Notes to Consolidated Financial Statements
June 30, 2016
Note 1 – Organization and Background
BRT Realty Trust (“BRT” or the “Trust”) is a business trust organized in Massachusetts. BRT owns, operates and develops multi‑family properties and owns and operates other assets, including real estate and a real estate loan.
Generally, the multi‑family properties are acquired with venture partners in transactions in which the Trust contributes
65%
to
80%
of the equity. At
June 30, 2016
, the Trust owns
31
multi-family properties with
8,973
units located in
11
states (including
271
units at a property under construction and
350
units at a property in the lease up stage). At June 30, 2016, the net book value of the multi family assets (including real estate asset held for sale) was
$685,537,000
.
The Trust also owns and operates various other real estate assets. At
June 30, 2016
, the net book value of the real property included in these other real estate assets was
$29,968,000
, including a real estate loan of
$19,500,000
.
BRT conducts its operations to qualify as a real estate investment trust, or REIT, for federal income tax purposes.
Note 2 – Basis of Preparation
The accompanying interim unaudited consolidated financial statements as of
June 30, 2016
, and for the
three and nine
months ended
June 30,
2016
and
2015
, reflect all normal recurring adjustments which, in the opinion of management, are necessary for a fair presentation of the results for such interim periods. The results of operations for the
three and nine
months ended
June 30,
2016
and
2015
, are not necessarily indicative of the results for the full year. The consolidated balance sheet as of
September 30, 2015
, has been derived from the audited financial statements at that date but does not include all the information and footnotes required by accounting principles generally accepted in the United States ("GAAP") for complete financial statements.
The consolidated financial statements include the accounts and operations of BRT Realty Trust, its wholly owned subsidiaries, and its majority owned or controlled real estate entities and its interests in variable interest entities ("VIE's") in which the Trust is determined to be the primary beneficiary. Material inter-company balances and transactions have been eliminated.
The Trust’s consolidated joint ventures that own multi‑family properties, were determined to be VIE’s because the voting rights of some equity investors are not proportional to their obligations to absorb the expected losses of the entity and their right to receive the expected residual returns. In addition, substantially all of the entity’s activities either involve or are conducted on behalf of an investor that has disproportionately fewer voting rights. It was determined that the Trust is the primary beneficiary of these joint ventures because it has a controlling interest in that it has the power to direct the activities of the VIE that most significantly impact the entity's economic performance and it has the obligation to absorb losses of the entity and the right to receive benefits that could potentially be significant to the VIE.
The joint venture that owns the Dallas, TX property was determined not to be a VIE but is consolidated because the Trust has a controlling financial interest in the entity due to its substantive participating rights.
The distributions to each joint venture partner are determined pursuant to the applicable operating agreement and may not be pro-rata to the percentage equity interest each partner has in the applicable venture.
Certain items on the consolidated financial statements for the prior fiscal periods have been reclassified to conform with the current year's presentation, including the reclassification of (i) balance sheet and revenue and expense items related to the Newark Joint Venture, which are now reported as discontinued operations and (ii) reclassification of real estate properties and mortgages to held for sale.
The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements. Actual results could differ from those estimates.
Note 3 ‑ Equity
Common Share Dividend Distribution
During the nine months ended
June 30, 2016
, the Trust did not declare a dividend on its shares.
Stock Based Compensation
The Trust's Amended and Restated 2016 Incentive Plan (the "Plan") permits the Trust to grant stock options, restricted stock, restricted stock units, performance shares awards and any one or more of the foregoing, up to a maximum of
600,000
shares. The Plan also allows for the grant of cash settled dividend equivalent rights in tandem with the grant of restricted stock units and certain performance based awards.
Pursuant to the Plan, during the quarter ended June 30, 2016, the Trust issued restricted stock units (the "Units") to acquire up to
450,000
common shares (the "Pay for Performance Program").
Subject to satisfying a continued service requirement through the
five
years ending March 31, 2021 (the “Performance Period”), the Units entitle the recipients to acquire in the aggregate, (i)
200,000
shares (the “TSR Award”) based on achieving, during the Performance Period, certain levels in compounded annual growth rate (“CAGR”) in total shareholder return (“TSR”), and (ii)
200,000
shares based on achieving, during the Performance Period, certain levels in CAGR in adjusted funds from operations, as determined pursuant to the performance agreement. In addition, subject to satisfying the continued service requirement, up to
50,000
shares may be added to or subtracted from the TSR Award, based on attaining or failing to attain, during the Performance Period, of CAGR in TSR relative to the CAGR in TSR for the constituent REITs that comprise, with specified exceptions, the FTSE NAREIT Equity Apartment Index. Recipients of the Units are entitled to receive cash dividends with respect to the common shares underlying the Units as if the underlying shares were outstanding during the Performance Period, if, when, and to the extent, the related Units vests. Accordingly, for accounting purposes, the shares underlying the Units are excluded in the outstanding shares reflected on the balance sheet.
For the awards which vest based on TSR, a third party appraiser prepared a Monte Carlo simulation pricing model to assist management in determining the fair value. For the awards which vest based on adjusted funds from operations, the fair value is based on the market value on the date of grant. Expense is not recognized on the Units which the Trust does not expect to vest as a result of service conditions or the Trust’s performance expectations. The total amount recorded as deferred compensation with respect to the Units is
$2,117,000
and is being charged to General and administrative expense over the approximate
five
year vesting period. The deferred compensation expense to be recognized is net of certain forfeiture and performance assumptions. The Trust recorded
$50,000
of compensation expense related to the amortization of unearned compensation with respect to the Units in the
three and nine
months ended
June 30, 2016
.
