BRT Apartments (BRT) - 2019 Q4 - Annual Report

Explanatory Note and Forward-Looking Statements Explanatory Note Financial statements were restated due to a shift in joint venture accounting to the equity method, significantly impacting reported revenues, expenses, assets, and liabilities but not net income or FFO - The company restated its financial statements to account for most joint ventures using the equity method instead of consolidation, as required by ASC 810, significantly reducing reported revenues, expenses, assets, and liabilities[8] - Despite presentation changes, the restatement correctly stated or understated total stockholders' equity and had no impact on previously reported absolute and per-share figures for net income, funds from operations (FFO), and adjusted funds from operations (AFFO)[8] - In February 2019, the company changed its fiscal year end from September 30 to December 31 to better align with other multi-family REITs[8] - The filing of this Annual Report was delayed due to the impacts of the COVID-19 pandemic, which affected the ability of personnel to complete the report on a timely basis[9] Cautionary Statement Regarding Forward-Looking Statements Key risks affecting forward-looking statements include economic conditions, real estate market fluctuations, geographic concentration, joint venture disagreements, and COVID-19 impact - The company's multi-family properties are concentrated in the Southeastern United States and Texas, making it susceptible to adverse developments in those specific markets[13] - Risks associated with joint venture partnerships include potential disagreements, misconduct by partners, and economic interests that may become inconsistent with the company's goals[13] - The impact of the COVID-19 pandemic is highlighted as a significant risk factor affecting the business[15] - The company notes risks related to the ongoing review and restatement of its financial statements, including the discovery of any additional adjustments[15] PART I Business BRT Apartments Corp. is a REIT focused on owning and developing multi-family properties, primarily via joint ventures in the Southeast U.S. and Texas Portfolio Overview (as of December 31, 2019) | Ownership Type | Number of Properties | Number of Units | States | Carrying Value (Net Equity, in millions) | | :--- | :--- | :--- | :--- | :--- | | Wholly-Owned | 8 | 1,880 | 6 | $159.4 | | Unconsolidated JVs | 30 | 8,898 | 9 | $177.0 | - In 2019, the company, through joint ventures, acquired three multi-family properties for $109.5 million and sold two multi-family properties for $34.0 million, realizing a gain of $10.6 million; it also raised $7.5 million in equity and increased its dividend by 10%[23] - The company's acquisition strategy targets Class B or better properties with cap rates of 4.5% to 5.75%, aiming for an initial 6.5% to 8% annual return on cash and an IRR of 10% to 16%[36] - The weighted average annual interest rate on mortgage debt across all multi-family properties is 4.17%, with a weighted average remaining term to maturity of approximately 7.8 years as of year-end 2019[48] - The COVID-19 pandemic is expected to adversely affect operations by impacting tenants' ability to pay rent, increasing operating expenses, and potentially delaying value-add programs and transactions[25] Risk Factors Key risks include significant mortgage debt refinancing, geographic concentration, joint venture conflicts, COVID-19 impact, and a material weakness in internal financial controls - The company has significant mortgage debt with balloon payments of $182.6 million (including $108.0 million at JVs) maturing through 2022, which will require successful refinancing[66][67] - A high concentration of properties in the Southeastern U.S. and Texas exposes the company to greater risks from adverse regional economic conditions, pandemics, or natural disasters[68] - The COVID-19 pandemic is adversely affecting tenants' ability to pay rent and may increase operating expenses, limit property marketing, and delay value-add programs[82] - A material weakness in internal control over financial reporting was identified due to the company's improper consolidation of joint ventures, which was inconsistent with the Consolidation Standard (ASC 810); this led to a significant restatement of financial statements[117][118][119] - The phasing out of LIBOR after 2021 presents a risk for the company's $37.4 million in junior subordinated notes and $114.2 million of variable rate mortgage debt tied to LIBOR[84] Unresolved Staff Comments The company reports no unresolved staff comments - Not applicable[120] Properties The company's executive office is in Great Neck, New York, with property details in Item 1 - The company's executive office is located at 60 Cutter Mill Road, Suite 303, Great Neck, New York[122] - Additional property information is cross-referenced to "Item 1—Business"[122] Legal Proceedings A subsidiary faces a wrongful death lawsuit seeking over $1 million in damages related to a Houston property incident, with insurance expected to cover compensatory damages - A subsidiary is involved in a wrongful death lawsuit seeking over $1 million in compensatory damages related to an incident at a Houston, TX property[122] - The company's primary insurance carrier is defending the claim, and management believes insurance coverage is sufficient for compensatory damages, though it generally does not cover exemplary damages[122] Mine Safety Disclosures The company has no mine safety disclosures - Not applicable[123] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Common stock is NYSE-listed, with a $5.0 million share repurchase program authorized and shares repurchased post-year-end - The company's common stock trades on the New York Stock Exchange under the symbol "BRT"[125] - A share repurchase program authorizing up to $5.0 million in buybacks