Item 2. Properties.
The Trust's executive offices are located at 60 Cutter Mill Road, Great Neck, New York, where it currently occupies 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 the executive offices are located is owned by an affiliate of Gould Investors L.P. The Trust contributed $79,900 to the annual rent in Fiscal 1997.
For a description of the real estate acquired by the Trust in foreclosure, see Item 1, Business; Real Estate Owned.
Item 3.
Item 3. Legal Proceedings.
The Trust is not a defendant in any material pending legal proceedings.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted during the fourth quarter of the fiscal year to a vote of the Trust's security holders.
PART II
Item 5.
Item 5. Market for the Registrant's Common Equity and Related Matters
The Trust's shares of Beneficial Interest ("Beneficial Shares") are listed on the New York Stock Exchange. The following table shows for the quarters indicated, the high and low sales prices of the Trust's Beneficial Shares on the New York Stock Exchange as reported on the Composite Tape.
Fiscal Year Ended September 30, High Low
First Quarter 6 5/8 5 7/8 Second Quarter 7 7/8 6 3/8 Third Quarter 7 3/4 6 5/8 Fourth Quarter 9 3/16 7 1/8
First Quarter 4 1/2 4 1/8 Second Quarter 5 1/8 4 1/8 Third Quarter 5 1/8 4 3/8 Fourth Quarter 6 1/4 4 7/8
As of December 5, 1997 there were approximately 1,800 holders of record of the Trust's Beneficial Shares.
The Trust did not declare any cash distributions to common shareholders during the years ended September 30, 1996 and 1997. In the year ended September 30, 1996 the Trust paid $203,000 as dividends on 1,030,000 shares of preferred stock. The preferred stock, owned by Gould Investors L.P., a related party, was converted into 1,030,000 Beneficial Shares on July 1, 1996.
The Trust qualifies as a real estate investment trust for Federal income tax purposes. In order to maintain that status, it is required to distribute to its shareholders at least 95% of its annual taxable income. Management believes that as a result of accumulated tax losses the Trust will not be required to make cash distributions to maintain its real estate investment trust status until its accumulated tax losses have been fully used or shall expire. Management does not expect that accumulated tax losses will be fully used for a number of years and they do not begin to expire until 2005. The resumption of cash distributions and the amount and timing of future distributions, if any, will be at the discretion of the Board of Trustees and will depend upon the Trust's financial condition, earnings, business plan, cash flow and other factors. The Credit Agreement with First Boston provides that prior to payment of cash distributions on Beneficial Shares the Trust must give advance notice to First Boston and certify that payment of such distributions will not breach the Trust's net worth covenant.
Item 6.
Item 6. Selected Financial Information
The following table, not covered by the report of the independent auditors, sets forth selected historical financial data of the Trust for each of the fiscal periods in the five years ended September 30, 1997. This table should be read in conjunction with the detailed information and financial statements of the Trust appearing elsewhere herein.
(1) Earning and non-earning loans and real estate owned are presented without deduction of the related allowance for possible losses or valuation allowance.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Liquidity and Capital Resources
The Trust engages in the business of originating and holding for investment senior real estate mortgages, secured by income producing property and to a lesser extent junior real estate mortgage loans secured by income producing property and senior mortgage loans secured by unimproved real property. The Trust's investment policy emphasizes short-term mortgage loans. Repayments of real estate loans in the amount of $25,036,000 are due during the twelve months ending September 30, 1998 ("Fiscal 1998"), including $6,678,000 of which is due on demand. There presently exists a favorable environment for obtaining mortgage financing secured by real property and for selling real estate. Accordingly, prior to or at maturity, borrowers should be able to refinance and repay the indebtedness due to the Trust. However, the Trust 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.
In October 1996 the Trust entered into a $25,000,000 credit facility with CS First Boston Mortgage Capital Corp. ("First Boston"). The facility, a revolving credit facility, permits the Trust to borrow, repay and borrow again. Interest is charged on the outstanding principal balance at the lower of prime plus 1% or Libor plus 3% adjusted monthly and matures on October 17, 1998. The Trust has the right to extend the facility for two additional six-month periods for a fee of .25% with each extension. The Trust can use funds borrowed under this facility for any corporate purpose, the primary of which is lending. Borrowings under the credit facility are secured by specific receivables and real estate assets held by the Trust, and the credit agreement provides that the loan amount will never exceed 75% of the agreed value of the collateral. There was no balance outstanding under the credit facility at September 30, 1997.
During the twelve months ended September 30, 1997, the Trust generated cash of $7,369,000 from operating activities, $22,961,000 from the sale of real estate owned, and $10,278,000 from collections from real estate loans (net of repayments to participating lenders of $1,000,000). These funds in addition to cash on hand, were used primarily to fund real estate loans of $15,353,000, payoff a note payable and mortgages payable on real estate sold of $14,859,000, and purchase 356,820 shares of beneficial interest of the Trust at an approximate aggregate cost of $2,397,000.
The Trust's Board of Trustees authorized the purchase from time to time of up to 750,000 shares of beneficial interest of the Trust. Through September 30, 1997, 409,571 shares have been purchased at an approximate aggregate cost of $2,701,000. From October 1, 1997 through December 31, 1997 an additional 208,402 shares have been purchased at an aggregate cost of $1,700,000.