In January
2016
, the Trust granted
141,050
shares of restricted stock pursuant to the 2012 Incentive Plan (the "2012 Plan"). As of
June 30, 2016
, an aggregate of
667,025
shares of unvested restricted stock are outstanding pursuant to the 2012 Plan and the 2009 Incentive Plan ( collectively the "Prior Plans").
No
additional awards may be granted under the Prior Plans. All restricted shares vest
five
years from the date of grant and under specified circumstances, including a change in control, may vest earlier. For accounting purposes, the restricted shares are not included in the outstanding shares shown on the consolidated balance sheets until they vest, but are included in the earnings per share computation. For the three months ended
June 30, 2016
and
2015
, the Trust recorded $
221,000
and
$232,000
, respectively, of compensation expense related to the amortization of unearned compensation with respect to the restricted share awards. For the
nine
months ended
June 30, 2016
and
2015
, the Trust recorded
$639,000
and
$676,000
, respectively of compensation expense related to the amortization of unearned compensation with respect to the restricted share awards. At
June 30, 2016
and September 30, 2015, $
2,311,000
and
$2,184,000
has been deferred
as unearned compensation and will be charged to expense over the remaining vesting periods of these restricted share awards. The weighted average vesting period of these restricted shares is
2.6
years.
Share Buyback
In February 2016, pursuant to a share repurchase program then in effect, the Trust purchased
252,000
shares of beneficial interest at the market price of
$6.26
for a purchase price , including commission, of
$1,584,000
.
On March 11, 2016, the Board of Trustees approved a new share repurchase program authorizing the Trust to repurchase up to
$5,000,000
of shares of beneficial interest through September 30, 2017. During the quarter ended June 30, 2016, the Trust purchased
66,554
shares of beneficial interest at an average market price of
$7.11
for a purchase price, including commissions, of
$474,000
.
Per Share Data
Basic earnings (loss) per share is determined by dividing net income (loss) applicable to common shareholders for the applicable period by the weighted average number of shares of beneficial interest outstanding during such period. The Units are excluded from the basic earnings per share calculation, as they are not participating securities. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue shares of beneficial interest were exercised or converted into shares of beneficial interest or resulted in the issuance of shares of beneficial interest that share in the earnings of the Trust. Diluted earnings (loss) per share is determined by dividing net income (loss) applicable to common shareholders for the applicable period by the weighted average number of shares of beneficial interest outstanding during such period. For the three and nine month periods ended June 30, 2016, none of the Units are included in the diluted weighted average as they did not meet the applicable performance metrics during such periods.
Basic and diluted shares outstanding for the three months ended
June 30,
2016
and
2015
, were
13,932,515
and
14,101,056
, respectively, and for the nine months ended June 30, 2016 and
2015
were
14,055,436
and
14,144,236
, respectively.
Note 4 ‑ Real Estate Properties
A summary of real estate properties owned (including properties held for sale) follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2015
Balance
|
|
Additions
|
|
Capitalized Costs and Improvements
|
|
Depreciation
|
|
Sales
|
|
June 30, 2016
Balance
|
Multi-family
|
$
|
605,040
|
|
|
$
|
205,350
|
|
|
$
|
29,225
|
|
|
$
|
(16,390
|
)
|
|
$
|
(137,688
|
)
|
|
$
|
685,537
|
|
Land - Daytona, FL
|
7,972
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
7,974
|
|
Shopping centers/Retail - Yonkers, NY
|
2,574
|
|
|
—
|
|
|
—
|
|
|
(80
|
)
|
|
—
|
|
|
2,494
|
|
Total real estate properties
|
$
|
615,586
|
|
|
$
|
205,350
|
|
|
$
|
29,227
|
|
|
$
|
(16,470
|
)
|
|
$
|
(137,688
|
)
|
|
$
|
696,005
|
|
The following table summarizes the preliminary allocations of the purchase prices of assets acquired during the three months ended
June 30, 2016
(dollars in thousands):
|
|
|
|
|
|
|
|
Preliminary Purchase Price Allocation
|
Land
|
|
$
|
18,875
|
|
Buildings and Improvements
|
|
69,688
|
|
Acquisition-related intangible assets
|
|
587
|
|
Total Consideration
|
|
$
|
89,150
|
|
The preliminary measurements of fair value reflected above are subject to change. The Trust expects to finalize the valuations and complete the purchase price allocations within one year from the date of the applicable acquisition.
