BRT Apartments Corp. stockholders' equity:
Preferred shares $0.01 par value 2,000 shares authorized, none outstanding — —
Common stock, $0.01 par value, 300,000 shares authorized,
Total BRT Apartments Corp. stockholders' equity 228,460 250,088
Non-controlling interests (15) (18)
See accompanying notes to consolidated financial statements.
F-4
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Index
BRT APARTMENTS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
Year Ended December 31,
Revenues:
Rental and other revenue from real estate properties $ 93,069 $ 70,515
Expenses:
Total revenues less total expenses (14,282) (15,011)
Equity in earnings from unconsolidated joint ventures 2,293 1,895
Gain on sale of real estate 604 6
Insurance recovery of casualty loss 793 850
Gain on insurance recovery 240 62
Loss on extinguishment of debt — (563)
Income from continuing operations 4,069 50,920
Provision for taxes 54 821
Income from continuing operations, net of taxes 4,015 50,099
Income attributable to non-controlling interests (142) (144)
Net income attributable to common stockholders $ 3,873 $ 49,955
Weighted average number of shares of common stock outstanding:
Per share amounts attributable to common stockholders
See accompanying notes to consolidated financial statements.
F-5
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Index
BRT APARTMENTS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 2023 and 2022
(Dollars in thousands, except per share data)
Distributions - Common Stock - $0.98 per share — — (18,532) — (18,532)
Restricted stock and restricted stock units vesting 2 (2) — — —
Distributions to non-controlling interests — — — (157) (157)
Shares issued through equity offering program, net 5 9,940 — — 9,945
Shares issued through DRIP — 1,278 — — 1,278
Other comprehensive income — — — — —
Comprehensive income — — — — 50,099
Distributions - Common Stock - $1.00 per share — — (18,904) — (18,904)
Restricted stock and restricted stock units vesting 2 (2) — — —
Distributions to non-controlling interests — — — (139) (139)
Shares issued through DRIP — 3,034 — — 3,034
See accompanying notes to consolidated financial statements
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Index
BRT APARTMENTS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Year Ended December 31,
Cash flows from operating activities:
Amortization of deferred financing fees 1,072 628
Amortization of debt fair value adjustment 613 137
Amortization of restricted stock and restricted stock units 4,768 4,486
Equity in earnings of unconsolidated joint ventures (2,293) (1,895)
Gain on sale of real estate (604) (6)
Gain on insurance recovery (240) (62)
Loss on extinguishment of debt — 563
Increases and decreases from changes in other assets and liabilities:
(Increase) decrease in other assets (787) 5,142
Decrease in accounts payable and accrued liabilities (678) (3,923)
Net cash provided by operating activities 19,606 15,450
Cash flows from investing activities:
Improvements to real estate owned (9,643) (6,295)
Purchase and consolidation of joint venture properties — (101,666)
Proceeds from the sale of real estate owned 711 4,385
Distributions from unconsolidated joint ventures 25,687 91,239
Contributions to unconsolidated joint ventures (316) (3,500)
Proceeds from insurance recoveries 240 62
Net cash provided by (used in) investing activities 16,679 (15,775)
Cash flows from financing activities:
Mortgage payoffs — (41,666)
Mortgage principal payments (3,308) (2,219)
Proceeds from credit facility — 43,000
Increase in deferred financing costs (683) (693)
Distributions to non-controlling interests (139) (157)
Proceeds from the sale of common stock — 9,945
Proceeds from the issuance of DRP shares 3,034 1,278
Repurchase of shares of common stock (14,399) —
Net cash used in financing activities (32,231) (13,422)
F-7
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Index
BRT APARTMENTS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Year Ended December 31,
Supplemental disclosures of cash flow information:
Cash paid during the year for interest expense $ 20,433 $ 14,086
Cash paid during the year for income and excise taxes $ 689 $ 283
Consolidation on buyout of partnership interest:
Increase in real estate assets $ — (370,513)
Increase in other assets — (13,893)
Increase in mortgage payable — 231,896
Increase in deferred loan costs — (3,892)
Increase in accounts payable and accrued liabilities — 6,278
Decrease in investment in unconsolidated joint ventures — 48,458
See accompanying notes to consolidated financial statements.
F-8
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Index
BRT APARTMENTS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
December 31,
F-9
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Index
BRT APARTMENTS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2023
NOTE 1—ORGANIZATION, BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Background
BRT Apartments Corp. (“BRT” or the “Company”) owns, operates and, to a lesser extent, develops multi-family properties. These multi-family properties may be wholly owned by us or by unconsolidated joint ventures in which the Company contributes a significant portion of the equity. At December 31, 2023, BRT: (i) wholly-owns 21 multi-family properties located in 11 states with an aggregate of 5,420 units and a carrying value of $634,046,000; (ii) has ownership interests, through unconsolidated entities, in seven multi-family properties located in four states with an aggregate of 2,287 units, and the carrying value of its net equity investment is $30,418,000; and (iii) owns other assets, through consolidated and unconsolidated subsidiaries, with a carrying value of $5,615,000. The Company's 28 multi-family properties are located in 11 states primarily in the Southeast United States and Texas.