There will be no effect on the Trust's liquidity relating to the year 2000 issue because during the last quarter of the 1997 fiscal year the Trust acquired computer hardware and software to handle the companies accounting and real estate management. The computer software is capable of handling all issues relating to the year 2000.
The Trust will satisfy its liquidity needs from cash and liquid investments on hand, the credit facility with First Boston, interest received on outstanding real estate loans and net cash flow generated from the operation and sale of real estate assets.
Results of Operations
1997 vs. 1996
Interest and fees on real estate loans increased to $4,877,000 for the year ended September 30, 1997 as compared to $4,516,000 for the year ended September 30, 1996. The increase of $361,000 was primarily a result of interest earned on the origination of new loans and the receipt of additional interest during the first half of Fiscal 1997 of approximately $486,000 upon the payoff of two loans, one of which was non-earning. Payoffs and pay-downs of various earning real estate loans offset these increases.
Operating income on real estate assets decreased by $95,000 to $8,590,000 for Fiscal 1997 from $8,685,000 for the comparable period in the prior fiscal year. This decrease was the result of the loss of rental income upon the sale of properties offset in part by an increase in occupancy and rental rates at various properties and the receipt of a real estate tax refund of approximately $106,000 as a result of a successful tax appeal.
During fiscal year ended September 30, 1997 the Trust reversed previously provided allowances of $1,300,000 upon the payoff in full of two real estate loans and realized $2,105,000 from previously written off provisions. There were no comparable transactions during Fiscal 1996.
Interest expense on notes and loans payable decreased by $984,000 from $1,134,000 for the year ended September 30, 1996 to $150,000 for Fiscal 1997. This decrease was a direct result of the continued reduction and the eventual payoff in August 1996 of the outstanding debt under the Trust's old credit agreement.
The Advisor's fee decreased to $559,000 for Fiscal 1997 from $615,000 for Fiscal 1996, a decrease of $56,000. This decrease was a result of a decrease in total invested assets, the basis on which the advisory fee is calculated.
General and administrative expenses decreased by $410,000 from $2,666,000 for the fiscal year ended September 30, 1996 to $2,256,000 for the fiscal year ended September 30, 1997. This decrease is primarily the result of the recognition during Fiscal 1996 of approximately $187,000 of additional legal, accounting and investment-banking expenses incurred in connection with a potential transaction, which did not proceed beyond the negotiation stage. There has also been a reduction in the Trust's general overhead expenses.
Operating expenses relating to real estate assets decreased to $6,732,000 for Fiscal 1997 from $6,937,000 for the fiscal year ended September 30, 1997 a decrease of $205,000. This decrease was primarily a result of the sale of foreclosed properties.
Depreciation and amortization increased by $384,000 for the fiscal year ended September 30, 1997. This increase was a direct result of the amortization of the remaining deferred mortgage costs associated with the sale of various real estate assets.
Gain on sale of foreclosed properties for Fiscal 1997 was $687,000 as compared to $470,000 during Fiscal 1996. It is the policy of the Trust to offer for sale all foreclosed property at prices which management believes represents fair value in the geographic area in which the property is located.
1996 vs. 1995
Interest and fees on real estate loans decreased to $4,516,000 for Fiscal 1996 as compared to $7,862,000 for Fiscal 1995. This decrease of $3,346,000 was primarily due to a decrease in earning real estate loans as a result of payoffs (including the payoff in Fiscal 1995 of three participating loans, one of which produced additional interest of approximately $1,000,000), recognition of interest earned of approximately $400,000 upon settlement, after litigation, of a junior interest in a pool of mortgages and a property securing a real estate loan becoming real estate owned.
Operating income on real estate owned increased by $471,000 to $8,685,000 for the year ended September 30, 1996 as compared to $8,214,000 for the comparable period in the prior fiscal year. This increase was principally the result of income generated from an office building in Fairway, Kansas, acquired by deed in lieu of foreclosure in October 1995 and an increase in rental income at the Dover, Delaware property,(acquired in foreclosure)as a result of improved occupancy directly attributable to the conversion of this property from a regional mall to an office park, offset in part by the sale of a number of properties.
Interest expense decreased by $4,052,000 to $1,134,000 for the year ended September 30, 1996 from $5,186,000 for the year ended September 30, 1995 due to the continuing decrease and the eventual payoff of outstanding bank debt in August 1996.
The expenses for Fiscal 1995 include provisions for possible loan losses of $1,021,000 and provisions for valuation adjustments of $178,000 with no comparable provisions during Fiscal 1996. Management determined that no additional provisions for possible loan losses or valuation adjustments were required for Fiscal 1996.
The Advisor's fee decreased to $615,000 for the twelve months ended September 30, 1996 from $777,000 for the comparable twelve month period in the prior year, a decrease of $162,000. This decrease was a result of a decrease in total invested assets, the basis on which the advisory fee is calculated.
General and administrative expenses decreased by $305,000 from $2,971,000 for the year ended September 30, 1995 to $2,666,000 for the year ended September 30, 1996. This decrease is primarily the result of a decrease in the Trust's executive compensation and related expenses due to a reduction of staff. This decrease was offset in part by the recognition during Fiscal 1996 of approximately $187,000 of additional legal, accounting and investment banking expenses incurred in connection with a potential transaction which did not proceed beyond the negotiation stage.