The following table summarizes the preliminary allocations of the purchase price of seven properties purchased between July 1, 2015 and June 30, 2016 and the finalized allocation of the purchase price of such properties, as adjusted, as of
June 30,
2016 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preliminary Purchase Price Allocation
|
|
Adjustments
|
|
Finalized Purchase Price Allocation
|
Land
|
|
$
|
28,556
|
|
|
$
|
(4,730
|
)
|
|
$
|
23,826
|
|
Building and improvements
|
|
181,912
|
|
|
4,087
|
|
|
185,999
|
|
Acquisition-related intangible assets
|
|
332
|
|
|
643
|
|
|
975
|
|
Total Consideration
|
|
$
|
210,800
|
|
|
$
|
—
|
|
|
$
|
210,800
|
|
Note 5 ‑ Acquisitions and Dispositions
Property Acquisitions
The table below provides information for the
nine
months ended
June 30,
2016
regarding the Trust's purchases of multi-family properties (dollars in thousands):
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location
|
|
Purchase Date
|
|
No. of Units
|
|
Contract Purchase Price
|
|
Acquisition Mortgage Debt
|
|
Initial BRT Equity
|
|
Ownership Percentage
|
|
Property Acquisition Costs
|
N. Charleston, SC (a)
|
|
10/13/2015
|
|
271
|
|
|
$
|
3,625
|
|
|
—
|
|
|
$
|
6,558
|
|
|
65
|
%
|
|
—
|
|
La Grange, GA
|
|
11/18/2015
|
|
236
|
|
|
22,800
|
|
|
$
|
16,051
|
|
|
6,824
|
|
|
100
|
%
|
|
$
|
57
|
|
Katy, TX
|
|
1/22/2016
|
|
268
|
|
|
40,250
|
|
|
30,750
|
|
|
8,150
|
|
|
75
|
%
|
|
382
|
|
Macon, GA
|
|
2/1/2016
|
|
240
|
|
|
14,525
|
|
|
11,200
|
|
|
3,250
|
|
|
80
|
%
|
|
158
|
|
Southaven, MS
|
|
2/29/2016
|
|
392
|
|
|
35,000
|
|
|
28,000
|
|
|
5,856
|
|
|
60
|
%
|
|
413
|
|
San Antonio, TX
|
|
5/6/2016
|
|
288
|
|
|
35,150
|
|
|
26,400
|
|
|
6,688
|
|
|
65
|
%
|
|
539
|
|
Dallas, TX
|
|
5/11/2016
|
|
494
|
|
|
37,000
|
|
|
27,938
|
|
|
6,750
|
|
|
50
|
%
|
|
567
|
|
Columbia, SC
|
|
5/31/2016
|
|
204
|
|
|
17,000
|
|
|
12,934
|
|
|
4,930
|
|
|
80
|
%
|
|
302
|
|
|
|
|
|
2,393
|
|
|
$
|
205,350
|
|
|
$
|
153,273
|
|
|
$
|
49,006
|
|
|
|
|
$
|
2,418
|
|
___________________________________________________
(a) This acquisition of
41.5
acres of land was purchased for development. The initial equity includes funds contributed in connection with the commencement of construction. Acquisition costs of
$63,000
related to this development have been capitalized.
The N. Charleston, SC purchase was accounted for as an asset acquisition and the other purchases were accounted for as business combinations. The purchase price for the business combinations is allocated to the acquired assets and assumed liabilities based on management's estimate of the fair value of the acquired assets and assumed liabilities at the dates of acquisition.
Property Dispositions
The following table is a summary of the real estate properties disposed of by the Trust in the
nine
months ended
June 30,
2016 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location
|
Sale
Date
|
|
No. of
Units
|
|
Sales Price
|
|
Gain on Sale
|
|
Non-controlling partner portion of gain
|
New York, NY
|
10/1/2015
|
|
1
|
|
|
$
|
652
|
|
|
$
|
609
|
|
|
—
|
|
Cordova, TN
|
3/2/2016
|
|
464
|
|
|
31,100
|
|
|
6,764
|
|
|
$
|
2,195
|
|
Kennesaw, GA
|
3/15/2016
|
|
450
|
|
|
64,000
|
|
|
17,429
|
|
|
10,037
|
|
Pooler, GA
|
4/6/2016
|
|
300
|
|
|
38,500
|
|
|
5,710
|
|
|
1,405
|
|
Collierville, TN
|
6/1/2016
|
|
324
|
|
|
34,300
|
|
|
4,586
|
|
|
917
|
|
|
|
|
1,539
|
|
|
$
|
168,552
|
|
|
$
|
35,098
|
|
|
$
|
14,554
|
|
On June 6, 2016, the Trust sold its partnership interest in a venture that owned a Little Rock, AK property. The Trust sold its interest for
$2,342,000
and recognized a gain of
$386,000
on the sale.
On July 27, 2016, the Trust entered into a contract to sell the Wichita, KS property for
$30,000,000
. The sale is subject to customary closing conditions. The Trust anticipates a gain on the sale of the property of approximately
$7,700,000
(net of a mortgage prepayment charge of
$1,900,000
), of which
$2,900,000
will be allocated to non-controlling interests.
Note 6 –Discontinued Operations
On February 23, 2016, the Trust sold, through subsidiaries which owned such interests, its equity interests in RBH - TRB Newark Holdings, LLC (the "Newark Joint Venture"), to RBH Partners III, LLC, for
$16,900,000
(the "NJV Sale"). The buyer is an affiliate of the Trust's former partners in the Newark Joint Venture. The Trust recognized a gain of
$15,467,000
in connection with this sale. In addition, the Trust (i) may be paid up to an additional
$900,000
by the newly formed parent of the Newark Joint Venture (“Holdco”) upon the achievement of specified investment returns, development of certain properties, realization of specified cost savings and any one or more of the foregoing and (ii) has been granted a nominal profit participation interest in Holdco. None of these amounts will be recognized until received.
Other than the agreement of the Trust's subsidiary to provide an indemnity with respect to up to
$2,800,000
of obligations related to the venture, neither the Trust nor its subsidiaries have any guaranty, indemnity or similar obligations with respect to the Newark Joint Venture.
