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Edited Transcript of BRT.N earnings conference call or presentation 7-Nov-19 1:30pm GMT

Q3 2019 BRT Apartments Corp Earnings Call

GREAT NECK Nov 26, 2019 (Thomson StreetEvents) -- Edited Transcript of BRT Apartments Corp earnings conference call or presentation Thursday, November 7, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jeffrey Alan Gould

BRT Apartments Corp. - President, CEO & Director

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Conference Call Participants

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* Craig Gerald Kucera

B. Riley FBR, Inc., Research Division - Analyst

* Gaurav Mehta

National Securities Corporation, Research Division - MD & Equity Research Analyst

* Morey Alan Marcus

ICR, LLC - Senior Associate

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Presentation

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Operator [1]

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Good day, and welcome to BRT Apartment Corp. Conference Call for the Third Quarter of 2019. Today's conference is being recorded.

At this time, I would like to turn the conference over to Morey Marcus of ICR. Thank you. You may begin.

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Morey Alan Marcus, ICR, LLC - Senior Associate [2]

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Thank you. Good day, everyone, and welcome to the BRT Apartments conference call. On the call today is Jeffrey Gould, President and Chief Executive Officer. Also available are George Zweier, Chief Financial Officer; David Kalish, Senior Vice President; and Ryan Baltimore, Senior Vice President. As a reminder, this call is being webcast through the company's website at www.brtapartments.com. Additionally, the company's supplemental information and earnings release are available for your review and the company's 10-Q will be available later today on the Investor Relations section of the BRT's website.

Before we begin, I would like to remind everyone that this conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on management's current expectations, assumptions and beliefs. Forward-looking statements can be often identified by words such as believe, expect, estimate, anticipate, intend and similar expressions and variations or negatives of these words. These forward-looking statements include, but are not limited to, statements regarding BRT's strategy and expectations for the future. They are not guarantees of future results and are subject to risks, uncertainties and assumptions that could cause actual results to differ materially for those expressed in any forward-looking statements. Listeners should not place undue reliance on any forward-looking statements and are encouraged to review the company's most recent annual report on Form 10-K and the company's other filings with the SEC for a more complete discussion of risks and other factors that could affect these forward-looking statements. Except as required by law, BRT does not undertake any obligation to publicly update or revise any forward-looking statements.

This conference call also include a discussion of funds from operations, or FFO; adjusted funds from operations, or AFFO; and net operating income, or NOI, all of which are non-GAAP financial measures of performance. These non-GAAP measures should be used as a supplement to and not a substitute for net income computed in accordance with GAAP. For a more complete discussion of FFO, AFFO and NOI see the company's earnings release and supplemental that were filed yesterday in the 10-Q that will be filed later today. As a reminder, the company changed its fiscal year so that it ends on December 31.

I would now like to turn the call over to Jeffrey Gould, President and CEO of BRT Apartments Corp. Please go ahead, Jeff.

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Jeffrey Alan Gould, BRT Apartments Corp. - President, CEO & Director [3]

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Thank you, Morey. I would like to welcome everyone to BRT's third quarter conference call. Let me start with an overview of our differentiated multifamily business model. BRT is focused on the ownership, operation and to a limited extent development of multifamily properties. These properties are owned primarily through consolidated joint ventures in which we generally contribute 65% to 80% of the equity. The properties, concentrated in the Southeast United States and Texas, are located primarily in secondary markets with high employment and population growth.

As of November 6, we own 39 multifamily properties, consisting of 11,178 units in 12 states, including properties in lease-up or owned by unconsolidated joint ventures. Eight properties are wholly owned by BRT, and the balance are generally owned through consolidated joint ventures in which BRT owns a substantial equity interest.

We currently believe that acquiring properties through joint ventures is our most efficient strategy. We've a proven record of aligning with select operators that possess local expertise. These operators present us with off-market transactions -- with transactions. We target opportunities that are already under contract, which allows us to focus on deals that are very likely to close. We do not waste valuable resources pursuing properties and deals that we may not win as the partners act as an additional acquisition team.

We leverage our local partners' experience and property management platforms to produce the best risk-adjusted returns for our stockholders. Our approach in acquiring multifamily assets is unlike other models in this space, but we believe this approach maximizes our resources, efficiencies and relationships.