Operating expenses relating to real estate owned increased by $535,000 from $6,402,000 for Fiscal 1995 to $6,937,000 for Fiscal 1996. This increase was primarily due to an increase in interest on mortgages secured by real estate owned to $1,968,000 for the year ended September 30, 1996 from $441,000 for the comparable period in 1995, and the Trust taking title to an office building in October 1995, by deed-in-lieu of foreclosure. This increase was offset in part by a combination of the sale of real estate owned and the completion of extensive repairs at a mixed use property during the fiscal year ended September 30, 1995.
Depreciation and amortization decreased by $196,000 for the twelve months ended September 30, 1996 from the comparable period ended September 30, 1995. This is a result of the reclassification of a mixed use property located in Philadelphia, Pennsylvania from an asset held for the production of income to an asset held for sale, thereby no longer being depreciated, offset in part by an increase in the amortization of deferred mortgage costs.
Gain on sale of foreclosed properties for the year ended September 30, 1996 was $470,000 as compared to $3,496,000 for the year ended September 30, 1995. It is the policy of the Trust to offer for sale all real estate owned at prices which management believes represents fair value in the geographic area in which the property is located.
Item 8.
Item 8. Financial Statements and Supplementary Data
This information appears in a separate section of this report following Part IV.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
PART III
Items 10, 11, 12 and 13 will be included in the Trust's proxy statement to be filed pursuant to Regulation 14A not later than January 28, 1998.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. 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(a). Second Amended and Restated Declaration of Trust dated June 13, 1972. Incorporated by reference to Exhibit 3A to Form 10-K for the year ended September 30, 1984.
3(b). First Amendment to Second Amended and Restated Declaration of Trust dated August 20, 1986. Incorporated by reference to the Trust's Registration Statement on Form S-2 (No. 33-8125).
3(c). Second Amendment to Second Amended and Restated Declaration of Trust dated March 2, 1987. Incorporated by reference to the Trust's Registration Statement on Form S-2 (No.33-12172).
3(d). Third Amendment to Second Amended and Restated Declaration of Trust dated March 2, 1988. Incorporated by reference to Exhibit 3D to Form 10-K for the year ended September 30, 1988.
3(e). By-laws - Incorporated by reference to the Trust's Registration Statement on Form S-2 (No. 33-8125).
10(a). Advisory Agreement dated February 7, 1983 between the Trust and REIT Management Corp. Incorporated by reference to the Trust's Registration Statement on Form S-2 (No. 33-8125).
10(b). Credit Agreement with CFS First Boston Mortgage Capital Corp. dated October 17, 1996. Incorporated by reference to Exhibit 7(c) to Form 8-K filed on October 24, 1996.
21. Subsidiaries - Each subsidiary is 100% owned by the Trust. Exhibit 21 is filed with this Form 10-K.
27. Financial Data Schedule - Filed with electronic filing.
(b) Reports on Form 8-K:
Form 8-K dated September 2, 1997 was filed on September 2, 1997 to reflect the election of David Herold to the Trust's Board of Trustees. Form 8-K dated November 28, 1997 was filed on December 1, 1997 to report the disposition of a property, and a Form 8 amending said Form 8-K was filed on December 18, 1997.
(c) Exhibits - See Item 14(a) 3., above.
(d) See Item 14(a) 2., above.
SIGNATURES
Pursuant to the requirements 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 22, 1997 By: (S) Jeffrey A. Gould --------------------- Jeffrey A. Gould President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
Signature Title Date
(S) Fredric H. Gould Chairman of the Board December 22, 1997 -------------------- Fredric H. Gould (Principal Executive Officer)
- --------------------- Trustee December 22, 1997 Patrick J. Callan
(S) Arthur Hurand Trustee December 22, 1997 - ---------------------- Arthur Hurand
(S) Gary Hurand Trustee December 22, 1997 - ---------------------- Gary Hurand
(S) David Herold Trustee December 22, 1997 - ---------------------- David Herold
(S) Nathan Kupin Trustee December 22, 1997 - ---------------------- Nathan Kupin
(S)Herbert C. Lust Trustee December 22, 1997 - ---------------------- Herbert C. Lust II
- ---------------------- Marshall Rose Trustee December 22, 1997
(S) David W. Kalish - ---------------------- David W. Kalish Vice President December 22, 1997 (Principal Financial and Accounting Officer)
Annual Report on Form 10-K Item 8, Item 14(a)(1) and (2)
Index to Consolidated Financial Statements and Consolidated Financial Statement Schedules September 30, 1997
The following consolidated financial statements of BRT Realty Trust are included in Item 8:
Page No.
Report of Independent Auditors
Consolidated Balance Sheets as of September 30, 1997 and 1996
Consolidated Statements of Income for the three years ended September 30, 1997, 1996 and 1995
Consolidated Statements of Shareholders' Equity for the three years ended September 30, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the three years ended September 30, 1997, 1996 and 1995 -6
Notes to Consolidated Financial Statements -20
Consolidated Financial Statement Schedules for the year ended September 30, 1997:
III - Real Estate and Accumulated Depreciation -22 IV - Mortgage Loans on Real Estate -24
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.