As a result of the NJV Sale, the mortgage debt in principal amount of
$19,500,000
(the “NJV Debt”) owed to the Trust by this venture (which was not included on the Trust's consolidated balance sheet at September 30, 2015 as such debt and the interest that had accrued thereon was eliminated in consolidation), is reflected as a real estate loan on the balance sheet at
June 30,
2016. The NJV Debt is secured by various contiguous parcels on Market Street (between University Avenue and Washington Street) in Newark, NJ. The site is approximately
68,000
square feet and has approximately
303,000
square feet of rentable space. The NJV Debt matures in June 2017 and bears an annual interest rate of
11%
. Six percent (
6%
) is to be paid on a monthly basis ("Current Interest") and five percent (
5%
) is deferred (the"Deferred Interest"). Prior to the June 3, 2016 agreement described below, Deferred Interest was to be paid in June 2016 and at maturity in June 2017. At
June 30,
2016, the amount of Deferred Interest that has been recognized is
$2,212,000
.
Effective as of June 3, 2016, the Trust entered into an agreement with the Newark Joint Venture pursuant to which the Trust agreed, among other things, (i) to defer, until September 30, 2016, the payment of the Deferred Interest owed at June 30, 2016, (ii) subject to the Trust's receipt of
$750,000
of Deferred Interest, to release certain of the mortgages securing the NJV Debt in connection with the repayment (the "Repayment"), if any, of all or a portion of such debt on or before September 30, 2016, and (iii) in the event a Repayment occurs before September 30, 2016, to defer the payment of any remaining Deferred Interest until the June 2017 maturity of the NJV Debt.
The assets and liabilities as of September 30, 2015 of the discontinued operations of the Newark Joint Venture and the statement of operations for the three and
nine
months ended
June 30,
2016 and 2015, are summarized as follows (dollars in thousands):
|
|
|
|
|
|
Balance Sheet
|
|
September 30, 2015
|
ASSETS
|
|
|
Real estate properties, net
|
|
$
|
141,441
|
|
Restricted cash
|
|
13,277
|
|
Deferred costs, net
|
|
9,683
|
|
Deposits and escrows
|
|
93
|
|
Other assets
|
|
8,734
|
|
Total assets of discontinued operations
|
|
$
|
173,228
|
|
|
|
|
LIABILITIES
|
|
|
Mortgage payable
|
|
$
|
110,375
|
|
Accounts payable and accrued liabilities
|
|
6,848
|
|
Deferred income
|
|
30,990
|
|
Total liabilities of discontinued operations
|
|
$
|
148,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Operations
|
|
|
Three Months Ended
June 30,
|
|
Nine Months Ended
June 30,
|
|
|
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Revenues:
|
|
|
|
|
|
|
|
|
Rental and other revenue from real estate properties
|
|
$
|
—
|
|
|
$
|
1,167
|
|
|
$
|
2,437
|
|
|
$
|
3,237
|
|
Other income
|
|
—
|
|
|
268
|
|
|
444
|
|
|
798
|
|
Total revenues
|
|
—
|
|
|
1,435
|
|
|
2,881
|
|
|
4,035
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Real estate operating expenses
|
|
—
|
|
|
1,402
|
|
|
2,277
|
|
|
3,545
|
|
Interest expense
|
|
—
|
|
|
1,151
|
|
|
2,242
|
|
|
3,718
|
|
Depreciation
|
|
—
|
|
|
584
|
|
|
1,150
|
|
|
1,655
|
|
Total expense
|
|
—
|
|
|
3,137
|
|
|
5,669
|
|
|
8,918
|
|
Income from discontinued operations
|
|
—
|
|
|
(1,702
|
)
|
|
(2,788
|
)
|
|
(4,883
|
)
|
Gain on sale of partnership interest
|
|
—
|
|
|
—
|
|
|
15,467
|
|
|
—
|
|
Discontinued operations
|
|
$
|
—
|
|
|
$
|
(1,702
|
)
|
|
$
|
12,679
|
|
|
$
|
(4,883
|
)
|
Note 7 - Real Estate Property Held For Sale
At
June 30,
2016
, the Sandtown Vista, Atlanta, GA property was classified as a real estate asset held for sale. The property has a book value of
$27,020,000
. The Trust estimates it will recognize a gain on the sale of the property of approximately
$8,800,000
, of which approximately
$4,000,000
will be allocated to the non-controlling partner. This sale is anticipated to close in the first quarter of the Trust's 2017 fiscal year and is subject to the lender consenting to the purchaser's assumption of the mortgage loan securing the property and other customary closing conditions.
At September 30, 2015, the Grove at Trinity, Cordova, TN property, was classified as a real estate asset held for sale. This property was sold in the quarter ended
March 31,
2016 and the Trust recognized a gain of $
6,764,000
, of which
$2,195,000
was allocated to the non-controlling partner. See Note 5 - Acquisitions and Dispositions.
Note 8 - Restricted Cash
Restricted cash represents funds that are being held for specific purposes and are therefore not generally available for general corporate purposes. As reflected on the consolidated balance sheets, Restricted cash represents funds that are held by or on behalf of the Trust specifically for capital improvements at certain multi-family properties.
Note 9 – Debt Obligations
Debt obligations consist of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
September 30, 2015
|
Mortgages payable (a)
|
|
$
|
516,617
|
|
|
$
|
456,064
|
|
Junior subordinated notes
|
|
37,400
|
|
|
37,400
|
|
Total debt obligations
|
|
$
|
554,017
|
|
|
$
|
493,464
|
|
_____________________________________
(a) Excludes mortgages payable held for sale of $27,130
and $19,248 at June 30, 2016 and September 30, 2015, respectively.
