UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 2006
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-07172
BRT REALTY TRUST
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(Exact name of registrant as specified in its charter)
Massachusetts 13-2755856
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(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
60 Cutter Mill Road, Great Neck, New York 11021
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 516-466-3100
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Shares of Beneficial New York Stock Exchange
Interest, $3.00 Par Value
Securities registered pursuant to Section 12(g) of the Act:
NONE
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(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 No X
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Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the Act. Yes No X
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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
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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 ?
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 Accelerated filer X Non-accelerated filer
-- -- --
Indicate by check mark whether registrant is a shell company (as
defined in Exchange Act Rule 12b-2). Yes No X
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The aggregate market value of voting and non-voting common equity held
by non-affiliates of the registrant was $94,732,000 based on the last sale price
of the common equity on March 31, 2006, which is the last business day of the
registrant's most recently completed second quarter.
As of December 12, 2006, the registrant had 10,858,747 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 29, 2007 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 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, 2006, we had 61
loans outstanding that were secured by properties located in 12 states. We
believe that our ability to act promptly on loan requests and to expedite a
closing provides us with many lending opportunities and enables us to be
competitive with other firms that offer similar lending products.
From time to time, we have also participated as both an equity investor
in, and as 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, 2006, we had equity investments totaling
approximately $9.6 million in seven real estate joint ventures, and we owned
approximately 1.0 million Common Shares of Entertainment Properties Trust.
As of September 30, 2006, our portfolio consisted of approximately
$284.6 million in mortgage loans (before allowances of $669,000) with an average
interest rate of 13.06%. As of September 30, 2006, all outstanding loans, except
for one mortgage loan in the aggregate principal amount of $1,346,000, with an
allowance of $25,000 for loan losses, were earning interest. The mortgage loan
not earning interest represents approximately .5 % of our outstanding loan
portfolio at September 30, 2006.
Of the principal amount of loans outstanding on September 30, 2006, 92%
represent first mortgage loans or mortgage loans in which we held a senior or
pari passu participation interest, and 8% represent junior mortgage loans or
junior participations.
During the fiscal year ended September 30, 2006, in addition to
originating mortgage loans, we were engaged in servicing our loan portfolio,
supervising the management of real estate assets owned by us and overseeing the
activities of joint ventures in which we are involved as an equity participant.
We entered into a joint venture agreement with CIT Capital USA, Inc.
dated as of November 2, 2006 and agreed to present all loan proposals received
by us to the joint venture, which is 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 (or $150 million, in the event
that the joint venture obtains a line of credit of $50 million). The joint
venture will fund 100% of the principal of loans that meet its investment
criteria until the joint venture has originated loans with an aggregate
principal amount of $50 million. Upon funding $50 million of loans, the joint
venture will then fund 50% of the principal of loans that it accepts, and we
will fund the other 50%. Notwithstanding the foregoing, because we expect that
certain of the loan proposals that we present to the joint venture will not meet
the specified investment criteria of the joint venture, we will continue to
originate loans for our own account during the period prior to the point when
the joint venture has originated loans with an aggregate principal amount of $50
million and thereafter. The joint venture is described in greater detail in this
Form 10-K under "Business, Joint Venture with CIT Capital U.S.A., Inc."
On December 11, 2006, we completed a public offering of 2,800,000
shares of our common shares deriving net proceeds of approximately $74.3
million, before expenses. On December 13, 2006, the underwriters exercised their
over-allotment option in part and purchased an additional 132,500 of our common
shares resulting in additional net proceeds to us of approximately $3.5 million.
The net proceeds received by us on December 11, 2006 from the public
offering have been used to reduce indebtedness under our margin lines of credit
and our revolving credit facility. The net proceeds received by us on December
14, 2006 from the exercise by the underwriters of their over-allotment option
have been used to further reduce indebtedness under our revolving credit
facility.
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 financing can be obtained or until the property is
sold. Our investment policy emphasizes the origination of short-term senior and
junior real estate mortgage loans secured by liens on improved real property
which generate rental income. As of September 30, 2006, 92% of the aggregate
principal balance of our portfolio consisted of 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, industrial buildings and undeveloped real
property. During the past year, the percentage of our loans that are secured by
residential property that is pending renovation and conversion to condominium
ownership has increased, and at September 30, 2006, 39% of our loan portfolio
consisted of such loans. 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.
We may sell, from time to time, 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.
In the past, we have originated 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. 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 in mezzanine loans, the collateral securing our loans is
subordinate to the liens of senior mortgages or senior participations. At
September 30, 2006, approximately 8 % of our real estate mortgages, or $22.6
million in principal amount, were represented by junior mortgages or junior
participations. 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 than our total investment, less allowances
for possible losses, and we could lose our entire investment in that loan.
We also originate mortgage loans to joint ventures in which we are an
equity participant. If we determine that a real property investment provides an
opportunity to participate in capital appreciation, we may make an equity
investment with a joint venturer, and make a mortgage loan, either senior or
junior, to the venture. At September 30, 2006, we had $9,608,000 invested in
joint ventures in which we were an equity participant, and $550,000 in second
mortgage loans was due to us from these joint ventures. In most instances, a
mortgage loan made by us to a joint venture in which we are an equity
participant is secured by the real property owned by the joint venture.
In the past three fiscal years there has been significant growth in our
loan originations. We originated $309.7 million, $259.3 million and $231.6
million of mortgage loans in fiscal 2006, 2005 and 2004, respectively. In this
three year period our lending activities have become nationwide and we have seen
an increase in the average loan originated. Both of these factors we attribute
to an increase in our marketing activities. As of September 30, 2006, we had
loans outstanding that were secured by properties located in 12 states. It is
not our present intent to originate or otherwise invest in any mortgage loan
secured by property located outside the United States and Puerto Rico.
When underwriting a loan, the primary focus of our analysis is the
intrinsic value of a property, which we determine by considering a number of
factors including, without limitation, its location, potential for alternative
use, current and potential net operating income and local demographics. We also
examine the creditworthiness of a borrower or its principals and take into
consideration its or their ability to meet the operational needs of the property
and the experience of the borrower or its principals in the real estate
industry. Because of our emphasis on fundamental property value, we believe that
in the event of default, foreclosure and acquisition of title to a property, we
will generally be able to manage a property until market conditions present a
favorable opportunity to dispose of the property.
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
also experienced a great deal of repeat business with our borrowers. Once a loan
application is processed, it goes through our due diligence process.
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 a case of an acquisition 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 prospective borrower and its
principals. If management determines that an environmental assessment of the
underlying property is necessary, then such an assessment is conducted by a
third-party. Before a loan commitment is issued, a loan must be 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 our executive officers.
We generally obtain a non-refundable cash payment allocable for legal and other
expenses from a prospective borrower at the time of issuing a loan commitment,
and our loan commitments are generally issued subject to receipt by us of title
documentation, 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 $30 million, in the aggregate.
We 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 terminates only if (1) the borrower conveys title to the property to
us within a negotiated period of time after a loan default and (2) the borrower
or the guarantor satisfy certain obligations, such as current payment of all
real estate taxes and operating expenses. The "walk-away guarantee" is intended
to provide an incentive to the principals of a borrower, in a situation where
the 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, 2006, we had 61 outstanding mortgage loans,
aggregating approximately $284.6 million in principal amount before allowances
of $669,000, which include senior and junior mortgage loans, participations in
mortgage loans (which as of September 30, 2006 were all on a pari passu basis)
and loans to joint ventures in which we are an equity participant. Our
allowances of $669,000 relate to two of our mortgage loans with an aggregate
principal amount of $26.1 million, to two borrowers, of which one borrower was
performing its financial obligations under a loan with a principal amount of
$24.8 million and the other borrower was not performing under a loan with a
principal amount of $1.3 million, as of September 30, 2006.
At September 30, 2006, our loan portfolio was secured by real property
located in 12 states. Loans representing 53% of the principal amount of our
total outstanding loans were secured by properties located in the New York
metropolitan area, including New Jersey and Connecticut, 34% of the principal
amount by properties located in Florida, 5% of the principal amount by
properties located in Tennessee, and 8% of the principal amount by properties in
the remaining states.
During the year ended September 30, 2006, we originated approximately
$309.7 million of mortgage loans, approximately $157.5 million of our
outstanding loans were repaid in whole or in part and we sold participation
interests of approximately $61.2 million. Our three largest mortgage loans
outstanding (net of participations to others) at September 30, 2006 of
approximately $24.8 million, $23.6 million and $16.0 million, each of which is
secured by one property, represented approximately 6.7%, 6.4% and 4.3%
respectively, of our total assets. There were no other mortgage loans in our
portfolio that represented more than 3.6% of our total assets as of September
30, 2006. From the period commencing with our 1999 fiscal year, or October 1,
1998, through September 30, 2006, we originated $1.02 billion of real estate
loans on which we have realized losses of $212,000.
From time to time, we make loans to multiple borrowers that are
controlled by the same individual. At September 30, 2006, we had loans
outstanding with an aggregate principal amount of $21.8 million to two borrowers
controlled by one individual and loans outstanding with an aggregate principal
amount of $19.3 million to five borrowers controlled by another individual. The
second of these individuals, who at December 11, 2006 controlled six of our
borrowers having loans with an aggregate principal amount of $27.1 million,
pleaded guilty on November 9, 2006 to four criminal charges relating to (1) the
use of a false social security number in connection with a real estate loan that
was not from us and (2) the failure to file federal tax returns and to pay
federal income taxes for the calendar years 1999, 2000 and 2001. Sentencing in
the matter is currently scheduled for February 2007. As of the date of this
filing, we have not taken any action, under the applicable loan documents,
against the borrowers as a result of this matter. Each of the borrowers under
the six loans is performing its financial obligations to us under the loans as
of the date of this report, but we can not provide any assurance that the
borrowers will continue to perform. We believe that the collateral securing the
loans is adequate to support the principal balance due thereunder.
At September 30, 2006, approximately 95% 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 approximately 5% 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 which 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 mortgage loans
outstanding at September 30, 2006:
Interest Non-Interest Prior No. of % of
Total Earning Earning Liens Loans Portfolio
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First mortgage loans:
Short-term (five years or less):
Condominium development/
units 110,995,000 110,995,000 - - 11 39
Multi-Family Residential 57,623,000 57,623,000 - - 18 20
Land35,074,000 35,074,000 - - 6 12
Shopping centers/retail 25,689,000 25,689,000 - - 12 9
Office 20,803,000 20,803,000 - - 3 8
Industrial buildings 6,221,000 4,875,000 1,346,000 - 3 2
Residential 5,598,000 5,598,000 - - 2 2
Second mortgage loans and
junior participations:
Short-term (five years or less):
Retail 19,225,000 19,225,000 - 40,979,000 3 7
Multi-Family Residential 2,850,000 2,850,000 - 11,070,000 2 1
Office 550,000 550,000 - 3,418,000 1 -
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100
Loan Defaults
Loan defaults will reduce our current return and may require 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 or seek to protect our investment through negotiations
with the borrower or other interested parties, which may involve further cash
outlays. During a foreclosure proceeding, we will usually not receive interest
payments under our mortgage. Foreclosure proceedings in certain jurisdictions
can take a considerable period of time, and may extend for in excess of two
years in many instances. 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 agreement in order to preserve
the rental income stream and provide for the maintenance of the property. At the
conclusion of the foreclosure or negotiated workout process, which occurs after
the property is either sold at auction to a third party purchaser, acquired by
us, or the workout process results in the borrower or its designee retaining the
property, then the amounts, if any, 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. In certain negotiated workouts, we
have acquired title to a property from the borrower and afforded the borrower
the opportunity to reacquire the property within a specified period of time at a
fixed price.
Our Credit Facility and Our Lines of Credit
We have a credit facility, which we refer to herein as our 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 those banks make
available 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
additional one-year periods for 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. At
September 30, 2006, $152 million was available to be drawn based on the lending
formula under the revolving credit facility and $122 million was outstanding. At
November 30, 2006, $173 million was available to be drawn down based on the
lending formula under our credit facility and $123 million was outstanding. On
December 11, 2006, we applied $55 million from the net proceeds received by us
in the public offering of our common beneficial shares, which was consummated on
December 11, 2006, to reduce the outstanding amount due on our credit line to
$68 million and on December 14, 2006 we applied the $3.5 million received by us
on the exercise by the underwriters of their over-allotment option to further
reduce the outstanding amount due on our credit line to $64.5 million.