EXHIBIT 21
SUBSIDIARIES
COMPANY STATE OF INCORPORATION Hoboken Front Corp. New Jersey Huntington-Park Corporation New York Forest Green Corporation New York Realty 49 Corp. New York TRB No. 1 Corp. New York TRB No. 2 Corp. New York TRB Cutter Mill Corp. New York Kew Gardens Realty Corp. New York Blue Realty Corp. Delaware 3581 Broadway Realty Corp. New York 620 West 172nd Street Realty Corp. New York Multiple Property Realty Corp. New York 119 Madison Avenue Realty Corp. New York TRB No. 3 Owners Corp. Wyoming 2190 Boston Post Road Realty Corp. New York TRB 96th Street Corp. New York Remson Point Realty Corp. New York TRB 13 Eighth Avenue Corp. New York Casa Wrap Holding Corp. Florida TRB Valley Corp. New York 76 Madison Avenue Realty Corp. New York 2211 Church Avenue Realty Corp. New York TRB Cruger Avenue Corp. New York TRB Fairway Office Center Corp. Kansas TRB East 33rd Street Corp. New York TRB Abbotts Corp. Pennsylvania TRB Greenpoint Avenue Realty Corp. New York
REPORT OF INDEPENDENT AUDITORS
To the Trustees and Shareholders BRT Realty Trust
We have audited the accompanying consolidated balance sheets of BRT Realty Trust (the "Trust") as of September 30, 1997 and 1996, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended September 30, 1997. Our audits also included the consolidated financial statement schedules listed in the Index at Item 14(a). These consolidated financial statements and consolidated schedules are the responsibility of the Trust's management. Our responsibility is to express an opinion on these consolidated financial statements and consolidated schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. 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 consolidated 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of BRT Realty Trust at September 30, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended September 30, 1997, in conformity with generally accepted accounting principles. Also, in our opinion, the related consolidated financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
ERNST & YOUNG LLP New York, New York December 2, 1997
BRT REALTY TRUST AND SUBSIDIARIES Consolidated Balance Sheets (Amounts in thousands)
BRT REALTY TRUST AND SUBSIDIARIES Consolidated Statements of Income (Amounts in thousands except per share amounts)
BRT REALTY TRUST AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity For the Years Ended September 30, 1995, 1996, and 1997 (Amounts in thousands)
BRT REALTY TRUST AND SUBSIDIARIES Consolidated Statements of Cash Flows (Amounts in thousands)
BRT REALTY TRUST AND SUBSIDIARIES Consolidated Statements of Cash Flows (Amounts in thousands) (Continued)
BRT REALTY TRUST AND SUBSIDIARIES Notes to Consolidated Financial Statements (Amounts in Thousands Except Share Data)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation; Basis of Preparation
The consolidated financial statements include the accounts of BRT Realty Trust, its wholly-owned subsidiaries, and its majority-owned or controlled real estate entity. For financial statement and economic purposes, the majority-owned real estate entity is deemed wholly-owned and presented accordingly. Investments in less than majority-owned entities have been accounted for using the equity method. Material intercompany items and transactions have been eliminated. Many of the 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".
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 both financial reporting and income tax purposes. The Trust does not accrue interest or rental income on impaired loans or real estate owned where, in the judgment of management and the Trustees, collection of interest or rent according to the contractual terms is considered doubtful. Among the factors the Trust considers in making an evaluation of the collectibility of interest or rent are, the status of the loan or property, the financial condition of the borrower or tenant and anticipated future events. Loan discounts are amortized over the life of the real estate loan using the constant interest method.
Loan commitment and extension fee income is deferred and recorded as income over the life of the commitment and loan. If a loan subsequently becomes nonearning, the unamortized portion of the fee is offset against the loan balance.
Allowance for Possible Losses
The Trust measures the impairment of its real estate loans based upon the fair value of the underlying collateral which is determined on an individual loan basis. In arriving at the fair value of the collateral, numerous factors are considered, including, market evaluations of the underlying collateral, 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 fair value of the underlying collateral securing the impaired real estate loan is less than the recorded investment in the loan, an allowance is created with a corresponding charge to expense. Adjustments may be necessary in the event that effective interest rates, rent-up periods, future economic conditions including the terms and availability of long term permanent financing for the property, or other relevant factors vary significantly from those assumed in estimating the allowance for possible losses. The existing allowances will be either increased or decreased based upon future valuations, with a corresponding increase or reduction in the provision for loan losses.
Real Estate Assets
Foreclosed properties (real estate acquired by foreclosure or by a deed in lieu of foreclosure) are recorded at estimated fair value, net of foreclosure costs, at the time of foreclosure. In subsequent periods, individual foreclosed assets held for sale are valued at the lower of the recorded cost or estimated fair value, as described below, and if required, a valuation allowance is recognized. Assets acquired through foreclosure and held for sale, are not depreciated, while assets held long-term for the production of income 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. With respect to the operating properties, operating income and expenses are reflected in the statement of operations. For residential apartment units acquired through foreclosure which are subject to an offering for the sale of units or cooperative shares, the net effect of income and expenses is applied to the basis of the asset to the extent that fair value is not exceeded.