Moving on to our third quarter 2019 results. We will be referring to the quarter ended September 30, 2019 as the current quarter and the quarter ended September 30, 2018 as the 2018 quarter. Net income was $3.3 million or $0.20 per diluted share in the current quarter versus net loss of $3.1 million or a loss of $0.20 per diluted share in the 2018 quarter. FFO was $2 million for the current quarter or $0.12 per diluted share compared to $4.1 million in the 2018 quarter or $0.26 per diluted share. FFO for the 2019 quarter was reduced by $1.8 million or $0.11 per diluted share relating to a mortgage prepayment charge and swap termination fee. The noncontrolling portion of such charge and fee was $231,000 or $0.01 per diluted share. AFFO was $4.2 million for the current quarter compared to $3.4 million in the 2018 quarter. On a per share diluted basis, AFFO increased 23% from $0.21 in the 2018 quarter to $0.26 in the current quarter.

Rental revenues grew 8.3% to $33.9 million from $31.3 million in the 2018 quarter and real estate operating expenses increased 4% to $16.3 million from $15.7 million in the 2018 quarter. NOI for the current quarter increased 12.8% to $17.6 million from $15.6 million for the 2018 quarter.

Our renewal percentage for the current quarter was 52.6%. On renewals, we averaged 4.6% rental rate increases, and on new leases, we averaged 5.6% rental rate increases. Excluding the value-add units, our new leases averaged approximately 4.8% rental rate increases.

On the value-add front, for the current quarter, we repositioned 256 units at 18 properties, spending on average approximately $4,800 per unit and achieving a return on investment of approximately 26%. As reflected in our supplemental financial information, a portion of the costs may have been incurred in a prior period, but we report the return on investment when the unit is released. Overall, we are very pleased with the performance of our value-add program. We estimate that we will have approximately 1,000 units in the renovation pipeline over the next several years. We expect this strategy to continue to be a factor in our ability to drive same-store rent and NOI growth over the long term.

Our same-store pool for the current quarter comprised 30 properties, totaling 8,202 units. Same-store NOI for the current quarter increased 11.3% for the 2018 quarter. Same-store revenue grew 6.5% in the current quarter to $28.5 million and same-store expenses rose 1.7% from the 2018 quarter. We received reimbursements for prior year tax appeals on one property, which resulted in lower operating expenses. Same-store rental rate increased 4.6% to $1,046 per unit from $1,000 per unit a year earlier. The growth in our same-store rental rate was driven by rate increases in markets led by Virginia, which grew 8.7%; Florida, up 7.3%; and Ohio, up 7.3%.

As we shared on our previous calls, our most challenging properties remain our Downtown St. Louis asset. With that said, however, these assets saw a strong NOI and revenue growth driven by occupancy gains as the market has responded positively to the rent adjustments. This currently is not a long-term hold market for us, and in the interim, our efforts to maximize NOI appears to be working.

During the quarter, BRT acquired a value-add 200-unit property in Auburn, Alabama, for $18.4 million, including $14.5 million of mortgage debt obtained in connection with the acquisition. The mortgage bears a fixed interest rate of 3.79% and matures in 2031. BRT also sold 2 Houston, Texas properties for a net gain to BRT of $9 million after giving effect to $894,000 allocated to the noncontrolling partner. In connection with the sales, BRT incurred a $1.4 million prepayment charge, of which $125,000 was allocated to the noncontrolling partner.

Turning to the balance sheet. At September 30, 2019, we had $18.5 million of cash and cash equivalents, total assets of $1.2 billion, total debt of $885.2 million and stockholders' equity of $183.6 million. At November 1, 2019, BRT's available liquidity was approximately $32.4 million, including $14.4 million of cash and cash equivalents, $10.8 million of restricted cash for property improvements and up to $7.2 million available under its credit facility. Cash and cash equivalents include amounts held at the property operating level for working capital purposes.

Our property mortgage debt of $844.6 million has a weighted average interest rate of 4.19% and a weighted average remaining term to maturity of 8.1 years. Approximately 95% of the mortgage debt bears interest at a fixed rate.

We continue to make great progress, and I'm proud of the team's efforts. As we look ahead, we will focus on finding the right multifamily assets to add to our portfolio where we can extract incremental value. Thank you for joining us today on our conference call.

With that, I will turn the call over to the operator for your questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Gaurav Mehta with National Securities.

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Gaurav Mehta, National Securities Corporation, Research Division - MD & Equity Research Analyst [2]

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I was hoping if you could provide some color on your acquisition pipeline, what you're seeing in the market these days?

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Jeffrey Alan Gould, BRT Apartments Corp. - President, CEO & Director [3]

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Yes. Definitely, we're seeing a more competitive market. The pipeline, we do see deals and opportunities. Yields are definitely down a bit from where they were years ago and even months ago. The pipeline, I would say, is actually fairly strong, but we're being very selective about the deals we're looking at. Our focus still remains in the Southeast, but partners, I think, are having more difficulty finding good deals for us to consider, and in that, we're being that much more selective. So it's definitely a more competitive marketplace than it's been for quite a while.