Borrowings under the revolving credit facility bear interest at 30 day LIBOR
plus 225 basis points, or 7.58% per annum as of September 30, 2006. The loan
agreement between us and our lenders contains affirmative and negative
covenants, including (1) a requirement that the ratio of shareholders' equity 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 (1) by the common shares we
own in Entertainment Properties Trust and (2) by various 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,
2006, $19.5 million was outstanding under one of these margin accounts, and zero
was outstanding under the other margin account. For the three month period ended
September 30, 2006, the average interest rate paid on these margin accounts was
8.18%. Our margin lines were paid in full by us on December 11, 2006, using a
portion of the public offering proceeds.
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 with and among (1) 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 (2) 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 will engage 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, similar to those that we originate. 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% will be funded by the BRT member and
75% will be funded by the CIT member. In addition, the joint venture
contemplates that it will obtain a line of credit from a third party lender for
up to $50 million. At this time, however, there are no agreements or commitments
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. During the current period and for so long as the joint venture
does not have a line of credit from a third party lender, the BRT member will
fund 25% of each loan made by the joint venture, and the CIT member will fund
75% of each loan made by the joint venture. 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 will fund 100% of the principal amount of loans that meet its
investment criteria until the joint venture has originated loans with an
aggregate principal amount of $50 million. Upon funding $50 million of loans,
the joint venture will then fund 50% of the principal of loans that it accepts,
and BRT will fund the other 50%, in each such case pursuant to a participation
agreement with respect to each such loan to be entered into with the joint
venture.
Allocations. We will manage the joint venture and will 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 will be distributed 37.5% to the CIT member and 62.5% to the BRT member.
Any amount of origination fees in excess of 2% of the principal amount of a loan
but not exceeding 3% of the principal amount of the loan will be paid to REIT
Management Corp., BRT's advisor. Any amounts of the joint venture's origination
fees which exceed 3% of the principal amount of a loan will be 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 the CIT member
receives a return of 9% (inclusive of origination fees), annualized on its
outstanding advances. If the joint venture is able to provide the CIT member
with an annualized 9% return, thereafter, additional available net cash will be
distributed, 37.5% to the CIT member and 62.5% to the BRT member.
Loan Review. Loan proposals presented to the joint venture will be
reviewed by BRT's loan committee. Up to three individuals shall be designated as
the designees of 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, 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 shall have two
business days to indicate its disapproval of the proposal, and if such
disapproval is not provided, then the loan proposal shall be deemed approved;
provided, however, that in the event that the CIT member requests additional
information with respect to any loan proposal, the CIT member shall have two
business days following the earlier of (1) the receipt of such information or
(2) the loan closing to approve or disapprove of such loan. BRT may originate
for its own account any loan that is disapproved, or deemed to be 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.
CIT shall be entitled to enter into a joint venture or other
arrangement with another person to make or invest in commercial real estate
loans, provided that prior to entering into any such joint venture or other
arrangement during the restricted period, CIT provides BRT with 30 days notice
of such proposed action. In the event BRT desires to participate in such
investment, at a level of up 25% of the investment, BRT shall provide notice of
its intention to do so within 20 days of being notified by CIT of the proposed
investment. CIT has agreed that in the event that BRT so provides timely notice
of its intention to participate, CIT will not close or otherwise proceed with
any such joint venture or other arrangement unless BRT is given the opportunity
to participate in the investment along substantially the same terms and
conditions as CIT.
In addition to the foregoing, CIT shall be entitled to lend funds to
another person that makes commercial real estate loans; provided however, that
prior to entering into any such transaction during the restricted period, CIT
shall provide BRT with 30 days notice of its intention to do so. In the event
that BRT desires to participate in any such loan in an amount up to 25% of the
loan, BRT shall, within 20 days following its receipt of such notice, gives CIT
written notice of its commitment to do so. In the event that BRT does provide
such notice within such 20 day period, CIT shall not close on any such loan
unless BRT is given he opportunity to participate in CIT's investment on the
same or substantially the same terms and conditions as CIT.
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, 2006, we owned approximately 1.0 million common
shares of Entertainment Properties Trust, a New York Stock Exchange listed
company, 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, 2006,
the market value of this investment was approximately $49.8 million, or $49.32
per share and as of November 30, 2006 was approximately $61.3 million, or $60.70
per share. In our 2006 fiscal year, EPR paid or declared cash dividends to its
shareholders at a quarterly rate of $.6875 per share, which provided us with an
annual yield of 21% 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.
Our Real Estate Assets
In addition to originating mortgage loans, we supervise the management
of our real estate assets, which include properties that were acquired by
foreclosure and properties owned by joint ventures in which we participate as an
equity investor. At September 30, 2006, approximately 2% of our total assets, or
an aggregate of approximately $6.2 million, was represented by three operating
properties, two of which were acquired by foreclosure. One of the properties
acquired in foreclosure, with a book value of $2.8 million, was sold in October
2006 for a consideration of $3.2 million. At September 30, 2006, approximately
3% of our total assets, or an aggregate of approximately $9.6 million, was
represented by interests in the joint ventures that collectively own seven
properties. In November 2006, one of the joint ventures in which we hold a 50%
equity interest sold its only property for a consideration of $17.4 million,
which results in a book gain to us of approximately $1.8 million in the quarter
ending December 31, 2006. This sale also results in a decrease of $7.4 million
in the amount of our assets represented by interests in joint ventures. From
time to time, we evaluate the status of our real estate assets and determine our
short-term and long-term objectives for these investments.
Competition
With respect to our real estate lending activities, we compete for
investments with other entities, including other mortgage REITs, commercial
banks, savings and loan associations, specialty finance companies, conduits,
pension funds, public and private lending companies, and mortgage bankers.
Competition for mortgage loans is highly competitive, with lenders competing on
rate, fees, amounts committed, term and service. Many of our competitors possess
greater financial and other resources than we possess. Competitive variables
include market visibility, size of loans offered and underwriting standards. To
the extent a competitor is willing to risk larger capital in a particular
transaction, 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, and we may offer a higher loan to value ratio than
institutional competitors. In order to compete more effectively, we engage in an
active advertising and marketing 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
REIT. Jeffrey A. Gould, our President and Chief Executive Officer, George
Zweier, our Vice President and Chief Financial Officer, two officers engaged in
loan origination and underwriting activities, four others engaged in
underwriting and servicing activities devote substantially all of their business
time to our company, while our other personnel 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, which we refer to
as the Advisory Agreement, between us and REIT Management Corp. Pursuant to the
Advisory Agreement, REIT Management furnishes advisory and administrative
services with respect to our business, including, without limitation, arranging
credit lines for us, participating in our loan analysis and approvals, providing
investment advice, providing assistance with building inspections and litigation
support. For services performed by REIT Management under the Advisory Agreement,
REIT Management has received, and will receive 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. During the year ended September 30,
2006, we paid $2.7 million directly to REIT Management under the Advisory
Agreement. In addition, our borrowers pay fees directly to REIT Management based
on their loans, which generally are one-time fees payable upon funding of the
loan commitment, in the amount of 1% of the total commitment amount. During the
year ended September 30, 2006, these fees totaled $3.2 million. The Advisory
Agreement has been amended to provide that effective January 1, 2007 the asset
management fee will be six tenths of 1% of our invested assets and that there
will be 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 1/2% 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 is wholly owned by the chairman of our Board of Trustees and he and
other of our executive officers receive compensation, directly or indirectly,
from REIT Management Corp. We discuss compensation paid by REIT Management Corp.
to our Chairman 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 properties held by us and
some of the 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 will result in a decrease in interest income and may
require an increase in loan loss reserves. The decrease in interest income
resulting from loan defaults may be for a prolonged period of time as we seek to
recover primarily through legal proceedings, the outstanding principal balance,
accrued interest, default interest and our legal costs. These 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 seeking to recover the outstanding amounts will reduce
the amount of cash available to meet our expenses. In addition, the decrease in
interest income 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 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 and, 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 senior
indebtedness, to the value of the real property underlying the loan as
determined by our own in-house procedures. The higher the loan to value ratio,
the greater the risk that the amount obtainable from 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 may find it
necessary to acquire the property at a foreclosure sale or bankruptcy auction,
in which event we assume the risks that may result from ownership of the
property.
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 a significant number of
our mortgage loans are in default or if a recessionary environment exists under
which generally accepted accounting principles require us to take provisions
against our loans or against our real estate assets, our financial position
could be materially adversely affected causing us to be in breach of the
financial covenants.
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 dispose of assets in a rapid
fashion, which could have an adverse impact on the amounts we would 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 all, or any 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 net
worth and adversely affect our ability to pay cash distributions to our
shareholders.
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 five 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. If a borrower is unable to pay the balance due at maturity, and we are
not willing to extend or restructure the loan, in most cases we will be required
to 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.
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 or junior participations in mortgage 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 region 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
of the senior lien holder. However, in certain situations, we may not have the
right to make payments to the senior lien holder, or may choose not to make such
payments despite having the right to do so. In such cases, the senior lien
holder may foreclose and we will be entitled to share in the proceeds of the
foreclosure sale only after amounts due to senior lien 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. These loans are
subject to a higher risk of default because such properties generally are not
income-producing properties. Following a borrower's default, we may experience
delays in enforcing our rights as a lender and may incur costs in protecting our
investment. In addition, the market value of such properties may be volatile.
Consequently, in the event of a default and foreclosure, we may not be able to
sell such a property for an amount equal to our investment or at all. 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.
We may suffer a loss if a borrower defaults on a loan that is not secured 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.
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, to the extent 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 future 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 will 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.
Our allowance for loan losses 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 maintain an allowance
for loan losses to manage the risk associated with loan defaults and
non-performance by assessing the likelihood of non-performance, tracking loan
performance and diversifying our portfolio. However, unexpected losses may occur
that could have a material adverse effect on our business, financial condition,
results of operations and cash flows. Unexpected losses may arise from a wide
variety of specific or systemic factors, many of which are beyond our ability to
predict, influence or control.
The allowance for loan losses reflects our estimate of the probable
losses in our loan portfolio at the relevant balance sheet date. Our allowance
for loan losses is based on prior experience, as well as an evaluation of the
known risks in the current portfolio and economic factors. The determination of
an appropriate level of loan loss allowance is an inherently difficult process
and is based on numerous assumptions. The amount of future losses 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 may not be adequate to cover
actual loan losses, and future provisions for loan losses could materially and
adversely affect our business, financial condition, results of operations and
cash flows.
We are exposed to risk of environmental liabilities with respect to properties
to which we take title
In the course of our business, we may 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 and Connecticut,
and in 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 and mortgage
bankers. 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, 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 costs 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
costs 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.
An SEC investigation involving our affiliate could adversely affect our
stock price
On June 21, 2006, One Liberty Properties, Inc., a company affiliated
with us, announced that it received a formal order of investigation from the
SEC. One Liberty has disclosed that the SEC has requested information regarding
"related party" transactions between One Liberty and entities affiliated with it
and with certain of One Liberty's officers and directors and compensation paid
to certain of One Liberty's executive officers by those affiliates. In
connection with such investigation, the SEC served a subpoena on us requesting
that the we produce certain documents, relating to, among other things, related
party transactions between us and certain affiliates of ours and our executive
officers. One Liberty and BRT have several executive officers and directors in
common. Moreover, we have engaged in the past in related party transactions with
some of the same affiliated entities as One Liberty and others and continue to
do so. We are complying with the SEC's subpoena. We are not aware of the scope
of the SEC's investigation of One Liberty. We cannot predict what the outcome of
the SEC's investigation or document request will be.
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 our senior management to carry out business and investment
strategies. In addition to Jeffrey A. Gould, only three other executive
officers, our vice presidents, David Heiden and Mitchell Gould, and our vice
president and chief financial officer, George Zweier, devote substantially all
of their business time to our company. 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 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, 2006 and November 30, 2006 were $49.8 million and $61.3 million,
respectively, while our cost basis was $13.3 million. At September 30, 2006, our
balance sheet reflects as an asset $53.3 million of available-for-sale
securities, of which $49.8 million represents the market value of the shares of
EPR owned by us on September 30, 2006 and $36.5 million, or 24% of our
shareholders' equity, represents the difference between our cost basis for such
shares and the market value for such shares. 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 and our shareholders' equity.