Valuation Allowance on Real Estate Assets
The Trust reviews each real estate asset owned 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 the property, many indicators of value are considered, including 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 at the time of foreclosure. If future evaluations result in a diminution in the value of the property, the reduction will be recognized as a valuation allowance. If the value of the property subsequently increases, the valuation allowance will be reduced.
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 short term investments: The carrying amounts reported in the balance sheet for these instruments approximate their fair values.
Investment in U.S. Government obligations: Investment in U.S. Government obligations are considered "held-to-maturity" and are reported on the balance sheet at cost.
Securities available-for-sale: Investment 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. At September 30, 1997 and 1996 these interest rates are reflective of current market conditions for these loans. Accordingly, the carrying amounts of the earning, non-impaired mortgage loans approximate their fair values. For earning loans which are impaired and non-earning loans, the Trust has valued such loans based upon the fair value of the underlying collateral. Accordingly, their carrying amounts are recorded at fair value.
Notes, loans and mortgages payable: The Trust determined the estimated fair value of its debt by discounting future cash payments at their effective rates of interest, which approximate current market rates of interest for similar loans. Accordingly, there is no material difference between their carrying amounts and fair value.
Per Share Data
Primary earnings per share of beneficial interest is based upon the weighted average number of common shares and the assumed equivalent shares outstanding during each year, after giving effect to dividends relating to the Trust's preferred stock. The preferred stock, issued on September 14, 1993, is not considered a common stock equivalent for the purpose of computing primary earnings per share. The preferred stock was converted to shares of beneficial interest on a one for one basis on July 1, 1996. The assumed exercise of outstanding share options, using the treasury stock method, is not materially dilutive for the primary earnings per share computation for the years ended September 30, 1997, 1996 and 1995, respectively.
Fully diluted earnings per share of beneficial interest amounts are based on an increased number of common shares that would be outstanding assuming the exercise of common share options and the conversion of preferred stock (where applicable) to shares of beneficial interest at the year end market price. The fully diluted per share computation for the years ended September 30, 1996 and 1995 are dilutive with the addition of 1,030,000 shares of preferred stock and 91,858 and 66,515 shares, respectively, upon exercise of common share options. As for the year ended September 30, 1997, the fully diluted per share computation is not materially dilutive, and therefore not presented.
In February 1997, the Financial Accounting Standards Board issued Statement No. 128 ("FASB 128"), Earnings Per Share, which is required to be adopted on December 31, 1997. At that time, the Trust will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements for calculating primary earnings per share (renamed basic earnings per share), the dilutive effect of stock options will be excluded. The impact of FASB 128 on the calculation of primary and fully diluted earnings per share is not expected to be material.
Cash Equivalents
Cash equivalents consist of highly liquid investments, primarily 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 generally accepted accounting principles 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.
Reclassification of Financial Statements
Certain amounts reported in previous financial statements have been reclassified in the accompanying financial statements to conform to the current year's presentation.
Segment Reporting
In June, 1997 the Financial Accounting Standards Board issued Statement No. 131, Disclosure About Segments of an Enterprise and Related Information, which is effective for financial statements issued for periods beginning after December 15, 1997. Statement No. 131 requires disclosures about segments of an enterprise and related information regarding the different types of business activities in which an enterprise engages and the different economic environments in which it operates. The Trust does not believe that the implementation of Statement No. 131 will have a material impact on its financial statements.
NOTE 2 - REAL ESTATE LOANS
At September 30, 1997, information as to real estate loans is summarized as follows:
Of the real estate loans not earning interest at September 30, 1997 and 1996, $3,835 and $5,905, respectively, were deemed impaired, as it is probable that the Trust will be unable to collect all amounts due according to the contractual terms. Allowances for possible losses were provided for all such non-earning loans, with the exception of loans in the amount of $648 at September 30, 1996. Of the real estate loans earning interest at September 30, 1997 and 1996, $6,248 and $11,766, respectively, were deemed impaired and all are subject to allowances for possible losses. For the years ended September 30, 1997, 1996 and 1995, respectively, an average $15,470, $18,547 and $20,350 of real estate loans were deemed impaired, on which $1,827, $1,464 and $2,524 of interest income was recognized.
Loans originated by the Trust generally provide for interest rates, which are related to the prime rate. However, purchase money mortgages provided by the Trust in connection with the sale of foreclosed property held for sale have fixed interest rates, with incremental annual increases. The weighted average interest rate on earning loans was 11.31% and 9.31% at September 30, 1997 and 1996, respectively.
Annual maturities of real estate loans receivable during the next five years reflect revised maturities as a result of debt restructurings and are summarized as follows:
Years Ending September 30, .......................... Amount 1998 ................................................ $ 25,036 1999 ................................................ 9,163 2000................................................. 4,836 2001................................................. 381 2002 ................................................ 105 2003 and thereafter.................................. 4,344 ---- -----
Total $43,865 =======
The Trust's portfolio consists primarily of senior mortgage loans, secured by residential and commercial property, 89% of which are located principally in the New York metropolitan area.
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. Of the $25,036 of real estate loans receivable which mature in Fiscal 1998, $14,000 were extended during the fiscal year ended September 30, 1997.