BRT conducts its operations to qualify as a real estate investment trust, or REIT, for Federal income tax purposes.
Substantially all of the Company's assets are comprised of multi-family real estate assets generally leased to tenants on a one-year basis. Therefore, the Company aggregates real estate assets for reporting purposes and operates in one reportable segment.
Principles of Consolidation
The consolidated financial statements include the accounts and operations of the Company and its wholly-owned subsidiaries.
The joint venture that owns a commercial property in Yonkers, NY was determined not to be a variable interest entity ("VIE") but is consolidated because the Company has controlling rights in such entity.
The Company accounts for its investments in unconsolidated joint ventures under the equity method of accounting. For each joint venture, the Company evaluated the rights provided to each party in the venture to assess the consolidation of the venture. All investments in unconsolidated joint ventures have sufficient equity at risk to permit the entity to finance its activities without additional subordinated financial support and, as a group, the holders of the equity at risk have power through voting rights to direct the activities of these ventures. As a result, none of these joint ventures are VIEs. Additionally, the Company does not exercise substantial operating control over these entities, and therefore the entities are not consolidated. These investments are recorded initially at cost, as investments in unconsolidated joint ventures, and subsequently adjusted for their share of equity in earnings, cash contributions and distributions. The distributions to each joint venture partner are determined pursuant to the applicable operating agreement and may not be pro-rata to the percentage equity interest each partner has in the applicable venture.
Certain items on the consolidated financial statements for the year ended December 31, 2022, have been reclassified to conform with the current year's presentation including reclassifying (i) Credit Facility deferred fees to Other assets and (ii) Deposit and escrows within Cash and Restricted Cash on the statement of cash flows.
Income Tax Status
The Company qualifies as a real estate investment trust under sections 856-860 of the Internal Revenue Code of 1986, as amended. The board of directors may, at its option, elect to revoke or terminate the Company's election to qualify as a real estate investment trust.
The Company will not be subject to federal, and generally state and local taxes on amounts it distributes to stockholders, provided it distributes 90% of its ordinary taxable income and meets other conditions.
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Index
BRT APARTMENTS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2023
NOTE 1—ORGANIZATION, BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES (continued)
In accordance with Accounting Standards Codification ("ASC") Topic 740 - "Income Taxes", the Company believes that it has appropriate support for the income tax positions taken and, as such, does not have any uncertain tax positions that, if successfully challenged, could result in a material impact on the Company's financial position or results of operations. The Company's income tax returns for the tax years 2020 through 2022 are subject to review by the Internal Revenue Service.
Revenue Recognition
Rental revenue from multi-family properties is recorded when due from residents and is recognized monthly as it is earned. Rental payments are due in advance. Leases on residential properties are generally for terms that do not exceed one year.
Rental revenue from commercial properties, including the base rent that each tenant is required to pay in accordance with the terms of their respective leases, net of any rent concessions and lease incentives, is reported on a straight-line basis over the non-cancellable term of the lease.
Real Estate Properties
Real estate properties are stated at cost, net of accumulated depreciation, and include properties acquired through acquisition or development.
When the Company purchases real estate assets from third-parties, the Company allocates the purchase price of real estate, including direct transaction costs applicable to an asset acquisition, among land, building, improvements and intangibles (e.g., the value of above, below and at market leases, and origination costs associated with in-place leases and above or below-market mortgages assumed at the acquisition date). The value, as determined, is allocated to the gross assets acquired based on management’s determination of the relative fair values of these assets and liabilities.
Whenever the Company buys out the remaining interest from joint venture partners, the Company follows a cost-accumulation approach, wherein the Company allocates the cost basis of its existing interest and the purchase price to the Company of its partners' remaining interest, to the real estate acquired (including land, buildings and improvements, and identified intangibles such as acquired in-place leases) and acquired liabilities.
Depreciation for multi-family properties is computed on a straight-line basis over an estimated useful life of 30 years. Intangible assets (and liabilities) are amortized over the remaining life of the related leases at the time of acquisition and is usually less than one year. Expenditures for maintenance and repairs are charged to operations as incurred.
Real estate is classified as held for sale when management has determined that the applicable criteria have been met. Real estate assets that are expected to be disposed of are valued at the lower of their carrying amount or their fair value less costs to sell on an individual asset basis. Real estate classified as held for sale is not depreciated.
The Company accounts for the sale of real estate when title passes to the buyer, sufficient equity payments have been received, there is no continuing involvement by the Company and there is reasonable assurance that the remaining receivable, if any, will be collected.