Our ownership of shares of EPR resulted in the receipt by us for the
fiscal year ended September 30, 2006 of cash dividends of $2.7 million. If there
is a decrease in the EPR dividend for any reason, it could 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 two margin lines of credit collateralized primarily
by the EPR shares owned by us. At September 30, 2006, $26.5 million was
available under these margin lines of credit, of which $19.5 million was
outstanding, and at November 30, 2006, $31.5 million was available under these
margin lines of credit, of which $19.0 million was outstanding. Our margin lines
of credit were paid in full on December 11, 2006 from the proceeds we received
from our underwritten public offering completed on December 11, 2006. When 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 believe that we operate so as to qualify as a REIT under the
Internal Revenue Code of 1986, as amended, also known as the Code. 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 will be subject to Federal corporate income
tax on our undistributed taxable income. In addition, we will be 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 holders of our shares.
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:
o defaults by borrowers in paying debt service on outstanding loans;
o an inability to originate loans on favorable terms;
o increased competition from entities engaged in mortgage lending;
o general and local economic and business conditions;
o general and local real estate conditions;
o changes in Federal, state and local governmental laws and regulations;
o an inability to retain our REIT qualification; and
o 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 2007 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 29, 2007.
Name Office
Fredric H. Gould* Chairman of the Board of Trustees
Jeffrey A. Gould* President and Chief Executive Officer;
Trustee
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
David Heiden Vice President
Mitchell K. Gould Vice President
* Fredric H. Gould is the father of Jeffrey A. and Matthew J. Gould.
** Simeon Brinberg is Mark H. Lundy's father-in-law.
Simeon Brinberg (age 72) 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., 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 59) 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 also 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 59) 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 44) has been our General Counsel and Assistant Secretary
since March 2006 and a Senior Vice President since March 2005. Prior to March
2005 and since 1993, he has been 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 42) 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.
David Heiden (age 40) has been employed by us since April 1998 and has been
a Vice President since March 1999. From May 1997 until April 1998, Mr. Heiden
was an associate at GMAC Commercial Mortgage engaged in originating and
underwriting commercial real estate loans for securitization. He is a licensed
real estate appraiser and real estate broker.
Mitchell K. Gould (age 33) has been employed by us since May 1998 and has
been a Vice President since March 1999. 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.
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, 2006, we contributed $69,000 to the annual rent of $388,000 paid
by Gould Investors L.P., REIT Management Corp., One Liberty Properties,
Inc., and related entities. We also lease, under a direct lease with a
subsidiary of Gould Investors L.P., an additional 1,800 square feet directly
adjacent to the 12,000 square feet at an annual rental of $55,000.
At September 30, 2006, we did not own any real property with a book
value equal to or greater than 10% of our total assets. It has been our policy
to operate, with a view toward eventual sale, all real estate assets acquired by
us in foreclosure or deed in lieu of foreclosure. During the year ended
September 30, 2006, we sold two cooperative apartments located in New York City
for a gain on sale of $726,000.
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, 2006.
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
------------------------------ ---- --- ---------
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
2005
First Quarter $25.10 $21.05 $.48
Second Quarter 24.60 20.70 .48
Third Quarter 24.46 20.75 .50
Fourth Quarter 24.25 22.01 .50
As of December 11, 2006, there were approximately 1,011 holders of
record of our Beneficial Shares and approximately 4,153 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. and Signature Bank, 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, 2006 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 26,250 (1) $ 8.88 219,490
Equity compensation
plans not approved - - -
by security holders
------- ------ -------
Total 26,250 (1) $ 8.88 219,490
(1) Does not include 125,010 shares of restricted stock issued to
officers, directors, employees and consultants of ours. None of
these restricted shares vest, except under special circumstances
if vesting is accelerated by our Compensation Committee and Board
of Trustees, until 2008.
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, 2006. This
table should be read in conjunction with the detailed information and financial
statements appearing elsewhere herein.
Fiscal Years Ended
September 30,
2006 2005 2004 2003 2002
---- ---- ---- ---- ----
(In thousands, except for per share amounts)
Operating statement data
Total revenues $37,488 $25,491 $17,661 $13,891 $16,498
Total expenses 20,708 11,975 9,114 5,862 5,639
Income from continuing operations 19,279 14,441 10,347 12,797 11,392
Discontinued operations 792 1,773 1,655 886 1,194
Net income (1) 20,071 16,214 12,002 13,683 12,586
Income per
beneficial share: (1)
Income from continuing operations $2.43 $1.86 $1.36 $1.71 $1.55
Discontinued operations .10 .23 .22 .12 .16
------ ------ ----- ----- -----
Basic earnings per share $2.53 $2.09 $1.58 $1.83 $1.71
Income from continuing operations $2.42 $1.85 $1.34 $1.68 $1.52
Discontinued operations .10 .23 .21 .12 .16
----- ----- ----- ----- -----
Diluted earnings per share $2.52 $2.08 $1.55 $1.80 $1.68
Cash distribution per
common share $2.14 $1.96 $1.79 $1.30 $1.04
Balance sheet data:
Total assets 371,042 266,198 198,005 139,002 134,931
Earning real
estate loans (2) 283,282 192,012 132,229 63,733 84,112
Non-earning real
estate loans (2) 1,346 1,617 3,096 3,145 415
Real estate assets 12,950 12,188 13,680 13,066 13,204
Available-for-sale securities
at market 53,252 48,453 41,491 36,354 31,178
Borrowed funds 141,464 110,932 53,86 24,755 14,745
Junior Subordinated Notes 56,702 - - - -
Loans and mortgages
payable 2,471 2,542 2,609 2,680 2,745
Shareholders' equity 154,435 142,655 132,063 125,932 114,291
(1) Includes $680,000, $1,641,000 and $4,332,000, or $.09, $.21 and $.57
per share on a diluted basis, for the fiscal years ended September 30,
2005, 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 or 2002.
(2) Earning and non-earning loans and are presented without deduction of
the related allowance for possible losses.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations Results of Operations
General
Our primary business operations involve the origination and holding for
investment and servicing of mortgage loans. Our profitability in any year is
most affected by the principal amount of loans originated, the type of loans
originated and the payoff and pay down of outstanding mortgage loans during such
year. These factors determine, to a significant extent, the interest income and
fee income earned during such year. We cannot project the principal amount or
type of loans which will be originated in any year or those loan applications
submitted to us which will be approved by our loan committee or Board of
Trustees, as the case may be. Due to the short term nature of our loan portfolio
and our "no prepayment penalty" policy, we cannot project the rate of payoffs or
paydowns against our loan portfolio in any year. As noted in the discussion
below, both the 2006 fiscal year and the 2005 fiscal year reflect an increase in
interest and fee income compared to the preceding fiscal year. The primary
reason for these increases is the significant increase in loan originations
which we attribute to the increase in our marketing activities.
2006 vs. 2005
Interest and fees on loans increased to $33,263,000 for the year ended
September 30, 2006, as compared to $21,549,000 for the year ended September 30,
2005, an increase of $11,714,000, or 54%. During the current fiscal year, we
experienced an increase in the volume of loan originations that caused the
average balance of loans outstanding to increase to $216,400,000 in the current
fiscal year from $145,700,000 in the prior 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
recognized an increase of $1,003,000 in fee income in 2006, which is consistent
with the increased loan volume we experienced in the current fiscal year. We
also realized $51,000 of additional interest income 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 prior 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 current 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 from $2.50
per share to $2.75 per share and an increase in the average balance of other
investment balances. 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 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% 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 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 the negotiation of our new credit facility (which closed in
January 2006) and as the result of professional services related to the
cancelled offering. Advertising expense also 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 the result of
increased interest expense of $882,000, resulting from the prepayment of the
first mortgage upon the sale of the property. Additionally, the prior 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%, from $680,000 in the fiscal year ended September 30, 2005 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.
2005 vs. 2004
Interest and fees on loans increased to $21,549,000 for the year ended
September 30, 2005, as compared to $13,913,000 for the year ended September 30,
2004, an increase of $7,636,000, or 55%. During the 2005 fiscal year, we
experienced an increase in the volume of loan originations that caused the
average balance of loans outstanding to increase to $145,700,000 in the current
fiscal year from $107,300,000 in the prior fiscal year. This resulted in an
increase in interest income of $4,636,000. Increases in the prime rate of
interest caused the interest rate earned on our loan portfolio to increase from
10.87% to 12.63%, resulting in a $2,095,000 increase in interest income. We
recognized an increase of $946,000 in fee income in 2005, which is consistent
with the increased loan volume and an acceleration of amortization from the
prepayment of loans. We also realized an increase 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 in the 2004 fiscal year but was paid in full in the 2005
fiscal year. Offsetting these increases was a decline in interest income of
$461,000 due to the receipt in the 2004 fiscal year of interest in excess of the
stated rate on four loans that went into default during the prior year and
subsequently returned to performing status.
Operating income from real estate properties declined by $389,000, or
28%, to $983,000 in the fiscal year ended September 30, 2005 from $1,372,000 in
the fiscal year ended September 30, 2004. This decline is due to the write off
of $370,000 of straight line rent related to a retail tenant that filed for
bankruptcy in October 2005.
Other income, primarily investment income, increased by $583,000, or
25%, from $2,376,000 in the fiscal year ended September 30, 2004 to $2,959,000
in the fiscal year ended September 30, 2005. This increase was partially the
result of a 14% increase in the dividend paid on our EPR shares from $2.1875 per
share to $2.50 per share. During the fiscal year ended September 30, 2005, we
also recognized $365,000 of income from the payoff of a loan, a portion of which
was written off in a prior year.
Interest expense on borrowed funds increased to $4,324,000 in the
fiscal year ended September 30, 2005 from $1,408,000 in the fiscal year ended
September 30, 2004. This increase of $2,916,000, or 207%, is due to an increase
in the average balance of borrowed funds outstanding to fund our increased loan
originations, which increased by $38.1 million, from $28.1 million in the prior
fiscal year to $66.2 million in the current fiscal year. This caused an increase
in interest expense of $2,550,000. An increase in the average rate paid on our
borrowings from 4.93% to 6.44% caused $366,000 of the increase in interest
expense. The average interest rate includes the amortization of deferred
borrowing costs and a .3% 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
$418,000, or 29%, in the fiscal year ended September 30, 2005 to $1,862,000 from
$1,444,000 in the fiscal year ended September 30, 2004. The increase is a result
of a larger outstanding balance of invested assets, primarily loans, in the
current fiscal year, thereby causing the increase in the fee.
General and administrative expenses increased to $4,398,000 in the
fiscal year ended September 30, 2005 from $3,828,000 in the fiscal year ended
September 30, 2004. This increase of $570,000, or 15%, was the result of several
factors. Payroll and payroll related expenses increased by $389,000, as a result
of staff additions, increased commissions paid to loan originators and
restricted stock amortization. Accounting expenses increased by $325,000, a
result of Sarbanes-Oxley compliance activities. These increases were offset by a
$209,000 decline in legal expenses that resulted from a decline in foreclosure
related activities and the expensing in the 2004 fiscal year of legal costs
associated with the organization of a "de novo" bank that we did not pursue. The
remaining increase in expense of $65,000 was due to higher operating expenses in
several categories, none of which was significant.
Other taxes decreased by $63,000, or 13%, to $417,000 for the fiscal
year ended September 30, 2005 from $480,000 in the fiscal year ended September
30, 2004. The decrease is the result of a decline of $172,000 in federal and
state income taxes. In the prior fiscal year we were liable for federal and
state income taxes on earnings that were not distributed to shareholders. This
was offset by a $109,000 increase in federal excise tax recorded. The federal
excise tax is based on taxable income during the current fiscal year not
distributed.
Operating expenses relating to real estate declined by $976,000, or
54%, from $1,809,000 in the fiscal year ended September 30, 2004 to $833,000 in
the fiscal year ended September 30, 2005. In the prior fiscal year, we incurred
legal and other professional expenses of $945,000 in connection with a
litigation related to a property that was sold in 1997. This litigation was
resolved in June 2004. In the current year, we also refinanced the mortgage on
an existing leasehold interest resulting in a reduction of interest expense of
$62,000.
Equity in earnings of unconsolidated joint ventures increased by
$55,000, or 27%, from $202,000 in the fiscal year ended September 30, 2004 to
$257,000 in the fiscal year ended September 30, 2005. This increase resulted
from the sale of three cooperative apartment units by one of our joint ventures,
offset by a decline in rental income related to a property located in Dover,
Delaware, where, upon a lease renewal, a major tenant reduced the amount of
space it occupies.