Mortgages Payable
During the
nine
months ended
June 30,
2016, the Trust incurred the following fixed rate mortgage debt in connection with the following acquisitions (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location
|
|
Closing Date
|
|
Acquisition Mortgage Debt
|
|
Interest Rate
|
|
Interest only period
|
|
Maturity Date
|
LaGrange, GA
|
|
11/18/15
|
|
$
|
16,051
|
|
|
4.36
|
%
|
|
-
|
|
February 2022
|
Katy, TX
|
|
1/22/16
|
|
30,750
|
|
|
4.44
|
%
|
|
60 months
|
|
February 2026
|
Macon, GA
|
|
2/1/16
|
|
11,200
|
|
|
4.39
|
%
|
|
24 months
|
|
February 2026
|
Southaven, MS
|
|
2/29/16
|
|
28,000
|
|
|
4.24
|
%
|
|
60 months
|
|
March 2026
|
San Antonio, TX
|
|
5/6/16
|
|
26,400
|
|
|
3.61
|
%
|
|
23 months
|
|
May 2023
|
Dallas, TX
|
|
5/11/16
|
|
27,938
|
|
|
4.01
|
%
|
|
24 months
|
|
May 2028
|
Columbia, SC
|
|
5/31/16
|
|
12,934
|
|
|
4.28
|
%
|
|
36 months
|
|
June 2026
|
|
|
|
|
$
|
153,273
|
|
|
|
|
|
|
|
During the
nine
months ended
June 30, 2016
, the Trust obtained supplemental fixed rate mortgage financing as set forth in the table below (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Location
|
|
Closing Date
|
|
Supplemental Mortgage Debt
|
|
Interest Rate
|
|
Maturity Date
|
Pensacola, FL
|
|
10/13/15
|
|
$
|
3,194
|
|
|
4.92
|
%
|
|
March 2022
|
Atlanta, GA
|
|
11/10/15
|
|
5,000
|
|
|
4.93
|
%
|
|
July 2021
|
Houston, TX
|
|
2/9/16
|
|
3,865
|
|
|
4.94
|
%
|
|
August 2021
|
Huntsville, AL
|
|
4/15/16
|
|
2,650
|
|
|
5.29
|
%
|
|
November 2023
|
|
|
|
|
$
|
14,709
|
|
|
|
|
|
During the
nine
months ended
June 30,
2016,
$8,034,000
was advanced on the construction loan that financed the Greenville, SC (Southridge) development and
$6,808,000
was advanced on the loan that is financing the N. Charleston, SC (Factory at Garco) development.
Junior Subordinated Notes
At
June 30, 2016
and
September 30, 2015
, the Trust's junior subordinated notes had an outstanding principal balance of
$37,400,000
. At June 30, 2016, the interest rate on the outstanding balance is three month LIBOR + 2.00% (
i.e.
, 2.64%).
The junior subordinated notes require interest only payments through the maturity date of April 30, 2036, at which time repayment of the outstanding principal and unpaid interest become due. Interest expense for the
three months ended June 30, 2016
and
2015
was
$318,000
and
$458,000
, respectively; interest expense for the
nine
months ended
June 30, 2016
and
2015
was
$1,233,000
and
$1,375,000
, respectively. Amortization of the deferred costs, a component of interest expense, was
$5,000
for each of the three months ended
June 30,
2016
and
2015
, and
$15,000
for each of the
nine
months ended
June 30,
2016
and
2015
.
Note 10 – Related Party Transactions
The Trust paid REIT Management, a related party, advisory fees pursuant to its Advisory Agreement of
$0
and
$612,000
, respectively, for the three months ended
June 30,
2016 and 2015 and $
693,000
and $
1,801,000
, respectively, for the
nine
months ended
June 30,
2016 and 2015. The Advisory Agreement terminated effective December 31, 2015. Effective as of January 1, 2016, the Trust retained certain of its executive officers and its former chairman of the board to provide the services previously provided pursuant to such agreement. The aggregate fee in calendar 2016 for the provision of such services will not exceed
$1,150,000
. These fees totaled
$287,500
in the three months ended
June 30,
2016 and
$575,000
in the
nine
months ended
June 30, 2016
.
Majestic Property Management Corp., a related party, provides management services to the Trust for certain properties owned by the Trust and joint ventures in which the Trust participates. These fees amounted to
$7,000
and
$6,000
for the
three months ended June 30,
2016
and
2015
, respectively and
$26,000
and
$23,000
for the
nine
months ended
June 30,
2016 and 2015, respectively.
The allocation of expenses for the shared facilities, personnel and other resources used by the Trust is computed in accordance with a shared services agreement by and among the Trust and related parties. Amounts paid pursuant to the agreement are included in general and administrative expenses on the consolidated statement of operations. The Trust paid Gould Investors L.P., a related party,
$47,000
and
$57,000
, in the three months ended
June 30,
2016 and 2015, respectively, and
$134,000
and
$184,000
for the
nine
months ended
June 30,
2016 and 2015, respectively, for services provided under the agreement.
In the fiscal year ended September 30, 2015, the Trust leased space from an affiliate of Gould Investors L.P. The rent paid for the
nine
months ended
June 30, 2015
, was
$64,000
. The building was sold to a third party and the Trust ceased paying rent to Gould Investors in February 2015.
On December 11, 2015, the Trust borrowed
$8,000,000
from Gould Investors L.P. at an interest rate of 5.24%. This loan was satisfied on February 24, 2016. Interest expense during the
nine
months ended
June 30,
2016
, was
$86,000
.