If all loans classified as non-earning were earning interest at their contractual rates for the years ended September 30, 1997, 1996 and 1995, interest income would have increased by $501, $632 and $729 respectively.
The Trust's interests in wraparound mortgages are subject to underlying mortgages aggregating $3,285 and $4,632 at September 30, 1997 and 1996 respectively.
At September 30, 1997 the two largest real estate loans had principal balances outstanding of approximately $3,968 and $3,185, respectively. Of the total interest and fees earned on real estate loans during the fiscal year ended September 30, 1997, 7.5% and 7.2% related to these loans, respectively.
Included in the Trust's portfolio, is a real estate loan collateralized by a 50% interest in a partnership in which the Chairman of the Board of Trustees of the Trust holds 1/2 of the other 50% partnership interest.The balance of the loan at September 30, 1997 and 1996 is $2,575 and $2,625, respectively.
NOTE 3 - REAL ESTATE ASSETS
A summary of foreclosed properties held for sale, for the year ended September 30, 1997 is as follows:
(a) Unimproved land in Hoboken, New Jersey was contributed by the Trust as part of a real estate venture in which the Trust has a 41% interest.
(b) A significant portion of the costs capitalized to real estate owned, approximately $667, related to the office building in Kansas City, Kansas, which was sold during the year.
(c) During the year ended September 30, 1997, the Trust sold two office buildings with an aggregate net book value of $10,534 for an aggregate net price of $10,632 resulting in an aggregate gain of approximately $98. A retail building with a net book value of $233 was sold for a net sales price of $528 resulting in a gain of $295.
As a result of the sale of the Trust's general and limited partnership interests in a limited partnership, the Trust conveyed its interest in a mixed-use property located in Philadelphia, Pennsylvania with a net book value of $13,960, resulting in a gain of $294.
Future minimum rentals to be received by the Trust, pursuant to noncancellable operating leases in excess of one year, from properties on which the Trust has title at September 30, 1997 are as follows:
Years Ending September 30,................................ Amount 1998 .....................................................$ 2,346 1999 ..................................................... 1,895 2000 ..................................................... 1,716 2001 ..................................................... 1,499 2002...................................................... 1,330
NOTE 4 - ALLOWANCE FOR POSSIBLE LOSSES AND VALUATION ALLOWANCE ON REAL ESTATE OWNED
There has been a continued improvement in the real estate industry over the past few years as evidenced by an increase in occupancies and rental rates as well as a more favorable environment for obtaining financing secured by real property. As a result of this improvement, the Trust was not required to record provisions for possible loan losses nor valuation adjustments during the years ended September 30, 1997 and 1996. The most recent provisions for possible losses and provisions for valuation adjustments taken by the Trust were during the year ended September 30, 1995 in the amount of $1,021 and $178 respectively.
An analysis of the allowance for possible losses is as follows:
Year Ended September 30, ------------------------ 1997 1996 1995 ---- ---- ----
Balance at beginning of year $ 7,773 $ 9,084 $ 13,321 Provision for possible loan losses - - 1,021 Previously provided allowances (1,300) - - Write-off of allowances (517) (1,311) (5,258) ---- ------ ------
Balance at end of year $ 5,956 $ 7,773 $ 9,084 ======= ======= ==========
The allowance for possible losses applies to assets aggregating $10,083 at September 30, 1997, $17,023 at September 30, 1996 and $18,774 at September 30, 1995.
During the year ended September 30, 1997, $2,105 was realized from previously written off provisions.
The allowance for possible losses consists of the following components:
The valuation allowance applies to assets aggregating $4,316 at September 30, 1997, $23,434 at September 30, 1996 and $12,742 at September 30, 1995.
NOTE 5 - DEBT OBLIGATIONS
Debt obligations consist of the following:
September 30, ------------- 1997 1996 ---- ---- Notes payable, Gould (a related party) $ - $ 1,030 Loans and mortgages payable $ 11,562 $ 25,391
In October 1996 the Trust entered into a $25,000 credit facility ("Facility") with CS First Boston Mortgage Capital Corp. ("First Boston"). The Facility, a revolving credit facility, permits the Trust to borrow, repay and borrow again. Interest is charged on the outstanding principal balance at the lower of LIBOR plus 3% or the prime lending rate plus 1%, adjusted monthly. The Trust pays a commitment fee which amounted to $97 during the year ended September 30, 1997. The Facility matures on October 17, 1998 with the right to extend the Facility for two additional six-month periods for a fee of .25% with each extension. Borrowings under the Facility are secured by specific receivables and real estate assets held by the Trust. The Facility provides that the loan amount will never exceed 75% of the agreed value of the collateral. The Trust is required to maintain tangible net worth (as defined) of $50,000 and comply with certain other covenants all of which have been met. There was no balance outstanding on this Facility at September 30, 1997.
During August, 1996 the Trust purchased common stock of a local savings bank from Gould Investors L.P. ("Gould"), a related party. The Trust purchased these shares at Gould's cost, which approximated market and executed a Note Payable ("Note") to Gould for the full amount of the purchase price. The Note which bore interest at prime was paid in full in November, 1996. Interest expense on the Note was $10 and $16 for the years ended September 30, 1997 and 1996.