Gain on sale of available-for-sale securities declined $961,000, or
59%, from $1,641,000 in the fiscal year ended September 30, 2004 to $680,000 in
the fiscal year ended September 30, 2005. In the current 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. In the prior fiscal
year, we sold 61,300 shares of EPR and 58,550 shares of Atlantic Liberty which
resulted in net proceeds of $3,384,000 and had a cost basis of $1,743,000.
For the fiscal year ended September 30, 2005, gain on sale of real
estate assets, which is included in discontinued operations, increased to
$1,569,000 from $1,261,000 in the fiscal year ended September 30, 2004. In the
current fiscal year, the gain resulted from our sale of a shopping center
located in Wyoming. In the prior fiscal year, the gain was the result of the
sale of one condominium and four cooperative apartment units.
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 $269.6 million are due during the twelve months ending
September 30, 2007, including $9.9 million due on demand and $111.0 million
secured by mortgages on multi-family properties being converted to condominium
ownership. 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 is dependent on the market conditions for such
product in the geographic area in which the property is located, mortgage
availability for this product and interest rates available on such mortgage
financing. Since these 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.
On December 11, 2006, we completed a public offering of 2,800,000
shares of our common shares deriving net proceeds of approximately $74.3
million, before expenses. On December 13, 2006, the underwriters exercised
their over-allotment option in part and purchased an additional 132,500 of our
common shares resulting in additional net proceeds to us of approximately $3.5
million. The net proceeds received by us on December 11, 2006 from the public
offering have been used to reduce indebtedness under our margin lines of credit
and our revolving credit facility. The net proceeds received by us on December
14, 2006 from the exercise by the underwriters of their over-allotment option
have been used to further reduce indebtedness under our revolving credit
facility.
Credit Facilities
We have a 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 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. 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
65% of first mortgages, plus 50% of second mortgages and certain owned real
estate pledged to the participating banks and may not exceed 15% of the
borrowing base. At September 30, 2006, $152.0 million was available to be drawn
based on the lending formula under our credit facility and $122.0 million was
outstanding. At November 30, 2006, $173 million was available to be drawn based
on the lending formula under our credit facility and $123 million was
outstanding. On December 14, 2006, our outstanding balance under the credit
facility was reduced to $64.5 million. We applied proceeds derived by us from a
public offering of our common beneficial shares, which was consummated on
December 11, 2006, plus the additional proceeds we received on December 14, 2006
on the exercise by the underwriters of the over-allotment option to reduce the
outstanding balance due to the bank group under the credit facility.
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 an amount equal to 50% of the market value of the
shares we own. At September 30, 2006, $26.5 million was available under the
margin lines of credit, of which $19.5 million was outstanding. At November 30,
2006 $31.5 million was available under the margins lines of credit and $19.0
million 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 might decline and we could be required to repay a portion or all
of the margin loans. Our margin lines were paid in full on December 11, 2006,
using a portion of the public offering proceeds.
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, 2006, we generated cash
of $19.9 million from operating activities, $157.5 million from collections from
real estate loans, $61.2 million from the sale of participations in loans
originated by us and $55 million from the issuance of junior subordinated notes.
These funds, in addition to cash on hand and funds borrowed under our revolving
credit facility and our margin lines of credit, were used primarily to fund real
estate loan originations of $309.7 million, and to pay cash distributions to
shareholders in the amount of $16.4 million.
We will satisfy our liquidity needs in the year ending September 30,
2007 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, and net cash flow generated
from the operation and sale of real estate assets.
We have no off-balance sheet arrangements.
Disclosure of Contractual Obligations
The following table sets forth as of September 30, 2006 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 59,173,000 76,000 166,000 188,000 58,743,000
Capital Lease Obligations - - - - -
Operating Lease Obligation 1,045,000 58,000 116,000 116,000 755,000
Purchase Obligations - - - - -
Other Long-Term Liabilities
Reflected on Company
Balance Sheet Under GAAP - - - - -
--------- ------- ------- ------- ----------
- - - - -
Total 60,218,000 134,000 282,000 304,000 59,498,000
=========== ======= ======= ======= ==========
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 state of 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.
A declining real estate market however could also provide us with
opportunities since, in a declining market, other lenders, particularly
institutional lenders, become more conservative in their lending activities. If
such a lending environment should occur, the amount of potential business for us
could increase.
Since approximately 95% of our loan portfolio at September 30, 2006
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 as
distinguished from financial reporting purposes for which we are on a September
30th fiscal year. We distributed substantially all of our taxable income for
calendar 2005 by October 2006. We estimate taxable income for calendar 2006 will
be approximately $22.8 million, of which approximately $3.7 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 the calendar
2006 ordinary taxable income is required to be declared by September 15, 2007
and, assuming we continue to pay the quarterly dividends on or about the 1st day
of each calendar quarter (January 1st, April 1st, July 1st and October 1st),
distributed by October 1, 2007.
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 or such real estate on an individual basis by
taking into account numerous factors, including, market evaluations of the
underlying collateral or the real estate, estimated operating cash flow from the
property during a projected holding period and an estimated sales value computed
by applying an expected capitalization rate to the stabilized net operating
income of the specific property, less selling costs, discounted at market
discount rates. Each of these factors entails significant judgments and
estimates. 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 will reduce 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. No additional valuation allowance was recorded against our
mortgage portfolio in the fiscal year ended September 30, 2006 and no valuation
adjustment was recorded in fiscal 2006 against any real estate assets.
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 also indexed to the prime rate. At September 30, 2006, approximately 95% of
our portfolio was comprised of variable rate loans tied primarily to the prime
rate. Changes in the prime interest rate would affect our net interest income
accordingly. 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 of income before taxes of
$1.3 million and a one percent decline in interest rates would cause an increase
of income before taxes of approximately $134,000 based on line of credit
balance, margin account balance and loan portfolio as of September 30, 2006. In
addition, we originate loans with short maturities and maintain a strong capital
position. As of September 30, 2006, a majority of our loan portfolio was secured
by properties located in the New York metropolitan area, including New Jersey
and Connecticut, and in 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:
o pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and ispositions of the
assets of a company;
o 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
o 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, 2006. 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, 2006, our internal control over financial reporting was effective based on
those criteria.
Our independent auditors, Ernst & Young, LLP, have issued an audit
report on management's assessment of our 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 2007 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 2007
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 2007 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 2007 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
2007 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. Exhibits:
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).
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).
10.10 Underwriting Agreement dated December 5, 2006 between BRT
Realty Trust and Friedman, Billings, Ramsey & Co., Inc.
(incorporated by reference to Exhibit 10.1 to the Form 8-K of
BRT Realty Trust filed December 6, 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).
(b) Exhibits.
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 12, 2006 By: /s/ Jeffrey A. Gould
----------------------
Jeffrey A. Gould
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 12, 2006
--------------------
Fredric H. Gould
/s/ Jeffrey A. Gould Chief Executive Officer, December 12, 2006
--------------------- President and Trustee
Jeffrey A. Gould (Principal Executive
Officer)
/s/ Kenneth Bernstein Trustee December 12, 2006
---------------------
Kenneth Bernstein
/s/ Patrick J. Callan Trustee December 12, 2006
---------------------
Patrick J. Callan
/s/ Alan Ginsburg Trustee December 12, 2006
-----------------
Alan Ginsburg
/s/ Louis C. Grassi Trustee December 12, 2006
-------------------
Louis C. Grassi
/s/ Matthew J. Gould Trustee December 12, 2006
--------------------
Matthew J. Gould
/s/ Gary Hurand Trustee December 12, 2006
---------------
Gary Hurand
/s/ Jeffrey Rubin Trustee December 12, 2006
-----------------
Jeffrey Rubin
/s/ Jonathan Simon Trustee December 12, 2006
------------------
Jonathan Simon
/s/ George E. Zweier Chief Financial Officer, December 12, 2006
-------------------- Vice President
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,
2006 and 2005 F-3
Consolidated Statements of Income for the
years ended September 30, 2006, 2005 and 2004 F-4
Consolidated Statements of Shareholders' Equity
for the years ended September 30, 2006,
2005 and 2004 F-5
Consolidated Statements of Cash Flows for the
years ended September 30, 2006, 2005 and 2004 F-6
Notes to Consolidated Financial Statements F-8
Consolidated Financial Statement Schedules for the
year ended September 30, 2006:
III - Real Estate and Accumulated Depreciation F-28
IV - Mortgage Loans on Real Estate F-30
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 management's assessment, included in the accompanying
Management Report on Internal Control over Financial Reporting in Item 9A,
Controls and Procedures, of Form 10K, that BRT Realty Trust and Subsidiaries
(the "Trust") maintained effective internal control over financial reporting
as of September 30, 2006, 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. Our responsibility is to express an
opinion on management's assessment and an opinion on the effectiveness of
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, evaluating management's
assessment, testing and evaluating the design and operating effectiveness of
internal control, 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, management's assessment that the Trust maintained effective
internal control over financial reporting as of September 30, 2006, is
fairly stated, in all material respects, based on the COSO criteria. Also,
in our opinion, the Trust maintained, in all material respects, effective
internal control over financial reporting as of September 30, 2006, 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, 2006 and 2005, and
the related consolidated statements of income, shareholders' equity, and
cash flows for each of the three years in the period ended September 30,
2006 of the Trust and our report dated December 11, 2006 expressed an
unqualified opinion thereon.
/s/ Ernst & Young LLP
New York, New York
December 11, 2006
F-1
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, 2006
and 2005, and the related consolidated statements of income,
shareholders' equity, and cash flows for each of the three years in
the period ended September 30, 2006. 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, 2006 and 2005,
and the consolidated results of their operations and their cash flows
for each of the three years in the period ended September 30, 2006,
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), the effectiveness
of BRT Realty Trust and Subsidiaries' internal control over financial
reporting as of September 30, 2006, 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 11, 2006 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
New York, New York
December 11, 2006
F-2
BRT REALTY TRUST AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollar amounts in thousands except per share amounts)
ASSETS
September 30,
2006 2005
---- ----
Real estate loans
Earning interest, including $550 and $3,500
from related parties $283,282 $192,012
Not earning interest 1,346 1,617
-------- --------
284,628 193,629
Allowance for possible losses (669) (669)
-------- --------
283,959 192,960
-------- --------
Real estate assets
Real estate properties net of accumulated
depreciation of $725 and $613 3,342 3,475
Investment in unconsolidated
real estate ventures at equity 9,608 8,713
-------- --------
12,950 12,188
-------- --------
Cash and cash equivalents 8,393 5,709
Available-for-sale securities at market 53,252 48,453
Real estate property held for sale 2,833 2,642
Other assets 9,655 4,246
-------- --------
Total Assets $371,042 $266,198
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Borrowed funds $141,464 $110,932
Junior subordinated notes 56,702 -
Mortgage payable 2,471 2,542
Accounts payable and accrued liabilities including
deposits payable of $5,061 and $2,606 11,479 6,166
Dividends payable 4,491 3,903
-------- --------
Total liabilities 216,607 123,543
-------- --------
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
9,065 and 8,947 shares 27,194 26,841
Additional paid-in capital 85,498 83,723
Accumulated other comprehensive income - net
unrealized gain on available-for-sale securities 38,319 33,503
Unearned compensation - (1,311)
Retained earnings 13,510 10,465
-------- --------
164,521 153,221
Cost of 1,171 and 1,226 treasury shares
of beneficial interest (10,086) (10,566)
-------- --------
Total shareholders' equity 154,435 142,655
-------- --------
Total Liabilities and Shareholders' Equity $371,042 $266,198
======== ========
See accompanying notes to consolidated financial statements.