Management of many of the Trust's multi-family properties is performed by the Trust's joint venture partners or their affiliates (none of these joint venture partners is Gould Investors L.P. or its affiliates). In addition, the Trust may pay an acquisition fee to a joint venture partner in connection with a property purchased by such joint venture. Management and acquisition fees to these related parties for the three months ended
June 30,
2016
and
2015
was
$1,416,000
and
$353,000
, respectively. For the
nine
months ended
June 30,
2016 and 2015, these fees were
$2,643,000
and
$1,340,000
respectively.
Note 11 - Segment Reporting
Management determined that the Trust operates in
two
reportable segments: a multi-family property segment which includes the ownership, operation and development of multi-family properties; and an other assets segment which includes the ownership and operation of the Trust's other real estate assets and a real estate loan.
The following tables summarize our segment reporting for the periods indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2016
|
|
Multi-Family
Real Estate
|
|
Other
Assets
|
|
Total
|
Revenues:
|
|
|
|
|
|
Rental and other revenues from real estate properties
|
$
|
22,281
|
|
|
$
|
356
|
|
|
$
|
22,637
|
|
Other income
|
—
|
|
|
608
|
|
|
608
|
|
Total revenues
|
22,281
|
|
|
964
|
|
|
23,245
|
|
Expenses:
|
|
|
|
|
|
Real estate operating expenses
|
10,789
|
|
|
155
|
|
|
10,944
|
|
Interest expense
|
5,991
|
|
|
23
|
|
|
6,014
|
|
Property acquisition costs
|
1,408
|
|
|
—
|
|
|
1,408
|
|
General and administrative
|
2,326
|
|
|
47
|
|
|
2,373
|
|
Depreciation
|
5,844
|
|
|
27
|
|
|
5,871
|
|
Total expenses
|
26,358
|
|
|
252
|
|
|
26,610
|
|
Total revenue less total expenses
|
(4,077
|
)
|
|
712
|
|
|
(3,365
|
)
|
Gain on sale of real estate
|
10,263
|
|
|
—
|
|
|
10,263
|
|
Gain on sale of partnership interest
|
386
|
|
|
—
|
|
|
386
|
|
(Loss) income from continuing operations
|
6,572
|
|
|
712
|
|
|
7,284
|
|
Net (income) loss attributable to non-controlling interests
|
(1,776
|
)
|
|
(28
|
)
|
|
(1,804
|
)
|
Net income attributable to common shareholders before reconciling items
|
$
|
4,796
|
|
|
$
|
684
|
|
|
$
|
5,480
|
|
Reconciling adjustment:
|
|
|
|
|
|
Discontinued operations
|
|
|
|
|
—
|
|
Net income attributable to common shareholders
|
|
|
|
|
$
|
5,480
|
|
Segment Assets at June 30, 2016
|
$
|
757,522
|
|
|
$
|
30,599
|
|
|
$
|
788,121
|
|
Note 11- Segment Reporting - continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2015
|
|
|
Multi-Family
Real Estate
|
|
Other Assets
|
|
Total
|
Revenues:
|
|
|
|
|
|
|
Rental and other revenues from real estate properties
|
|
$
|
19,425
|
|
|
$
|
353
|
|
|
$
|
19,778
|
|
Other income
|
|
—
|
|
|
12
|
|
|
12
|
|
Total revenues
|
|
19,425
|
|
|
365
|
|
|
19,790
|
|
Expenses:
|
|
|
|
|
|
|
Real estate operating expenses
|
|
9,875
|
|
|
147
|
|
|
10,022
|
|
Interest expense
|
|
4,652
|
|
|
203
|
|
|
4,855
|
|
Advisor's fee, related party
|
|
522
|
|
|
90
|
|
|
612
|
|
General and administrative
|
|
1,571
|
|
|
83
|
|
|
1,654
|
|
Depreciation and amortization
|
|
4,423
|
|
|
30
|
|
|
4,453
|
|
Total expenses
|
|
21,043
|
|
|
553
|
|
|
21,596
|
|
Total revenues less total expenses
|
|
(1,618
|
)
|
|
(188
|
)
|
|
(1,806
|
)
|
|
|
|
|
|
|
|
Net (income) loss attributable to non-controlling interests
|
|
(52
|
)
|
|
982
|
|
|
930
|
|
Net (loss) income attributable to common shareholders before reconciling items
|
|
$
|
(1,670
|
)
|
|
$
|
794
|
|
|
$
|
(876
|
)
|
Reconciling adjustment:
|
|
|
|
|
|
|
Discontinued operations
|
|
|
|
|
|
(1,702
|
)
|
Net loss attributable to common shareholders
|
|
|
|
|
|
$
|
(2,578
|
)
|
Segment Assets at June 30, 2015
|
|
$
|
586,648
|
|
|
$
|
15,301
|
|
|
$
|
601,949
|
|
Note 11- Segment Reporting - continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended June 30, 2016
|
|
|
Multi-Family
Real Estate
|
|
Other Assets
|
|
Total
|
Revenues:
|
|
|
|
|
|
|
Rental and other revenues from real estate properties
|
|
$
|
65,836
|
|
|
$
|
1,030
|
|
|
$
|
66,866
|
|
Other income
|
|
—
|
|
|
2,641
|
|
|
2,641
|
|
Total revenues
|
|
65,836
|
|
|
3,671
|
|
|
69,507
|
|
Expenses:
|
|
|
|
|
|
|
Real estate operating expenses
|
|
31,604
|
|
|
448
|
|
|
32,052