At September 30, 1997 there are three outstanding mortgages payable, all of which are secured by individual real estate owned properties with an aggregate carrying value of $16,621, net of amortization. The mortgages bear interest at rates ranging from 8.07% to 8.75% and mature between 2000 and 2005.
Scheduled principal repayments during the next five years and thereafter are as follows:
Years Ending September 30,............................. Amount 1998.................................................. $ 853 1999.................................................. 926 2000.................................................. 1,031 2001.................................................. 3,581 2002.................................................. 911 2003 and thereafter.................................. 4,260 ----- $ 11,562 ========= NOTE 6 - FEDERAL INCOME TAXES
Cumulative taxable loss since inception is less than the cumulative loss reported for financial statement purposes principally because a portion of the allowance for possible losses has not yet been deducted for tax purposes.
The taxable income is expected to be $6,400 less than the financial statement income during Calendar 1997.
At December 31, 1996, the Trust had available tax operating loss carryforwards of $35,232 of which $2,469 will expire in 2005, $2,638 will expire in 2006, $13,605 will expire in 2007, $14,288 will expire in 2008, $1,634 will expire in 2009, $527 will expire in 2010 and $71 will expire in 2011.
NOTE 7 - SHAREHOLDERS' EQUITY
Distributions
There were no distributions on the Trust's shares of beneficial interest declared during the years ended September 30, 1995, 1996 and 1997.
Stock Options
On March 4, 1991 the Board of Trustees granted, under the 1988 Stock Option Plan (Incentive/Nonstatutory Stock Option Plan) options to purchase a total of 412,000 shares of beneficial interest at $3.50 per share to a number of officers and employees of the Trust. On May 20, 1991 the Board of Trustees granted, also under the 1988 Stock Option Plan, options to purchase a total of 50,000 shares of beneficial interest at $3.625 per share to certain trustees of the Trust. During the fiscal year ended September 30, 1995, 15,000 of these options were cancelled and became available for grant at that time. Options were exercisable at per share amounts at least equal to the fair market value of the Trust's beneficial shares at the date of grant. The options were cumulatively exercisable at the rate of 25% per annum, commencing after six months, and expired five years after the date of grant. During fiscal 1996, various officers, employees and Trustees of the Trust exercised 400,700 of these options. The balance of 46,300 options expired and accordingly, are available for grant at September 30, 1997.
On December 8, 1995, the Board of Trustees granted, under the 1988 Stock Option Plan, options to purchase the remaining 53,000 shares of beneficial interest available under this plan at $4.375 per share to various officers and employees of the Trust. The options are cumulatively exercisable at a rate of 25% per annum, for a period of five years commencing six months after the date of grant. At September 30, 1997 options to purchase 26,500 shares are exercisable, none of which have been exercised.
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.
Also on December 6, 1996, the Board of Trustees granted, under the 1996 Stock Option Plan options to purchase a total of 82,500 shares of beneficial interest at $6.00 per share to a number of officers, employees and consultants to the Trust. The options are cumulatively exercisable at a rate of 25% per annum, commencing after six months, and expire five years after the date of grant. At September 30, 1997 options to purchase 20,625 shares are exercisable, none of which have been exercised.
The Trust elected Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"), and related Interpretations in accounting for its employee stock options. Under APB 25, no compensation expense is recognized because the exercise price of the Trust's employee stock options equals the market price of the underlying stock on the date of grant. The alternative fair value accounting provided for under FASB No. 123, "Accounting for Stock-Based Compensation", is not applicable because it requires use of option valuation models that were not developed for use in valuing employee stock options.
Proforma information regarding net income and earnings per share is required by FASB No. 123, and has been determined as if the Trust had accounted 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 a Black-Scholes option pricing model with the following weighted-average assumptions for 1997 and 1996, respectively: risk free interest rate of 6.02% and 5.54%, dividend yield of 0% in both years, volatility factor of the expected market price of the Trust's common stock based on historical results of 0.270 and 0.389; and an expected life for each option grant of 5 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 estimate, management believes the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. The Trust has elected not to present proforma information because the impact on the reported net income and earnings per share is immaterial.
Changes in the number of shares under all option arrangements are summarized as follows:
Year Ended September 30, ------------------------ 1997 1996 1995 ---- ---- ----
Outstanding at beginning of period 53,000 447,000 462,000 Granted 82,500 53,000 - Option price per share granted $6.00 $4.375 - Cancelled - - 15,000 Exercisable at end of period 47,125 13,250 447,000 Exercised - 400,700 - Expired - 46,300 - Outstanding at end of period 135,500 53,000 447,000 Option prices per share outstanding $4.375-$6.00 $4.375 $3.50-$3.63
As of September 30, 1997 the outstanding options had a weighted average remaining contractual life of approximately 3.8 years and a weighted average exercise price of $5.36.
Preferred Shares
The preferred shares held by Gould, a related party, provided for cumulative annual dividends of $.2622 per share, payable quarterly, all of which were paid, and were convertible into shares of beneficial interest on a one-for-one basis, with one vote per share. On July 1, 1996 Gould converted its 1,030,000 preferred shares into 1,030,000 shares of beneficial interest. There were no preferred shares outstanding at September 30, 1996 and 1997.