F-3
BRT REALTY TRUST AND SUBSIDIARIES
Consolidated Statements of Income
(Dollar amounts in thousands except per share amounts)
Year Ended September 30,
2006 2005 2004
---- ---- ----
Revenues:
Interest and fees on real estate loans, including
$109, $651 and $742 from related parties $ 33,263 $ 21,549 $ 13,913
Operating income from real estate properties 1,214 983 1,372
Other, primarily investment income 3,011 2,959 2,376
-------- -------- --------
Total Revenues 37,488 25,491 17,661
-------- -------- --------
Expenses:
Interest - borrowed funds 10,718 4,324 1,408
Advisor's fees, related party 2,682 1,862 1,444
General and administrative - including $782, $708
and $754 to related parties 5,809 4,398 3,828
Other taxes 563 417 480
Operating expenses relating to real estate properties
including interest on mortgages payable
of $159, $174 and $254 791 833 1,809
Amortization and depreciation 145 141 145
-------- -------- --------
Total Expenses 20,708 11,975 9,114
-------- -------- --------
Income before equity in earnings of unconsolidated real
estate ventures, gain on sale of available-for-sale securities,
minority interest and discontinued operations 16,780 13,516 8,547
Equity (loss) in earnings of unconsolidated real estate ventures (7) 257 202
Gain on disposition of real estate related to unconsolidated real
estate venture 2,531 - -
-------- -------- --------
Income before gain on sale of available-for-sale securities,
minority interest and discontinued operations 19,304 13,773 8,749
Gain on sale of available-for-sale securities - 680 1,641
Minority interest (25) (12) (43)
-------- -------- --------
Income from continuing operations 19,279 14,441 10,347
Discontinued Operations
Income from operations 66 204 394
Gain on sale of real estate assets 726 1,569 1,261
-------- -------- --------
Income from discontinued operations 792 1,773 1,655
-------- -------- --------
Net income $20,071 $16,214 $12,002
======= ======= =======
Earnings per share of beneficial interest:
Income from continuing operations $ 2.43 $ 1.86 $ 1.36
Income from discontinued operations .10 .23 .22
-------- -------- --------
Basic earnings per share $ 2.53 $ 2.09 $ 1.58
======== ======== ========
Income from continuing operations $ 2.42 $ 1.85 $ 1.34
Income from discontinued operations .10 .23 .21
-------- -------- --------
Diluted earnings per share $ 2.52 $ 2.08 $ 1.55
======== ======== ========
Cash distributions per common share $ 2.14 $ 1.96 $ 1.79
======== ======== ========
Weighted average number of common shares outstanding:
Basic 7,931,734 7,747,804 7,617,116
========= ========= =========
Diluted 7,959,955 7,811,483 7,734,364
========= ========= =========
See Accompanying Notes to Consolidated Financial Statements.
F-4
BRT REALTY TRUST AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Years Ended September 30, 2006, 2005, and 2004
(Dollar amounts in thousands except per share data)
Accumulated
Other
Shares of Additional Compre- Unearned
Beneficial Paid-In hensive Compen- Retained Treasury
Interest Capital Income sation Earnings Shares Total
-------- ------- ------ ------ -------- ------ -----
Balances, September 30, 2003 $ 26,650 $81,151 $19,282 $ 406) $11,154 $(11,899) $125,932
Distributions - Common share
($1.79 per share) - - - - (13,674) - (13,674)
Exercise of Stock Options - (74) - - - 784 710
Issuance of restricted stock - 700 - (700) - - -
Restricted stock vesting - (8) - - - 15 7
Compensation expense -
restricted stock - - - 206 - - 206
Net income - - - - 12,002 - 12,002
Other comprehensive income - unrealized
gain on sale of avail- able-for-sale
securities (net of reclassification
adjustment for gains included in
net income of $1,641) - - 6,880 - - - 6,880
--------
Comprehensive income - - - - - - 18,882
--------------------------------------------------------------------------------
Balances, September 30, 2004 26,650 81,769 26,162 (900) 9,482 (11,100) 132,063
Shares issued - Purchase plan 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 - unrealized gain
on sale of avail- able-for-sale
securities (net of reclassification
adjustment for gains included in net
income of $680) - - 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 - Purchase plan 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 -
unrealized gain on sale of avail-
able-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
===================================================================================
See accompanying notes to consolidated financial statements.
F-5
BRT REALTY TRUST AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollar amounts in thousands)
Year Ended September 30,
------------------------
2006 2005 2004
---- ---- ----
Cash flows from operating activities:
Net income $ 20,071 $ 16,214 $ 12,002
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization and depreciation 608 421 328
Amortization of restricted stock and stock options 589 293 213
Net gain on sale of real estate assets from
discontinued operations (726) (1,569) (1,261)
Payoff of loan in excess of carrying amount - (365) -
Net gain on sale of available-for-sale securities - (680) (1,641)
Equity in loss (earnings) of unconsolidated
real estate ventures 7 (257) (202)
Gain on disposition of real estate related
to unconsolidated real estate venture (2,531) - -
Distributions of earnings of unconsolidated real estate ventures 681 546 220
(Increase) Decrease in straight line rent (57) 223 (153)
Increase in interest and dividends receivable (1,418) (927) (475)
(Increase) Decrease in prepaid expenses (19) 60 (56)
Increase (Decrease) in accounts payable and
accrued liabilities 5,313 368 2,874
Increase in deferred costs (2,523) (130) (150)
Other (146) 10 (8)
-------- -------- -------
Net cash provided by operating activities 19,849 14,207 11,691
-------- -------- -------
Cash flows from investing activities:
Collections from real estate loans 157,540 160,274 94,511
Proceeds from sale of participation interests 61,188 38,475 68,630
Additions to real estate loans (309,727) (259,346) (231,588)
Net costs capitalized to real estate owned (244) (457) (86)
Additions to real estate - (1,548) -
Proceeds from sale of real estate owned 778 5,529 1,358
Purchase of investment securities - (1,000) -
Sale of available-for-sale securities - 1,059 3,384
Contributions to unconsolidated real estate ventures (40) (1,303) (899)
Distributions of capital of unconsolidated real estate ventures 987 94 18
-------- --------- --------
Net cash used in investing activities (89,518) (58,223) (64,672)
-------- -------- --------
Cash flows from financing activities:
Proceeds from borrowed funds 255,000 215,909 179,107
Repayment of borrowed funds (224,468) (158,839) (130,000)
Proceeds from sale of junior subordinated notes 55,000 - -
Mortgage amortization (71) (67) (71)
Exercise of stock options 453 537 711
Cash distribution - common shares (16,438) (14,999) (12,714)
Issuance of shares-stock purchase plan 2,877 1,438 -
--------- --------- ---------
Net cash provided by financing activities 72,353 43,979 37,033
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 2,684 (37) (15,948)
Cash and cash equivalents at beginning of year 5,709 5,746 21,694
--------- --------- ---------
Cash and cash equivalents at end of year $ 8,393 $ 5,709 $ 5,746
========= ========= =========
See accompanying notes to consolidated financial statements.
F-6
BRT REALTY TRUST AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollar amounts in thousands)
(Continued)
Year Ended September 30,
2006 2005 2004
---- ---- ----
Supplemental disclosures of cash flow information:
Cash paid during the year for interest expense $9,389 $3,992 $1,434
====== ====== ======
Cash paid during the year for income
and excise taxes $ 396 $ 329 $ 542
====== ====== ======
2006 2005 2004
---- ---- ----
Non cash investing and financing activity:
Reclassification of loan to real estate
upon foreclosure $ - $2,446 $ -
====== ====== ======
Accrued distributions $4,491 $3,903 $3,673
====== ====== ======
Junior subordinated notes issued to
purchase statutory trust common
securities $1,702 $ - $ -
====== ====== ======
See accompanying notes to consolidated financial statements.
F-7
BRT REALTY TRUST AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended September 30, 2006, 2005 and 2004
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. With respect to its
unconsolidated joint ventures, as the Trust (1) is primarily the
managing member but does not exercise substantial operating control
over these entities pursuant to EITF 04-05, 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. 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."
Income Tax Status
The Trust qualifies as a real estate investment trust under Sections
856-860 of the Internal Revenue Code.
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 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 discounts are amortized
over the life of the real estate loan using the constant interest
method.
F-8
Loan commitment and extension fee income on loans held in our
portfolio is deferred and recorded as a component of interest 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 expected capitalization rate to the stabilized net
operating income of the specific property, less selling costs,
discounted at market discount rates. If upon completion of the
valuations, 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 Assets
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.
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 direct write down of
the loan. Real estate assets, including assets acquired through
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.
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 real estate 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 real estate ventures in the accompanying consolidated
financial statements.
F-9
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 will 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 indicators of value 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" (SFAS 140") 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 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.
F-10
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.
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 Company.
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 Company'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
Statement of Financial Accounting Standards ("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.
Accounting For Long-Lived Assets
The Financial Accounting Standards Board issued SFAS No.144
"Accounting for the Impairment of Long-Lived Assets" which supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of"; however it retained the
fundamental provisions of that statement related to the recognition
and measurement of the impairment of long-lived assets to be "held and
used". In addition,
F-11
SFAS No. 144 provides more guidance on estimating cash flows when
performing a recoverability test, requires that a long-lived asset or
asset group to be disposed of other than by sale (e.g. abandoned) be
classified as "held and used" until it is disposed of, and establishes
more restrictive criteria to classify an asset or asset group as "held
for sale." The adoption of this statement did not have an effect on
the earnings or the financial position of the Trust.
Consolidation of Variable Interest Entities
In January 2003, the Financial Accounting Standards Board issued
Interpretation No. 46, "Consolidation of Variable Interest Entities",
which explains how to identify variable interest entities ("VIE") and
how to assess whether to consolidate such entities. The provisions of
this interpretation became immediately effective for VIE's formed
after January 31, 2003. For VIEs formed prior to January 31, 2003, the
provisions of this interpretation apply to the first fiscal year or
interim period beginning after December 15, 2003. Management has
reviewed its unconsolidated joint ventures and determined that none
represent variable interest entities which would require consolidation
by the Trust pursuant to the interpretation.
New Accounting Pronouncements
Emerging Issues Task Force ("EITF") Issue 04-5, "Investor's Accounting
for an Investment in a Limited Partnership when the Investor is the
Sole General Partner and the Limited Partners Have Certain Rights" was
ratified by the Financial Accounting Standards Board (the "FASB") in
September 2005. This EITF provides guidance in determining whether a
general partner controls a limited partnership and what rights held by
the limited partners(s) preclude the sole general partner from
consolidating the limited partnership in accordance with the U.S.
generally accepted accounting principles. This EITF covers entities
that are equivalent to limited partnerships, such as limited liability
companies, in which the Company is a managing member. This EITF is
effective no later than fiscal years beginning after December 15, 2005
and as of September 29, 2005 for new or modified arrangements.
Management has adopted the EITF issue and its adoption did not have an
effect on earnings or the financial position of the Company.
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 Company
is evaluating FIN 48 and has not yet determined the impact the adoption
will have on the consolidated financial statements, but it is not
expected to be significant.
F-12
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. The Company believes that the adoption of this standard on
January 1, 2008 will not have a material effect on the Company's
consolidated financial statements.
In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 108 ("SAB 108"), which becomes effective
beginning on January 1, 2007. SAB 108 provides guidance on the
consideration of the effects of prior period misstatements in
quantifying current year misstatements for the purpose of a materiality
assessment. SAB108 provides for the quantification of the impact of
correcting all misstatements, including both the carryover and
reversing effects of prior year misstatements, on the current year
financial statements. If a misstatement is material to the current year
financial statements, the prior year financial statements should also
be corrected, even though such revision was, and continues to be,
immaterial to the prior year financial statements. Correcting prior
year financial statements for immaterial errors would not require
previously filed reports to be amended. Such correction should be made
in the current period filings. The Company is currently evaluating the
impact of adopting SAB 108.
Reclassification
Certain amounts reported in previous financial statements have been
reclassified in the accompanying financial statements to conform to
the current year's presentation.