is in place through September 30, 2021; no shares were repurchased in Q4 2019[125] - From January 1, 2020, through April 30, 2020, the company repurchased 39,093 shares for an aggregate price of $616,000[128] Selected Financial Data As a smaller reporting company, BRT omitted selected financial data prior to December 31, 2018 - The company qualifies as a smaller reporting company and has omitted financial data for periods prior to December 31, 2018[130] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial condition and operations, highlighting the restatement, 2019 revenue growth, sharp net income decline due to lower JV property sale gains, increased AFFO, and COVID-19 liquidity challenges Comparison of Operations (Years Ended December 31) | (in thousands) | 2019 (in thousands) | 2018 (in thousands) | % Change | | :--- | :--- | :--- | :--- | | Total Revenues | $27,761 | $23,429 | 18.5% | | Total Expenses | $36,135 | $31,444 | 14.9% | | Net Income (to common) | $856 | $25,495 | -96.6% | FFO and AFFO Reconciliation Summary (in thousands) | Metric | 2019 (in thousands) | 2018 (in thousands) | | :--- | :--- | :--- | | Funds from Operations (FFO) | $12,010 | $16,358 | | Adjusted Funds from Operations (AFFO) | $16,627 | $14,123 | - The 19.4% increase in rental and other property revenue was driven by $5.5 million from properties where JV partner interests were bought out and $845,000 from same-store properties, partially offset by a $1.9 million revenue loss from sold properties[137] - The significant decrease in net income was primarily due to recognizing $9.9 million in gains from the sale of unconsolidated JV properties in 2019, compared to $37.9 million in 2018[143] - Primary sources of liquidity in 2019 were property operations (including $28.1 million in distributions from JVs), $7.5 million from stock sales, and borrowings from a $10 million credit facility; cash and equivalents stood at $22.7 million at year-end[165] Quantitative and Qualitative Disclosures About Market Risk The company faces interest rate risk from variable-rate junior subordinated notes; a 100 basis point LIBOR change impacts annual interest expense by approximately $374,000 - The company's junior subordinated notes bear a variable interest rate of three-month LIBOR plus 200 basis points[178] - A 100 basis point (1%) increase or decrease in the interest rate on these notes would result in a corresponding $374,000 change in annual interest expense[178] Financial Statements and Supplementary Data This section presents audited, restated financial statements for 2019 and 2018, with the auditor providing an unqualified opinion on financials but an adverse opinion on internal controls due to a material weakness in consolidation accounting - The independent auditor, BDO USA, LLP, issued an adverse opinion on the company's internal control over financial reporting as of December 31, 2019[219][225] - The auditor's adverse opinion on internal controls was due to a material weakness related to management's failure to design and maintain effective controls over the accounting for real estate ventures in accordance with ASC Topic 810, "Consolidation"[229] Restatement Impact on 2018 Balance Sheet (in thousands) | Account | As Previously Reported (in thousands) | As Restated (in thousands) | | :--- | :--- | :--- | | Total Assets | $1,123,707 | $394,990 | | Total Liabilities | $833,347 | $191,171 | | Total Equity | $290,360 | $203,819 | Restatement Impact on 2018 Statement of Operations (in thousands) | Account | As Previously Reported (in thousands) | As Restated (in thousands) | | :--- | :--- | :--- | | Total Revenues | $122,725 | $23,429 | | Total Expenses | $144,329 | $31,444 | | Net Income (to common) | $25,495 | $25,495 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants - Not applicable[182] Controls and Procedures Management concluded disclosure controls were ineffective as of December 31, 2019, due to a material weakness in internal control over financial reporting related to improper joint venture consolidation, leading to restated financials - Management, including the CEO and CFO, concluded that disclosure controls and procedures were not effective as of December 31, 2019[183] - A material weakness was identified in the internal controls surrounding the supervision and review of accounting for the Previously Consolidated Ventures, which were improperly consolidated instead of being presented under the equity method[186] - The material weakness impacts the consolidated balance sheets, statements of operations, and cash flows, but does not affect the presentation of net income, FFO, or AFFO in previously reported information[187] Other Information In Q1 2020, the board adopted the 2020 Incentive Plan and approved fees for related parties for services - In Q1 2020, the board adopted the 2020 Incentive Plan, allowing for the grant of up to 1 million shares through various awards[188] - Fees for services to be paid to related parties in 2020 were approved, including payments to Israel Rosenzweig, Fredric H. Gould, Matthew J. Gould, and others[188] PART III Directors, Executive Officers, Corporate Governance, Compensation, and Other Matters Information for Items 10-14, covering directors, executive compensation, security ownership, related transactions, and accountant fees, is incorporated by reference from the proxy statement or a future amendment - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the company's proxy statement or a future amendment to the 10-K[191][192][193][194][195] PART IV Exhibits, Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed as part of the Annual Report, including governing documents, material contracts, and SOX certifications - This item contains a list of all financial statements, schedules, and exhibits included with the 10-K filing[198][199][200] Form 10-K Summary Not applicable - Not applicable[207]