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Gaurav Mehta, National Securities Corporation, Research Division - MD & Equity Research Analyst [4]

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Okay. And then can you provide some details on the Auburn, Alabama acquisition? What was the going-in cap rate year 1? And where do you expect that to stabilize over the next few years?

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Jeffrey Alan Gould, BRT Apartments Corp. - President, CEO & Director [5]

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Yes. So it was a value-add opportunity that we were excited about. We bought it at about a 5.1% year 1 return. The plan is that -- with the value-add is as is typical for most of our deals. It's typically a 2-year renovation value-add strategy to do most of the units. We held back about $1.1 million for capital improvements, which we plan to spend over that 2 years. And we think the increases that we planned is to get, or that we plan on getting under underwriting, look to be pretty accurate. And it's -- and we started out going well with it, and we're going to continue to push forward with it.

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Operator [6]

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Our next question is from Craig Kucera with Wunderlich Securities.

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Craig Gerald Kucera, B. Riley FBR, Inc., Research Division - Analyst [7]

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Actually, B. Riley FBR. Are you currently marketing any assets for sale?

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Jeffrey Alan Gould, BRT Apartments Corp. - President, CEO & Director [8]

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Are we marketing any assets, you said?

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Craig Gerald Kucera, B. Riley FBR, Inc., Research Division - Analyst [9]

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Are you marketing any assets for sale?

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Jeffrey Alan Gould, BRT Apartments Corp. - President, CEO & Director [10]

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Right now, no, we're not marketing any assets for sale. We are -- as we do always, we're looking through the portfolio to see where it makes sense to -- where we have a value-add that's completed or operating expenses have gotten too high and margins have gotten costly or the properties are older, we do consider some sales. So on occasion, and we are focusing on a few situations like that. But I think what's going to happen over the next number of months, the transactional aspect of our business themselves will slow, but there are a few opportunities that we are considering, yes.

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Craig Gerald Kucera, B. Riley FBR, Inc., Research Division - Analyst [11]

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Got it. That kind of leads to my next question. I mean transactionally, this year actually has been quite a bit slower than the last several years, both on the purchase and the sales side. Is that then because acquisition pricing has been too challenging or more a function of you being more or less pleased with where the portfolio is today?

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Jeffrey Alan Gould, BRT Apartments Corp. - President, CEO & Director [12]

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I would say more the latter. We are very pleased with the portfolio. I mean as I mentioned in my earlier statements, the St. Louis Downtown asset's one that we're not particularly pleased with, but even that improved. Just generally speaking, the core portfolio we like. We think we're in good markets, and we're seeing good renewal rates and everything. So the activity definitely has slowed.

As I said earlier, we're -- we do see a pipeline of deals, and it really just depends on when we have cash available to purchase these transactions. So we've been running pretty tight with cash as far as opportunities to do new deals. And that's one of the reasons why we haven't really been buying much, but we are comfortable with the core portfolio. And I think generally speaking, we may have a few sales going on over the next couple of years. But from the years earlier, from 2, 3 years ago, the transactional aspect of the [buy and sell] definitely slowed.

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Craig Gerald Kucera, B. Riley FBR, Inc., Research Division - Analyst [13]

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Right. And then a little of maybe purchasing new assets, understanding that capital is -- some of them are constraint, given your cash balance and sort of where you've been selling assets for the volume of assets. Assuming that you do, do dispositions in the future to maybe recycle capital, is there any thoughts to maybe consolidating ownership of some of the assets that you have that are significantly below 100% ownership or are you more likely to keep the existing structures in place?

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Jeffrey Alan Gould, BRT Apartments Corp. - President, CEO & Director [14]

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No. It's a good question. And we now -- as I said in my earlier statements, we have 8 properties that we own outright, and we have been -- or small minority interest from others. We'd like to see that grow for sure. And as a matter of fact, we make a strong concerted effort to go out, speak to our partners, see if they have interest in selling assets where they're participating interest in these assets, and we'd like to do that very much. So we're very focused on trying to buy back and wholly own more assets, and I think in time, we will.

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Operator [15]

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We have reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing remarks.

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Jeffrey Alan Gould, BRT Apartments Corp. - President, CEO & Director [16]

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I just want to thank everyone for being on the call today. As always, if you have further questions, you can reach out to Ryan Baltimore or myself at any time. And thank you for being on. We appreciate it.

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Operator [17]

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This concludes today's conference. You may disconnect your lines at this time, and thank you for your participation.