NOTE 2 - REAL ESTATE LOANS
At September 30, 2006, information as to real estate loans, is
summarized as follows (Dollar amounts in thousands):
Not
Earning Earning
Total Interest Interest
----- -------- --------
First mortgage loans:
Short-term (five years or less):
Condominium development/units $110,995 $110,995 $ -
Multi-family residential 57,623 57,623 -
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
======== ======== ========
F-13
A summary of loans at September 30, 2005 is as follows (Dollar
amounts in thousands):
Not
Earning Earning
Total Interest Interest
----- -------- --------
First mortgage loans:
Long-term:
Residential $ 31 $ 31 $ -
Short-term (five years or less):
Multi-family residential 103,091 103,091 -
Shopping centers/retail 27,517 25,900 1,617
Land 23,853 23,853 -
Condominium development/units 18,558 18,558 -
Industrial buildings 8,628 8,628 -
Second mortgage loans and junior participations:
Multi-family residential 9,119 9,119 -
Retail 1,510 1,510 -
Office 1,322 1,322 -
-------- -------- --------
$193,629 $192,012 $ 1,617
======== ======== ========
There was one real estate loan not earning interest at September 30,
2006. This loan, with an outstanding balance of $1,346,000, is deemed
impaired as it is probable that the Trust will not be able to collect
all amounts due according to the contractual terms and an allowance
has been established for it. Of the real estate loans earning interest
at September 30, 2006 and 2005 $24,770,000 and $1,447,000,
respectively, were deemed impaired and are subject to allowances for
possible losses. During the years ended September 30, 2006, 2005 and
2004, respectively, an average of $3,122,000, $3,770,000 and
$5,011,000 of real estate loans were deemed impaired, on which
$137,000, $460,000 and $373,000 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 earning
interest rate on all loans was 13.06% and 12.23% at September 30, 2006
and 2005, respectively.
Included in real estate loans is one second mortgage to a venture in
which the Trust (through a wholly owned subsidiary) holds a 50%
interest. At September 30, 2006, the balance of the mortgage loan was
$550,000. At September 30, 2005, the balance of mortgage loans to
ventures was $3,500,000, which included two second mortgages. Interest
received on these loans totaled $109,000 and $651,000 for the year
ended September 30, 2006 and September 30, 2005, respectively.
As of September 30, 2006, two borrowers had loans outstanding, each of
which represented in excess of 8% of the outstanding loans. The first
borrower had one loan outstanding of $24,770,000, which is
approximately 8.7% of the Trust's loan portfolio and 6.7% of the
Trust's total assets. This loan has an adjustable interest rate. The
second borrower had a loan outstanding of $23,623,000, which is
approximately 8.3% of the Trust's loan portfolio and 6.4% of the
Trust's total assets. This loan has an adjustable interest rate. At
September 30, 2006, there were two other borrowers who had multiple
loans outstanding at September 30, 2006. The first borrower had two
loans outstanding with a combined principal balance at September 30,
2006 of $21,780,000. The second borrower had five loans outstanding
with a combined principal amount at September 30, 2006 of $19,263,000.
These amounts represented 7.7% and 6.8% of the loans outstanding at
September 30, 2006, respectively. No other borrower or single loan
accounted for more than 6% of the outstanding loans.
F-14
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):
Years Ending September 30 Amount
------------------------- ------
2007 $269,609
2008 14,994
2009 -
2010 -
2011 and thereafter 25
--------
Total $284,628
========
The Trust's portfolio consists primarily of senior and junior mortgage
loans, secured by residential and commercial property, 53% of which
are located in the New York metropolitan area (which includes New
Jersey and Connecticut), 34% in the state of Florida, 5% in the state
of Tennessee 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
$172,013,000 of real estate loans receivable which matured in Fiscal
2006, of which, $51,634,000 were extended.
If all loans classified as non-earning were earning interest at their
contractual rates for the year ended September 30, 2006 and 2005,
interest income would have increased by $98,000 and $198,000,
respectively.
At September 30, 2006 the three largest real estate loans had
principal balances outstanding of approximately $24,770,000,
$23,623,000 and $16,000,000, respectively. Of the total interest and
fees earned on real estate loans during the fiscal year ended
September 30, 2006, 5%, 1% and 7% related to these loans,
respectively.
The Trust sold participations during the fiscal year ended September
30, 2006 totaling $61,188,000. All of these participations were sold at
par, and accordingly no gain or loss was recognized on the sales.
Included within the participations sold are 50% pari passu
participations the Trust sold to Gould Investors L.P. ("Gould"), a
related party, at par, in two separate loans. The first loan in the
face amount of $46 million was sold on March 30, 2006 for $23 million.
At September 30, 2006 the balance on this loan was $25.9 million and
BRT and Gould each retained their 50% pari passu interests. Gould
received $333,438 representing its 50% share of the total commitment
fee paid by the borrower. The second loan with an outstanding balance
of $20.8 million, net of interest and repair reserves at September 27,
2006, was sold for $10.4 million. Gould received a pro rata share of
the commitment fee paid by the borrower to BRT, or $219,818. On
November 16, 2006 the Trust repaid this participation in full, at which
time the outstanding participation balance was $9.5 million.
Gould has repaid the Trust $159,000, representing the unamortized
portion of the commitment fee of $219,818.
F-15
NOTE 3 - REAL ESTATE ASSETS
Real Estate Properties
A summary of real estate properties for the year ended
September 30, 2006 is as follows (Dollar amounts in thousands):
Gain on
Sale
Costs from Dis-
Sept. 30, 2005 Capitalized/ continued Sept. 30, 2006
Amount Amortization Sales Operation Amount
------ ------------ ----- --------- ------
Residential units-shares of
Cooperative corporations $ 21 $ 31 $ (778) $ 726 $ -
Shopping centers/retail 4,012 - - - 4,012
------------------------------------------------------------------
4,033 31 (778) 726 4,012
Depreciation and Amortization (558) (112) - - (670)
-------------------------------------------------------------------
Total real estate properties $3,475 $ (81) $ (778) $ 726 $3,342
==================================================================
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. The minority equity
interest, which equals 10%, amounted to $146,000 at September 30, 2006
and $130,000 at September 30, 2005 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, 2006 are as follows
(Dollar amounts in thousands):
Years Ending September 30, Amount
-------------------------- ------
2007 $ 816
2008 928
2009 928
2010 928
2011 964
Thereafter 5,199
------
Total $9,763
======
During the fiscal year ended September 30, 2006 the Trust sold two
cooperative apartments for a gain of $726,000, which is reported as
discontinued operations in the accompanying consolidated statements of
income.
Investment in Unconsolidated Real Estate Ventures at Equity
At September 30, 2006, the Trust was a partner in eight unconsolidated
real estate ventures which operate seven properties. In addition to
making an equity contribution, the Trust may hold a first or second
mortgage on the property owned by a joint venture. A brief summary of
the most significant real estate ventures are listed below:
Blue Hen Corporate Center and Mall - The Trust is a 50% venture
partner in the Blue Hen Corporate Center and Mall, located in Dover,
Delaware.
F-16
Unaudited condensed financial information for this venture at
September 30, 2006 and for the year then ended is as follows (Dollar
amounts in thousands):
Blue Hen
Venture
-------
Condensed Balance Sheet
Cash and cash equivalents $ 1,804
Real estate assets, net 14,862
Other assets 492
-------
Total assets $17,158
========
Mortgages payable $ -
Other liabilities 249
Equity 16,909
-------
Total liabilities and equity $17,158
=======
Trust's equity investment $ 7,448
Condensed Statement of Operations
Revenues, primarily rental income $ 3,938
Operating expenses 1,718
Depreciation 609
Interest expense -
-------
Total expense 2,327
-------
Net income attributable to members $ 1,611
=======
Trust's share of net income $ 805
=======
Amount recorded in income statement (1) $ 822
=======
(1) The unamortized excess of the Trust's share of the net equity
over its investment in the Blue Hen venture that is attributable
to building and improvements is being amortized over the life of
the related property. The portion that is attributable to land
will be recognized upon the disposition of the land.
In November 2006, this property was sold for $17,400,000 and the Trust
recorded a gain of approximately $1,800,000 for book purposes, on its
50% interest in the joint venture.
Rutherford Glen - In November 2005 one of our joint ventures in which
we were a 50% joint venture partner, sold a 248-unit garden apartment
complex (Rutherford Glen) in the Atlanta, Georgia area. The joint
venture recognized a gain on the sale of approximately $5,062,000, of
which the Trust recorded its 50% share of approximately $2,531,000.
During the fiscal year ended September 30, 2006, the Trust also
received cash distributions of $950,000 from this joint venture. For
the fiscal year ended September 30, 2006, the venture recorded losses
of $1,998,000 from the operations of the property which included
additional interest expense of $1,764,000 resulting from the prepayment
of the first mortgage upon the sale of the property. The Trust recorded
its 50% share of this loss, or $999,000.
F-17
The remaining six ventures contributed $170,000 in equity earnings for
the fiscal year ended September 30, 2006.
NOTE 4 - ALLOWANCE FOR POSSIBLE LOAN LOSSES
The Trust did not record any additional allowance provisions for
possible loan losses nor valuation adjustments on owned real estate
during the years ended September 30, 2006, 2005 and 2004.
An analysis of the allowance for possible losses is as follows
(Dollar amounts in thousands):
Year Ended September 30,
------------------------
2006 2005 2004
---- ---- ----
Balance at beginning of year $ 669 $ 881 $ 881
Charge-offs - (212) -
------- ------- ------
Balance at end of year $ 669 $ 669 $ 881
======= ======= ======
The allowance for possible losses applies to two loans
aggregating $26,116,000, aggregating at September 30, 2006, two
loans aggregating $3,065,000 at September 30, 2005 and three
loans $4,919,000 at September 30, 2004.
NOTE 5 - AVAILABLE-FOR-SALE SECURITIES
The cost of available-for-sale securities at September 30, 2006 was
$14,933,000. The fair value of these securities was $53,252,000 at
September 30, 2006. Gross unrealized gains at September 30, 2006 were
$38,319,000 and are reflected as accumulated other comprehensive
income on the accompanying consolidated balance sheets. There were no
unrealized losses at September 30, 2006.
Included in available for sale securities are 1,009,600 shares of
Entertainment Properties Trust (NYSE:EPR), which have a cost basis of
$13,262,000 and a fair value at September 30, 2006 of $49,793,000. The
fair value of the Trust's investment in Entertainment Properties Trust
at November 30, 2006 was $61,283,000. During the year ended September
30, 2005, 23,900 shares were sold for a gain of $729,000.
NOTE 6 - DEBT OBLIGATIONS
Debt obligations consist of the following (Dollar amounts in
thousands):
September 30,
-------------
2006 2005
---- ----
Notes payable - credit facility $122,000 $ 89,000
Margin account 19,464 21,932
-------- --------
Borrowed funds 141,464 110,932
Junior subordinated notes 56,702 -
Mortgage payable 2,471 2,542
-------- --------
Total debt obligations $200,637 $113,474
======== ========
F-18
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 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 periods for a
fee of $462,500 for each extension. 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 65% of first mortgages, plus
50% of second mortgages and certain owned real estate pledged to the
participating banks and may not exceed 15% of the borrowing base. At
September 30, 2006, $152 million was available to be drawn based on
the lending formula under the credit facility and $122 million was
outstanding.
The average outstanding balance on the credit facility for the year
ended September 30, 2006 and 2005 was $88,527,000 and $49,847,000,
respectively, and the average interest rate paid, which includes
amortization of fees, was 7.71% and 6.61%, respectively. Interest
expense for the year ended September 30, 2006 and 2005 was $6,917,000
and $3,341,000, respectively. The interest rate at September 30, 2006
was 7.58%. At November 30, 2006, $123 million was outstanding on the
credit line.
In addition to its credit facility, BRT 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. At
September 30, 2006, there was an outstanding balance of $19,464,000 on
the first margin account and no balance on the second margin account.
The weighted average interest rate at September 30, 2006 was 7.50%.
Marketable securities with a fair market value at September 30, 2006
of $53,252,000 were pledged as collateral. For the year ended
September 30, 2006, there was an average outstanding balance of
$19,933,000 at a rate of 7.36%. The average outstanding balance on the
margin facilities for the year ended September 30, 2005 was
$16,410,000 and the average interest rate paid was 5.92%. Interest
expense for the year ended September 30, 2006 and 2005 was $1,488,000
and $985,000, respectively. At November 30, 2006, $18,997,000 was
outstanding on the margin accounts.
On April 27, 2006, 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, 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. Interest expense for the
year ended September 30, 2006 was $1,157,000.
F-19
On March 21, 2006, 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 April 2036 and may be redeemed in whole
or in part anytime after five years, 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. Interest expense for the
year ended September 30, 2006 was $1,157,000.
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, 2006, the outstanding balance was $2,471,000.
Scheduled principal repayments on the mortgage during the initial and
extended maturity are as follows (Dollar amounts in thousands):
Years Ending September 30, Amount
-------------------------- ------
2007 76
2008 80
2009 86
2010 91
2011 and thereafter 2,138
-----
2,471
NOTE 7 - 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 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
F-20
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, 2006 and 2005, the Trust recorded
$563,000 and $417,000, respectively, of corporate tax expense which
included (i) $574,000 and $388,000, respectively, for the payment of
Federal excise tax which is based on taxable income generated but not
yet distributed; and (ii) ($11,000) and $29,000, respectively, for
state and local taxes relating to the 2006 and 2005 tax years.
Earnings and profits, which determine the taxability of dividends to
shareholders, differ from net income reported for financial statement
purposes due to various items among which are timing differences
related to depreciation methods and carrying values.
The taxable income is expected to be approximately $100,000 higher
than the financial statement income during calendar 2006.
NOTE 8 - SHAREHOLDERS' EQUITY
Distributions
During the year ended September 30, 2006, BRT declared cash
distributions in the amount of $2.14 per share. It is estimated that
23% of the distribution or $.49 will be capital gain distributions and
the remaining $1.65 will be ordinary income.
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 1998, the Board of Directors granted, under the 1996 Stock
Option Plan options to purchase 180,000 shares of beneficial interest
at $5.9375 per share to a number of officers, employees, consultants
and trustees of the Trust. The options are cumulatively exercisable at
a rate of 25% per annum, commencing after one year (50,000) and two
years (130,000), and expire five years (50,000) and ten years
(130,000) after the date of the grant. During the current year 5,000
options were cancelled. At September 30, 2006, there were no remaining
options to purchase under the grant.
In December 2000, the Board of Directors 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, 33,186 of the options were exercised. At
September 30, 2006, options to purchase 15,250 shares are remaining,
all of which are exercisable.
F-21
In December 2001 the Board of Directors 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 18,750 of the options were exercised. At
September 30, 2006 options to purchase 11,000 shares are remaining, all
of which are exercisable.
The Trust accounts for its employee stock options under the fair value
method. The fair value for these options was estimated at the date of
the grant using the Black-Scholes option pricing model with the
following weighted-average assumptions for both 2005 and 2004: risk
free interest rate of 4.46%, volatility factor of the expected market
price of the Trust's shares of beneficial interest based on historical
results of .207, dividend yield of 5.7% and an expected option life of
six years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including
expected stock price volatility. Because the Trust's employee stock
options have characteristics significantly different from those of
traded options, and changes in the subjective input assumptions can
materially affect the fair value estimated, management believes the
existing models do not necessarily provide a reliable single measure of
the fair value of its employee stock options.
The Trust recorded $17,000 of compensation expense during the fiscal
year ended September 30, 2006 related to options which vested in the
current fiscal year. As of December 13, 2005 all stock options have
fully vested.
Pro forma net income and earnings per share calculated using the
Black-Scholes option valuation model for prior years is as follows
(Dollar amounts in thousands):
Year Ended September 30,
------------------------
2005 2004
---- ----
Net income to common
shareholders as reported $16,214 $12,002
Less: Total stock-based
employee compensation
expense determined under
fair value based methods
for all awards 64 120
Pro forma net income $16,150 $11,882
Pro forma earnings per share of beneficial interest:
Basic 2.08 1.56
Diluted 2.07 1.54
F-22
Changes in the number of shares under all option arrangements are
summarized as follows:
Year Ended September 30,
------------------------
2006 2005 2004
---- ---- ----
Outstanding at beginning of period 83,186 149,124 240,062
Cancelled (5,000) (4,000) -
Exercised (51,936) (61,938) (90,938)
------ ------- -------
Outstanding at end of period 26,250 83,186 149,124
Exercisable at end of period 26,250 23,561 21,874
Option prices per share outstanding $7.75-$10.45 $5.9375-$10.45 $5.9375-$10.45
As of September 30, 2006, the outstanding options had a weighted
average remaining contractual life of approximately 4.6 years and a
weighted average exercise price of $8.88.
Restricted Shares
On December 16, 2002, the Board of Trustees adopted and on March 24,
2003 the shareholders of BRT 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 year ended September 30, 2006 and September 30, 2005, the
Trust issued 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. In 2006 the Trust adopted provisions
of Financial Accounting Standard Board ("FASB") No. 123 (R),
"Shared-Based Payment (revised 2004.)" These provisions require that
the estimated fair value of the restricted stock at the date of grant
be amortized ratably into expense over the appropriate vesting period.
For the year ended September 30, 2006 and 2005, the Trust recognized
$572,000 and $293,000 of compensation expense.
Changes in number of shares under the 2003 BRT Incentive Plan is shown
below:
Years Ended September 30,
-------------------------
2006 2005 2004
---- ---- ----
Outstanding at beginning of period 86,310 57,080 28,800
Issued 42,450 36,950 30,230
Cancelled - (7,720) (200)
Vested (3,750) - (1,750)
------- ------ ------
Outstanding at the end of period 125,010 86,310 57,080
======= ====== ======
F-23
Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share (Dollar amounts in thousands):
2006 2005 2004
---- ---- ----
Numerator for basic and diluted
earnings per share:
Net income $20,071 $16,214 $12,002
Denominator:
Denominator for basic earnings
per share -weighted average shares 7,931,734 7,747,804 7,617,116
Effect of dilutive securities:
Employee stock options 28,221 63,679 17,248
Denominator for diluted earnings
per share - adjusted weighted average
shares and assumed conversions 7,959,955 7,811,483 7,734,364
Basic earnings per share $ 2.53 $ 2.09 $ 1.58
Diluted earnings per share $ 2.52 $ 2.08 $ 1.55
Treasury Shares
During the fiscal year ended September 30, 2006 and September 30, 2005,
no shares were purchased by the Trust.
During the fiscal year ended September 30, 2006, 94,386 treasury shares
were issued in connection with the exercise of stock options and
restricted stock issuance under the Trust's plans. In the fiscal year
ended September 30, 2005, the Trust issued 91,168 Treasury shares in
connection with the exercise of stock options under the Trust's
existing stock option plan. As of September 30, 2006, the Trust owns
1,170,716 treasury shares of beneficial interest at an aggregate cost
of $10,086,000.
NOTE 9 - ADVISOR'S COMPENSATION AND CERTAIN 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 charged to operations at a rate of 1% on real estate loans and
1/2 of 1% on other invested assets. Advisory fees amounted to
$2,682,000, $1,862,000 and $1,444,000 for the years ended September 30,
2006, 2005, and 2004, respectively. At September 30, 2006, $133,000
remains unpaid and is included in accounts payable and accrued
liabilities on the consolidated balance sheet.
Our Borrowers pay fees directly to REIT Management Corp. based on their
loans, which generally are one-time fees payable upon funding of the
loan commitment, in the amount
F-24
of 1% of the total commitment. These fees, which are allowed by the
advisory agreement, on loans arranged on behalf of the Trust and
amounted to $3,200,000, $2,697,000 and $2,029,000 for the years ended
September 30, 2006, 2005 and 2004, respectively.
The Advisory Agreement between us and REIT Management Corp., an
affiliate of BRT has been amended and restated. As a result, effective
January 1, 2007, the Advisory Agreement will provide that we pay REIT
Management Corp. a base fee of six tenths of 1% of our invested assets,
and that our borrowers pay REIT Management Corp. an incentive fee 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.
Management of certain properties for the Trust is provided by Majestic
Property Management Corp., a corporation in which our chairman 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, 2006, 2005 and 2004 these
fees for these services aggregated $322,000, $387,000 and $400,000,
respectively.
The Chairman of the Board of Trustees 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. During the years ended September 30, 2006,
2005 and 2004, allocated general and administrative expenses reimbursed
by the Trust to Gould Investors L.P. pursuant to a Shared Services
Agreement, aggregated $782,000, $708,000 and $754,000, respectively. At
September 30, 2006, $101,000 remains unpaid and is included in accounts
payable and accrued liabilities on the consolidated balance sheet.
NOTE 10 - 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. Pension expense
approximated $237,000, $202,000 and $180,000 during the years ended
September 30, 2006, 2005 and 2004, respectively. At September 30, 2006,
$7,000 remains unpaid and is included in accounts payable and accrued
liabilities on the consolidated balance sheet.
NOTE 11 - OTHER MATTERS
One Liberty Properties, Inc. ("One Liberty"), an entity affiliated with
BRT, announced on June 21, 2006 that it had received notification of a
formal order of investigation from the Securities and Exchange
Commission (the "SEC"). One Liberty has disclosed that the SEC has
requested information regarding "related party" transactions between
One Liberty and entities affiliated with it and with certain of One
Liberty's officers and directors and compensation paid to certain of
One Liberty's executive officers by those affiliates. In
F-25
connection with such investigation, the SEC served a subpoena on BRT
requesting that it produce certain documents, relating to, among other
things, related party transactions between BRT and certain affiliates
of BRT and BRT's executive officers. One Liberty and BRT have several
executive officers and directors in common. Moreover, BRT has engaged
in the past in related party transactions with some of the same
affiliated entities as One Liberty and others and continues to do so.
BRT is complying with the SEC's subpoena.
NOTE 12 - SUBSEQUENT EVENTS
On November 1, 2006, BRT sold a property that was previously acquired
in foreclosure. This property which was classified as held for sale was
sold for $3,200,000. BRT will record a gain on the sale of
approximately $350,000. In connection BRT provided a purchase money
mortgage in the amount of $2,560,000.
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 and among (1) CIT Capital USA, Inc., which
is referred to herein as the CIT member and which is a wholly owned
subsidiary of CIT Group, Inc. and (2) BRT Funding LLC, a limited
liability company formed under the laws of the State of Delaware, which
is referred to as the joint venture. The joint venture will engage 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% will be funded by the BRT member and 75% will be funded by
the CIT member. In addition, the joint venture contemplates that it
will obtain a line of credit from a third party lender for up to $50
million. At this time, however, there are no agreements or commitments
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 any such line of credit.
We will manage the joint venture and will 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 will be distributed 37.5% to the CIT member and 62.5%
to the BRT member. Any amount of origination fees in excess of 2% of
the principal amount of a loan but not exceeding 3% of the principal
amount of the loan will be paid to REIT Management Corp., BRT's
advisor. Any amounts of the joint venture's origination fees which
exceeds 3% of the principal amount of a loan will be 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 the CIT member receives a return of 9% (inclusive of origination
fees), annualized on its outstanding advances. If the joint venture is
able to provide the CIT member with an annualized 9% return,
thereafter, additional available net cash will be distributed, 37.5% to
the CIT member and 62.5% to the BRT member.
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).
On December 5, 2006, the Trust entered into an Underwriting Agreement
with Friedman, Billings, Ramsey & Co., Inc., as representative of the
several underwriters named in the Agreement in connection with the
public offering of 2,800,000 shares of its beneficial interest, par
value $3.00 per share. The Agreement also grants the Underwriters an
option
F-26
to purchase up to an additional 420,000 Common Shares from the Trust to
cover over-allotments, if any, until December 14, 2006. The offering
closed on December 11, 2006 and the net proceeds to the Trust, after
deducting the underwriting discount and estimated offering expenses
payable by the Trust, was approximately $73.6 million. On December 13,
2006 the underwriters exercised the over allotment option to the extent
of 132,500 shares resulting in additional net proceeds to the Trust,
after underwriting discount, of approximately $3,500,000.
NOTE 13 - QUARTERLY FINANCIAL DATA (Unaudited)
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total
Oct.-Dec. Jan.-March April-June July-Sept. 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)
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total
Oct.-Dec. Jan.-March April-June July-Sept. For Year
--------- ---------- ---------- ---------- --------
2005
--------------------------------------------------------------------------
Revenues $ 5,806 $ 5,735 $ 6,021 $ 7,929 $25,491
Income before equity in earnings
of unconsolidated real estate
ventures, gain on sale of
available-for-sale securities,
minority interest and
discontinued operations 3,429 3,074 3,060 3,953 13,516
Discontinued operations 109 81 58 1,525 1,773
Net income 4,311 3,039 3,187 5,677 16,214
Income per beneficial share
Continuing operations .55 .38 .40 .53 1.86
Discontinued operations .01 .01 .01 .20 .23
--------------------------------------------------------------------------
Basic earnings per share $ .56 $ .39 $ .41 $ .73 $ 2.09 (a)
Per share earnings represent basic earnings per beneficial share.
(a) Calculated on weighted average shares outstanding for the fiscal year.
May not foot due to rounding.