Asset Impairments
The Company reviews each real estate asset owned quarterly to determine if there are indicators of impairment. If such indicators are present, the Company determines 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 asset are less than the asset's carrying amount and that carrying amount exceeds the estimated fair value of the asset. The impairment recognized is the difference between the carrying value and the fair value. The estimated fair value is determined using a discounted cash flow model of the expected future cash flows through the useful life of the property. The analysis includes an estimate of the future cash flows that are expected to result from the real estate investment’s use and eventual disposition. These cash flows consider factors such as expected future operating income, trends, the effects of leasing demands, and other factors. In evaluating a property for impairment, various 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 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 decrease in the value of the property below its carrying value, the reduction will be recognized as an
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BRT APARTMENTS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2023
NOTE 1—ORGANIZATION, BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES (continued)
impairment charge. The fair values related to the impaired real estate assets are considered to be a level 3 valuation within the fair value hierarchy because they are based on unobservable inputs and are subjective in nature.
For investment in real estate ventures, if indicators of impairment are present, the Company determines if the fair value of the investment is less than its carrying value. Fair value is determined using a discounted cash flow model of the expected future cash flows through the useful life of the asset. The fair values related to the impaired investments in real estate ventures are considered to be a level 3 valuation within the fair value hierarchy.
Equity Based Compensation
Compensation expense for grants of restricted stock, restricted stock units ("RSUs") and dividend equivalent rights are amortized over the vesting period of such awards, based upon the estimated fair value of such award at the grant date. The Company recognizes the effect of forfeitures when they occur and previously recognized compensation expense is reversed in the period the grant or unit is forfeited. The deferred compensation related to the performance based RSUs to be recognized as expense is net of certain performance assumptions which are re-evaluated quarterly. For accounting purposes, the shares of restricted stock and the RSUs are not included in the outstanding shares shown on the consolidated balance sheets until they vest; however, the restricted stock is included in the calculation of basic and diluted earnings per share as it participates in the earnings of the Company.
Per Share Data
Basic earnings (loss) per share is determined by dividing net income (loss) applicable to holders of common stock for the applicable year by the weighted average number of shares of common stock outstanding during such year. Net income is also allocated to the unvested restricted stock outstanding during each period, as the restricted stock is entitled to receive dividends and is therefore considered a participating security. The RSU's are excluded from the basic earnings per share calculation, as they are not participating securities.
Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue shares of common stock were exercised or converted into shares of common stock or resulted in the issuance of shares of common stock that share in the earnings of the Company. Diluted earnings per share is determined by dividing net income applicable to common stockholders for the applicable period by the weighted average number of shares of common stock deemed to be outstanding during such period.
In calculating diluted earnings per share, the Company includes only those shares underlying the RSUs that it anticipates will vest based on management's estimates which are evaluated quarterly. The Company excludes any shares underlying the RSUs from such calculation if their effect would have been anti-dilutive.
Cash Equivalents
Cash equivalents consist of highly liquid investments; primarily, direct United States treasury obligations with maturities of three months or less when purchased.
Restricted Cash
Restricted cash consists of cash held for construction costs and property improvements for specific joint venture properties as may be required by contractual arrangements.
Other Assets
Other assets consist of real estate tax , insurance and replacement escrows (classified as restricted cash within the consolidated statement of cash flows), lease intangibles, tenant receivables, prepaid expenses and other receivables.
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BRT APARTMENTS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2023
NOTE 1—ORGANIZATION, BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES (continued)
Deferred Costs
Fees and costs incurred in connection with multi-family property financings are deferred and amortized over the term of the related debt obligations. Fees and costs paid related to the successful negotiation of commercial leases are deferred and amortized on a straight-line basis over the terms of the respective leases.
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 consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Reclassifications
Immaterial Error Correction
During the preparation of financial statements for the current year, it was determined that we were not correctly including the escrow accounts classified within other assets within cash flows from operating activities and cash flows from investing activities on the Consolidated Statements of Cash Flows. As a result, we have made an immaterial error correction to the prior period to reclassify the deposits and escrows within Cash and Restricted Cash on the Statement of Cash Flows resulting in an increase in net cash from operating activities of $425,000 and a decrease in net cash used in investing activities of $3,596,000 from what was previously reported.
NOTE 2—REAL ESTATE PROPERTIES
Real estate properties consist of the following (dollars in thousands):
December 31,
A summary of activity in real estate properties, net, for the year ended December 31, 2023 follows (dollars in thousands):
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BRT APARTMENTS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2023
NOTE 2—REAL ESTATE PROPERTIES (continued)
The following summarizes, by state, information for the year ended December 31, 2023 regarding consolidated properties (dollars in thousands):__________________________________________
(a) Represents non-multi-family revenues.
Future minimum rentals to be received pursuant to non-cancellable operating leases with terms in excess of one year, from a commercial property owned by the Company at December 31, 2023, are as follows (dollars in thousands):
Year Ending December 31, Amount
Leases at the Company's multi-family properties are generally for a term of one year or less and are not reflected in this table.
NOTE 3—ACQUISITIONS AND DISPOSITIONS
Acquisitions of Interests in Joint Ventures
During 2023, the Company did not acquire any partnership interests. During 2022, the Company purchased its partners' remaining interests in 11 joint ventures. The Company determined that in each acquisition the gross assets acquired are concentrated in a single identifiable asset. Therefore, these transactions do not meet the definition of a business and are accounted for as asset acquisitions.
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