|
|
Interest expense
|
|
17,478
|
|
|
116
|
|
|
17,594
|
|
Advisor's fee, related party
|
|
593
|
|
|
100
|
|
|
693
|
|
Property acquisition costs
|
|
2,418
|
|
|
—
|
|
|
2,418
|
|
General and administrative
|
|
6,221
|
|
|
181
|
|
|
6,402
|
|
Depreciation
|
|
16,407
|
|
|
80
|
|
|
16,487
|
|
Total expenses
|
|
74,721
|
|
|
925
|
|
|
75,646
|
|
Total revenue less total expenses
|
|
(8,885
|
)
|
|
2,746
|
|
|
(6,139
|
)
|
Gain on sale of real estate
|
|
34,489
|
|
|
609
|
|
|
35,098
|
|
Gain on sale of partnership interest
|
|
386
|
|
|
—
|
|
|
386
|
|
Loss on extinguishment of debt
|
|
(2,668
|
)
|
|
—
|
|
|
(2,668
|
)
|
Income from continuing operations
|
|
23,322
|
|
|
3,355
|
|
|
26,677
|
|
|
|
|
|
|
|
|
Net (income) loss attributable to non-controlling interests
|
|
(12,555
|
)
|
|
1,581
|
|
|
(10,974
|
)
|
Net income attributable to common shareholders before reconciling items
|
|
$
|
10,767
|
|
|
$
|
4,936
|
|
|
$
|
15,703
|
|
Reconciling adjustment:
|
|
|
|
|
|
|
Discontinued operations
|
|
|
|
|
|
12,679
|
|
Net income attributable to common shareholders
|
|
|
|
|
|
$
|
28,382
|
|
Segment Assets at June 30, 2016
|
|
$
|
757,522
|
|
|
$
|
30,599
|
|
|
$
|
788,121
|
|
Note 11- Segment Reporting - continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended June 30, 2015
|
|
|
Multi-Family
Real Estate
|
|
Other
Real Estate
|
|
Total
|
|
|
|
|
|
|
|
Rental and other revenues from real estate properties
|
|
$
|
56,382
|
|
|
$
|
993
|
|
|
$
|
57,375
|
|
Other income
|
|
—
|
|
|
64
|
|
|
64
|
|
Total revenues
|
|
56,382
|
|
|
1,057
|
|
|
57,439
|
|
Expenses:
|
|
|
|
|
|
|
Real estate operating expenses
|
|
28,195
|
|
|
407
|
|
|
28,602
|
|
Interest expense
|
|
14,047
|
|
|
307
|
|
|
14,354
|
|
Advisor's fee, related party
|
|
1,525
|
|
|
276
|
|
|
1,801
|
|
Property acquisition costs
|
|
295
|
|
|
—
|
|
|
295
|
|
General and administrative
|
|
4,760
|
|
|
287
|
|
|
5,047
|
|
Depreciation
|
|
12,567
|
|
|
88
|
|
|
12,655
|
|
Total expenses
|
|
61,389
|
|
|
1,365
|
|
|
62,754
|
|
Total revenue less total expenses
|
|
(5,007
|
)
|
|
(308
|
)
|
|
(5,315
|
)
|
Gain on sale of real estate
|
|
2,777
|
|
|
—
|
|
|
2,777
|
|
Income from continuing operations
|
|
(2,230
|
)
|
|
(308
|
)
|
|
(2,538
|
)
|
|
|
|
|
|
|
|
Net (income) loss attributable to non-controlling interests
|
|
(1,067
|
)
|
|
2,664
|
|
|
1,597
|
|
Net (loss) income attributable to common shareholders before reconciling items
|
|
$
|
(3,297
|
)
|
|
$
|
2,356
|
|
|
$
|
(941
|
)
|
Reconciling adjustment:
|
|
|
|
|
|
|
Discontinued operations
|
|
|
|
|
|
(4,883
|
)
|
Net loss attributable to common shareholders
|
|
|
|
|
|
$
|
(5,824
|
)
|
Segment Assets at June 30, 2015
|
|
$
|
586,648
|
|
|
$
|
15,301
|
|
|
$
|
601,949
|
|
Note 12 – Fair Value of Financial Instruments
Financial Instruments Not Measured at Fair Value
The following methods and assumptions were used to estimate the fair value of each class of financial instruments that are not recorded at fair value on the consolidated balance sheets:
Cash and cash equivalents, restricted cash, accounts receivable (included in other assets), accounts payable and accrued liabilities: The carrying amounts reported in the balance sheets for these instruments approximate their fair value due to the short term nature of these accounts.
Junior subordinated notes: At
June 30, 2016
and
September 30, 2015
the estimated fair value of the notes is lower than their carrying value by approximately
$16,771,000
and
$21,400,000
based on a market interest rate of
6.15%
and
6.37%
, respectively.
Mortgages payable: At
June 30, 2016
, the estimated fair value of the Trust’s mortgages payable is greater than their carrying value by approximately
$9,983,000
assuming market interest rates between
2.15%
and
4.61%
and at
September 30, 2015
, the estimated fair value of the Trust's mortgages payable was greater than their carrying value by approximately
$890,000
assuming market interest rates between
1.99%
and
15.00%
. Market interest rates were determined using rates which the Trust believes reflects institutional lender yield requirements.
Considerable judgment is necessary to interpret market data and develop estimated fair value. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value assumptions.
Financial Instruments Measured at Fair Value
The Trust’s fair value measurements are based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, there is a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity and the reporting entity’s own assumptions about market participant assumptions. Level 1 assets/liabilities are valued based on quoted prices for identical instruments in active markets, Level 2 assets/liabilities are valued based on quoted prices in active markets for similar instruments, on quoted prices in less active or inactive markets, or on other “observable” market inputs, and Level 3 assets/liabilities are valued based significantly on “unobservable” market inputs. The Trust does not currently own any financial instruments that are classified as Level 3. Set forth below is information regarding the Trust’s financial liabilities measured at fair value as of
June 30, 2016
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying and Fair Value
|
|
Fair Value Measurements
Using Fair Value Hierarchy
|
|
|
Level 1
|
|
Level 2
|
Financial Liabilities:
|
|
|
|
|
|
Interest rate swaps
|
$
|
928
|
|
|
—
|
|
|
$
|
928
|
|
Derivative financial instruments:
Fair values are approximated using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of the derivatives. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves, foreign exchange rates, and implied volatilities. At
June 30, 2016
, these derivatives are included in other accounts payable and accrued liabilities on the consolidated balance sheet.
Although the Trust has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with them utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. As of
June 30, 2016
, the Trust assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative position and determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Trust determined that its derivatives valuation is classified in Level 2 of the fair value hierarchy.
Note 13 – Derivative Financial Instruments
Cash Flow Hedges of Interest Rate Risk
The Trust’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Trust primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Trust making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
The effective portion of changes in the fair value of derivatives, designated and that qualify as cash flow hedges, is recorded in accumulated other comprehensive (income) loss on our consolidated balance sheets and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings.
Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments are made on the Trust's variable-rate debt.
As of
June 30, 2016
, the Trust had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Derivative
|
|
Notional Amount
|
|
Rate
|
|
Maturity
|
Interest rate swap
|
|
$
|
1,586
|
|
|
5.25
|
%
|
|
April 1, 2022
|
Interest rate swap
|
|
$
|
26,400
|
|
|
3.61
|
%
|
|
May 6, 2023
|
The table below presents the fair value of the Trust’s derivative financial instrument as well as its classification on the consolidated balance sheets as of the dates indicated (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives as of:
|
June 30, 2016
|
|
September 30, 2015
|
Balance Sheet Location
|
|
Fair Value
|
|
Balance Sheet Location
|
|
Fair Value
|
Accounts payable and accrued liabilities
|
|
$
|
928
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
58
|
|
As of
June 30, 2016
, the Trust did not have any derivative instruments that were considered to be ineffective and does not use derivative instruments for trading or speculative purposes.
The following table presents the effect of the Trust’s interest rate swaps on the consolidated statements of comprehensive loss for the dates indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Nine Months Ended
June 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Amount of loss recognized on derivative in Other Comprehensive Income (loss)
|
|
$
|
(906
|
)
|
|
$
|
18
|
|
|
$
|
(935
|
)
|
|
$
|
(47
|
)
|
Amount of loss reclassified from Accumulated
Other Comprehensive Income (loss) into Interest Expense
|
|
$
|
(50
|
)
|
|
$
|
(8
|
)
|
|
$
|
(65
|
)
|
|
$
|
(25
|
)
|
No
gain or loss was recognized related to hedge ineffectiveness or to amounts excluded from effectiveness testing on the Trust’s cash flow hedges during the
three and nine
months ended
June 30, 2016
and
June 30, 2015
. During the twelve months ending
September 30, 2016
, the Trust estimates an additional
$294,000
will be reclassified from other comprehensive income (loss) as an increase to interest expense.
Credit-risk-related Contingent Features
The agreement between the Trust and its derivatives counterparties provides that if the Trust defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, the Trust could be declared in default on its derivative obligations.
As of
June 30, 2016
, the fair value of the derivatives in a net liability position, which includes accrued interest, but excludes any adjustment for nonperformance risk related to these agreement, was
$988,000
. As of
June 30, 2016
, the Trust has not posted any collateral related to these agreements. If the Trust had been in breach of these agreements at
June 30, 2016
, it could have been required to settle its obligations thereunder at its termination value of
$988,000
.
Note 14 – New Accounting Pronouncements
In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting,” which requires all excess tax benefits or deficiencies to be recognized as income tax expense or benefit in the income statement. In addition, excess tax benefits should be classified along with other income tax cash flows as an operating activity in the statement of cash flows. Application of the standard is required for the annual and interim periods beginning after December 15, 2016. Early adoption is permitted. The Trust is currently evaluating the impact of this new standard on our consolidated financial statements.
In April 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2015-03 Interest - Imputation of Interest, which amends the balance sheet presentation for debt issuance costs. Under the amended guidance, a company will present unamortized debt issuance costs as a direct deduction from the carrying amount of that debt liability. The guidance is to be applied on a retrospective basis, and is effective for annual reporting periods beginning after December 15, 2015, with early adoption being permitted. The Trust is evaluating the impact the adoption of the guidance will have on its consolidated financial statements.
In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis, which amends the current consolidation guidance, including introducing a separate consolidation analysis specific to limited partnerships and other similar entities. Under this analysis, limited partnerships and other similar entities will be considered a VIE unless the limited partners hold substantive kick-out rights or participating rights. The guidance is effective for annual and interim periods beginning after December 15, 2015, with early adoption permitted. The Trust has not elected early adoption and is evaluating the new guidance to determine the impact it may have on its consolidated financial statements.
Note 15 – Subsequent Events
Subsequent events have been evaluated and any significant events, relative to our consolidated financial statements as of
June 30, 2016
that warrant additional disclosure, have been included in the notes to the consolidated financial statements.