F-27
BRT REALTY TRUST
SCHEDULE III - REAL ESTATE PROPERTIES AND ACCUMULATED DEPRECIATION
SEPTEMBER 30, 2006
(Dollar amounts in thousands)
Gross Amount At Which Carried At
Initial Cost To Company September 30, 2006 Depreciation
Buildings Costs Capitalized Buildings Accum. Date Of Life For
Encum- And Subsequent to Acquisition And Amorti-Constru- Date Latest Income
Description brances Land Improvements Improvements Carrying Costs Land Improvements Total zation tion Acquired Statement
----------- ------------------------------------------------------------------------------------ ---- ------------------
Residential
Charlotte,
North Carolina (d) - $ 501 $1,945 $ 464 - $501 $2,409 $2,910 $ 76 - Jan-05 7.5 years
Commercial
Yonkers,
New York $2,471 - 4,000 12 - - 4,012 4,012 671 - Aug-00 39 Years
------ ----- ------ ---------------- ------------------------ ----
TOTAL $2,471 $ 501 $5,945 $ 476 $ - $501 $6,421 $6,922 $ 747
====== ===== ====== ================ ======================= ======
(a) (b) (c)
F-28
BRT REALTY TRUST
SCHEDULE III - REAL ESTATE PROPERTIES AND ACCUMULATED DEPRECIATION
SEPTEMBER 30, 2006
(Dollar amounts in thousands)
Notes to the schedule:
(a) Total real estate properties $ 6,922
Less: Accumulated depreciation and
amortization 747
--------
Net real estate properties $ 6,175
(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.
(d) Reported as real estate property held for sale on consolidated balance
sheet.
A reconciliation of real estate properties (including real estate
property held for sale) is as follows:
Year Ended September 30,
------------------------
2006 2005 2004
---- ---- ----
Balance at beginning of year $ 6,117 $ 5,887 $ 6,136
Additions:
Acquisitions - 3,994 -
Capitalization of expenses 244 457 86
------- ------- -------
6,361 10,338 6,222
------- ------- -------
Deductions:
Sales 74 3,960 97
Depreciation/amortization 112 261 238
------- ------- -------
186 4,221 335
------- ------- -------
Balance at end of year $ 6,175 $ 6,117 $ 5,887
======= ======= =======
The aggregate cost of investments in real estate assets for
federal income tax purposes approximates book value.
F-29
BRT REALTY TRUST
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
SEPTEMBER 30, 2006
(Dollar amounts in thousands)
FINAL
# OF INTEREST MATURITY
DESCRIPTION LOANS RATE DATE PERIODIC PAYMENT TERMS PRIOR LIENS
---------------------------------------------------------------------------------------------------------------------------------
First mortgage loans:
Short term:
Multi-family/Condo conversion 1 Prime+5.00 Apr-07 Interest monthly, principal at maturity -
Apopka, FL
Multi-family/Condo conversion 1 Prime+4.00 Sept-07 Interest monthly, principal at maturity -
Land, Daytona Beach, FL 1 Prime+5.25% Aug-07 Interest monthly, principal at maturity -
Retail, Hoboken, NJ 1 Prime+5.00% Jan-07 Interest monthly, principal at maturity -
Condominium, Tampa, FL 1 Prime+5.00% Nov-06 Interest monthly, principal at maturity -
Multi-family Condo conversion 1 Prime+5.00% Sept-07 Interest monthly, principal at maturity -
New York, NY
Apartments, Ft. Wayne, IN 1 Prime+5.00% Oct-06 Interest monthly, principal at maturity -
Condominium Units,
Miami, FL 1 Prime+4.75% Mar-07 Interest monthly, principal at maturity -
Multi-family Condo, Titusville, FL 1 Prime+5.00% Oct-06 Interest monthly, principal at maturity -
Miscellaneous
$0-$999 9 -
$1,000-$1,999 12 -
$2,000-$2,999 6 -
$3,000-$3,999 7 -
$4,000-$4,999 2 -
$5,000-$5,999 6 -
$6,000-$6,999 2 -
$7,000-$7,999 2 -
Junior mortgage loans and mezzanine loan:
Short Term:
Apartments, Wildwood, NJ 1 Prime+5.00% Mar-07 Interest monthly, principal at maturity 17,441
Miscellaneous
$0-$999 1 3,418
$1,000-$1,999 2 11,070
$3,000-$3,999 1 9,400
$5,000-$5,999 1 14,137
----- -------
61 $55,667
====== =======
F-30
BRT REALTY TRUST
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
SEPTEMBER 30, 2006
(Dollar amounts in thousands)
PRINCIPAL AMOUNT
CARRYING OF LOANS SUBJECT
FACE AMOUNT AMOUNT TO DELINQUENT
DESCRIPTION OF MORTGAGES OF MORTGAGES PRINCIPAL OR INTEREST
-----------------------------------------------------------------------------------------------------------------------------------
First mortgage loans:
Short term:
Multi-family/Condo conversion $24,770 $24,126 -
Apopka, FL
Multi-family/Condo conversion 23,623 23,623 -
New York, NY
Land, Daytona Beach, FL 16,000 16,000 -
Retail, Hoboken, NJ 13,302 13,302 -
Condominium, Tampa, FL 12,953 12,953 -
Multi-family Condo conversion 10,772 10,772 -
New York, NY
Apartments, Ft. Wayne, IN 10,601 10,601 -
Condominium Units,
Miami, FL 10,303 10,303 -
Multi-family Condo, Titusville, FL 8,828 8,828 -
Miscellaneous
$0-$999 3,641 3,641 -
$1,000-$1,999 17,635 17,610 $1,346
$2,000-$2,999 13,985 13,985 -
$3,000-$3,999 24,875 24,875 -
$4,000-$4,999 8,808 8,808 -
$5,000-$5,999 33,916 33,916 -
$6,000-$6,999 13,467 13,467 -
$7,000-$7,999 14,524 14,524
Junior mortgage loans and mezzanine loan:
Short Term:
Apartments, Wildwood, NJ 10,250 10,250 -
Miscellaneous
$0-$999 550 550 -
$1,000-$1,999 2,850 2,850 -
$3,000-$3,999 3,564 3,564 -
$5,000-$5,999 5,411 5,411 -
------------------------------------------------
$284,628 $283,959 $1,346
================================================
F-30
BRT REALTY TRUST
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
SEPTEMBER 30, 2006
(Dollar amounts in thousands)
Notes to the schedule:
(a) The following summary reconciles mortgage loans at their carrying values:
Year Ended September 30,
-------------------------
2006 2005 2004
---- ---- -----
Balance at beginning of year $192,960 $134,444 $ 65,997
Additions:
Advances under real estate loans 309,727 259,346 231,588
-------- -------- --------
502,687 393,790 297,585
-------- -------- -------
Deductions:
Collections of principal 157,540 159,909 94,511
Sale of participation interests 61,188 38,475 68,630
Transfer to real estate upon foreclosure - 2,446 -
-------- -------- --------
218,728 200,830 163,141
-------- -------- -------
Balance at end of year $283,959 $192,960 $134,444
======== ======== ========
(b) Carrying amount of mortgage loans in 2004 are net of a direct write off
in the amount of $365 that was recognized in a prior year and allowances
for loan losses in the amount of $669 in 2006 and 2005 and $881 in 2004.
(c) The aggregate cost of investments in mortgage loans is the same for
financial reporting purposes and Federal income tax purposes.
F-31
EXHIBIT 21.1
SUBSIDIARIES
COMPANY STATE OF INCORPORATION
Forest Green Corporation New York
TRB No. 1 Corp. New York
Blue Realty Corp. Delaware
TRB No. 3 Owners Corp. Wyoming
2190 Boston Post Road Realty Corp. New York
TRB Ashbourne Road Corp. Pennsylvania
BRT Funding Corp. New York
TRB 69th Street Corp. New York
TRB Lawrence Realty Corp. New York
TRB Yonkers Corp. New York
TRB Hartford Corp. Connecticut
TRB Realty Atlanta LLC Georgia
TRB Stroudsburg Realty LLC Pennsylvania
TRB New York Corp. New York
TRB Charlotte Apartments LLC North Carolina
BRT Joint Venture No. 1 LLC Delaware
BRT Realty Trust Statutory Trust I Delaware
BRT Realty Trust Statutory Trust II Delaware
EXHIBIT 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-128458 pertaining to the shelf registration of securities) and in
the related Prospectuses, and the Registration Statements (Form S-8 No.
333-101681 pertaining to the 1996 Stock Option Plan, Form S-8 No. 333-104461
pertaining to the 2003 Incentive Plan, and Form S-3 No. 333-118915 pertaining to
the Dividend Reinvestment and Share Purchase Plan) of BRT Realty Trust of our
reports dated December 11, 2006, with respect to the consolidated financial
statements and schedules of BRT Realty Trust, BRT Realty Trust management's
assessment of the effectiveness of internal control over financial reporting,
and the effectiveness of internal control over financial reporting of BRT Realty
Trust, included in this Annual Report (Form 10-K) for the year ended September
30, 2006.
New York, New York
December 11, 2006
/s/ Ernst & Young LLP
Exhibit 31.1
CERTIFICATION
I, Jeffrey A. Gould, President and Chief Executive Officer of BRT Realty
Trust, certify that:
1. I have reviewed this Annual Report on Form 10-K for the fiscal year
ended September 30, 2006 of BRT Realty Trust;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting,
or caused such internal control over financial reporting to be designed
under our supervision, 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;
(c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal controls over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in
the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial information;
and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: December 14, 2006
/s/ Jeffrey A. Gould
----------------------
President and Chief Executive Officer
Exhibit 31.2
CERTIFICATION
I, David W. Kalish, Senior Vice President-Finance of BRT Realty Trust,
certify that:
1. I have reviewed this Annual Report on Form 10-K for the fiscal year
ended September 30, 2006 of BRT Realty Trust;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered
by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting,
or caused such internal control over financial reporting to be designed
under our supervision, 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;
(c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal controls over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in
the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial information;
and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: December 14, 2006
/s/ David W. Kalish
-------------------------
Senior Vice President-Finance
Exhibit 31.3
CERTIFICATION
I, George Zweier, Vice President and Chief Financial Officer of BRT Realty
Trust, certify that:
1. I have reviewed this Annual Report on Form 10-K for the fiscal year
ended September 30, 2006 of BRT Realty Trust;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered
by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting,
or caused such internal control over financial reporting to be designed
under our supervision, 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;
(c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal controls over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in
the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial information;
and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: December 14, 2006
/s/ George Zweier
--------------------
Vice President and Chief
Financial Officer
EXHIBIT 32.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
(SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002)
The undersigned, Jeffrey A. Gould, the Chief Executive Officer of BRT
Realty Trust, does hereby certify to his knowledge, pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, that based upon a review of the Annual Report on Form 10-K for the
year ended September 30, 2006 of the registrant, as filed with the
Securities and Exchange Commission on the date hereof:
(1)The report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended; and
(2)The information contained in the report fairly presents, in all
material respects, the financial condition and results of operations of the
registrant.
Date: December 14, 2006 /s/ Jeffrey A. Gould
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Jeffrey Gould
Chief Executive Officer
EXHIBIT 32.2
CERTIFICATION OF SENIOR VICE PRESIDENT-FINANCE
PURSUANT TO 18 U.S.C. SECTION 1350
(SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002)
The undersigned, David W. Kalish, Senior Vice President-Finance of BRT
Realty Trust, does hereby certify to his knowledge, pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, that based upon a review of the Annual Report on Form 10-K for the
year ended September 30, 2006 of the registrant, as filed with the
Securities and Exchange Commission on the date hereof:
(1) The report fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the report fairly presents, in all
material respects, the financial condition and results of operations of the
registrant.
Date: December 14, 2006 /s/ David W. Kalish
----------------------------
David W. Kalish
Senior Vice President-Finance
EXHIBIT 32.3
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
(SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002)
The undersigned, George Zweier, the Chief Financial Officer of BRT Realty
Trust, does hereby certify to his knowledge, pursuant to 18 U.S.C. Section
1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that based upon a review of the Annual Report on Form 10-K for the year
ended September 30, 2006 of the registrant, as filed with the Securities
and Exchange Commission on the date hereof:
(1) The report fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the report fairly presents, in all
material respects, the financial condition and results of operations of the
registrant.
Date: December 14, 2006 /s/ George Zweier
-----------------------------------
George Zweier
Vice President and Chief Financial Officer