Treasury Shares
On July 2, 1996, the Trust's Board of Trustees authorized the purchase from time to time of up to 250,000 shares of beneficial interest of the Trust. Two additional 250,000 share purchase authorizations were approved on January 3, 1997 and August 25, 1997 for a total of 750,000 shares. As of September 30, 1997, 409,571 shares have been purchased (83,128 shares of which have been cancelled) at an approximate aggregate cost of $2,701. From October 1, 1997 through December 1, 1997 an additional 208,402 shares have been purchased at an aggregate cost of $1,700. At September 30, 1997, the Trust owns 518,000 shares of beneficial interest of the Trust at an aggregate cost of $4,447.
NOTE 8 - ADVISOR'S COMPENSATION AND CERTAIN TRANSACTIONS
Certain of the Trust's officers and trustees are also officers, directors and the shareholder of REIT Management Corp. ("REIT"), to which the Trust pays advisory fees for administrative services and investment advice. The agreement, which expires on December 31, 2001, 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 $559, $615 and $777 for the years ended September 30, 1997, 1996, and 1995, respectively.
The borrower may pay fees to REIT for services rendered in arranging and restructuring loans by the Trust. These fees, which are allowed by the advisory agreement, on loans arranged on behalf of the Trust and which are paid directly by the borrower to REIT amounted to $155 for the year ended September 30, 1997. There were no such fees paid to REIT during the years ended September 30, 1996 and 1995.
A company with the same shareholder as REIT manages certain foreclosed properties for the Trust under renewable year-to-year agreements. Management fees and leasing, selling and financing commissions incurred for the years ended September 30, 1997, 1996 and 1995 aggregated $638, $755 and $1,016, respectively.
A law firm in which the partners are officers of the Trust, received fees from either the Trust or directly from borrowers of the Trust totaling approximately $17, $21 and $17 for the years ended September 30, 1997, 1996 and 1995, respectively.
The Chairman of the Board of Trustees of the Trust holds a similar position in One Liberty, is an executive officer of the managing general partner and is a general partner of Gould (Note 5). During the years ended September 30, 1997, 1996 and 1995, allocated general and administrative expenses charged to the Trust by Gould aggregated $979, $1,161 and $1,338, respectively.
NOTE 9 - COMMITMENT
In August 1984, the Board of Trustees approved a non-contributory 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 salaries. Pension expense approximated $81, $60 and $101 during the years ended September 30, 1997, 1996 and 1995, respectively.
NOTE 10 - QUARTERLY FINANCIAL DATA (Unaudited)
Per share earnings represent primary earnings per beneficial share. (a) Calculated on weighted average shares outstanding for the fiscal year. (b) Balances do not crossfoot due to rounding.
NOTE 11 - SUBSEQUENT EVENT
On November 24, 1997 the Trust sold its second mortgage on a cooperative corporation, unsold shares in 246 cooperative apartment units and an unsecured loan on an apartment complex located in Queens, New York. The assets which had an aggregate book value of approximately $4,540 were sold for a total of $6,540 resulting in an aggregate gain of approximately $2,000.
On December 5, 1997, the Board of Trustees authorized the repurchase of an additional 500,000 shares as part of its stock repurchase program, increasing the total authorized shares to 1,250,000.
BRT REALTY TRUST SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION SEPTEMBER 30, 1997 (Amounts in Thousands)
BRT REALTY TRUST SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION SEPTEMBER 30, 1997 (Amounts in Thousands) Notes to the schedule:
(a) With respect to residential apartment units acquired through foreclosure which are subject to an offering for sale of units or cooperative shares, the net effect of income and expenses is applied to the basis of the asset to the extent that the realizable value is not exceeded. With respect to other operating properties, all operating income and expenses are reflected in the Statement of Income.
(b) Total foreclosed properties held for sale $23,500 (1) Less: Accumulated amortization 340 Valuation allowance 349 --- Net foreclosed properties held for sale $22,811 =======
(1) For federal income tax purposes, the net aggregate cost of foreclosed properties is approximately $24,000.
(c) Amortization of the Trust's leasehold interest is over the terms of the respective land leases.
(d) Information not readily obtainable.
(e) A reconciliation of real estate owned is as follows:
Year Ended September 30, ------------------------ 1997 1996 1995 ---- ---- ---- Balance at beginning of year $ 46,310 $50,248 $ 52,659 Additions: Foreclosures 13 34 5,310 Capitalization of expenses 854 1,861 7,762 Recognition of valuation allowance upon sale of property 1,779 332 - Recognition of valuation allowance upon relinquishment of property - - 435 ---- ---- --- 48,956 52,475 66,166 ------ ------ ------ Deductions: Sales/conveyances 26,031 5,961 13,821 Relinquishment of real estate owned - - 1,441 Provision for valuation adjustment - - 178 Depreciation/amortization 114 204 478 --- --- --- 26,145 6,165 15,918 ------ ----- ------ Balance at end of year $22,811 $46,310 $50,248 ======= ======= =======
BRT REALTY TRUST SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE SEPTEMBER 30, 1997 (Amounts in Thousands)
BRT REALTY TRUST SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE SEPTEMBER 30, 1997 (Amounts in Thousands)
Notes to the schedule:
(a) The following summary reconciles mortgages receivable at their carrying values: