Notes to Consolidated Financial Statements
June 30, 2018
Note 1 – Organization and Background
BRT Apartments Corp. (the "Company"), a Maryland corporation, owns, operates and develops multi-family properties. The Company conducts its operations to qualify as a real estate investment trust, or REIT, for federal income tax purposes.
Generally, the multi-family properties are acquired with joint venture partners in transactions in which the Company contributes a significant portion of the equity. At June 30, 2018, the Company owns: (a) 36 multi-family properties with 10,121 units (including 402 units at a property under development), located in 11 states with a carrying value of $1,044,063,000; and (b) interests in three unconsolidated multi-family joint ventures with a carrying value of $20,328,000.
Note 2 – Basis of Preparation
The accompanying interim unaudited consolidated financial statements as of June 30, 2018, and for the three and nine
months ended June 30, 2018 and 2017, 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, 2018 and 2017, are not necessarily indicative of the results for the full year. The consolidated balance sheet as of September 30, 2017, 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 the Company, its wholly owned subsidiaries, and its majority owned or controlled real estate entities and its interests in variable interest entities ("VIEs") in which the Company is determined to be the primary beneficiary. Material intercompany balances and transactions have been eliminated.
The Company’s consolidated joint ventures that own multi-family properties were determined to be VIEs because the voting rights of some equity investors in the applicable joint venture entity are not proportional to their obligations to absorb the expected losses of the entity and their right to receive the expected residual returns. It was determined that the Company 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 ventures that own properties in Ocoee, FL, Lawrenceville, GA, Dallas, TX, Farmers Branch, TX and Grand Prairie, TX were determined not to be a VIEs but are consolidated because the Company has controlling rights in such entities.
With respect to its unconsolidated joint ventures, as (i) the Company is primarily the managing member but does not exercise substantial operating control over these entities or the Company is not the managing member and (ii) such entities are not VIEs, the Company has determined that such joint ventures should be accounted for under the equity method of accounting for financial statement purposes.
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.
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. Substantially all of the Company's assets are comprised of multi- family real estate assets generally leased to tenants on a one-year basis. Therefore, the Company aggregates real estate assets for reporting purposes and operates in one reportable segment.
Note 3 - Equity
Equity Distribution Agreements
In January 2018, the Company entered into equity distribution agreements, which were amended in May 2018, with three sales agents to sell up to an aggregate of $30,000,000 of its common stock from time-to-time in an at-the-market offering. During the quarter ended June 30, 2018, the Company sold 835,374 shares of common stock for net proceeds of
$10,525,000, after giving effect to related fees and commissions of $218,000. Since the commencement of the at-the-market offering program through June 30, 2018, we sold 948,940 shares for an aggregate sales price of $12,237,000. From July 1, 2018 through August 2, 2018, the Company sold 558,777 shares of common stock for net proceeds of $7,437,000, after giving effect to related fees and commissions of $154,000.
Common Stock Dividend Distribution
The Company declared a quarterly cash distribution of $0.20
per share, payable on July 6, 2018, to stockholders of record on June 25, 2018.
Stock Based Compensation
The Company's Amended and Restated 2018 Incentive Plan (the "2018 Plan") permits the Company to grant: (i) stock options, restricted stock, restricted stock units, performance share awards and any one or more of the foregoing, up to a maximum of 600,000
shares; and (ii) cash settled dividend equivalent rights in tandem with the grant of restricted stock units and certain performance based awards.
Restricted Stock Units
In June 2016, the Company issued restricted stock units (the "Units") to acquire up to 450,000
shares of common stock pursuant to the 2016 Amended and Restated Incentive Plan (the "2016 Incentive Plan") . The Units entitle the recipients, subject to continued service through the March 31, 2021 vesting date, to receive (i) the underlying shares if and to the extent certain performance and/or market conditions are satisfied at the vesting date, and (ii) an amount equal to the cash dividends paid from the grant date through the vesting date with respect to the shares of common stock underlying the Units if, when, and to the extent, the related Units vest. For financial statement purposes, because the Units are not participating securities, the shares underlying the Units are excluded in the outstanding shares reflected on the consolidated balance sheet and from the calculation of basic earnings per share. The shares underlying the Units are contingently issuable shares and 200,000 of these shares have been included in the diluted earnings per share as the market conditions with respect to such units had been met at June 30, 2018.
Expense is recognized over the
five
year vesting period on the Units which the Company expects to vest. For the three months ended June 30, 2018 and 2017, the Company recorded $73,000
and $110,000
,
respectively, and for the nine
months ended June 30, 2018 and 2017
,
the Company recorded $219,000 and $329,000, respectively, of compensation expense related to the amortization of unearned compensation with respect to the Units. At June 30, 2018, and September 30, 2017, $797,000 and $1,015,000 of compensation expense, respectively, had been deferred and will be charged to expense over the remaining vesting period.
Restricted Stock
In March 2018, the Company granted 144,797 shares of restricted stock pursuant to the 2018 Incentive Plan. As of June 30, 2018
,
an aggregate of 706,097 shares of unvested restricted stock are outstanding pursuant to the 2018 Incentive Plan, 2016 Incentive Plan and 2012 Incentive Plan. No additional awards may be granted under the 2016 Incentive Plan and 2012 Incentive Plan. The shares of restricted stock vest
five
years from the date of grant and under specified circumstances, including a change in control, may vest earlier. For financial statement purposes, the restricted stock is 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, 2018 and 2017, the Company recorded $287,000 and $243,000, respectively, and for the nine months ended June 30, 2018 and 2017, the Company recorded $754,000 and $733,000, respectively, of compensation expense related to the amortization of unearned compensation with respect to the restricted stock awards. At June 30, 2018 and September 30, 2017
,
$3,313,000 and $2,356,000 has been deferred as unearned compensation and will be charged to expense over the remaining vesting periods of these restricted stock awards. The weighted average remaining vesting period of these shares of restricted stock is 2.6 years.
Stock Buyback
On September 5, 2017, the Board of Directors approved a repurchase plan authorizing the Company, effective as of October 1, 2017, to repurchase up to $5,000,000 of shares of common stock through September 30, 2019. No shares have been repurchased pursuant to this plan.
Per Share Data
Basic earnings per share is determined by dividing net income applicable to common stockholders for the applicable period by the weighted average number of shares of common stock 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 common stock were exercised or converted into shares of common stock or resulted in the issuance of shares of common stock that share in the earnings of the Company. Diluted earnings per share is determined by dividing net income applicable to common stockholders for the applicable period by the weighted average number of shares of common stock deemed to be outstanding during such period. For the nine months ended June 30, 2018
,
the Company included 133,333
shares of common stock underlying the Units in the calculation of diluted earning per share as a market criteria, with respect to the units, has been met at June 30, 2018
.
The following table sets forth the computation of basic and diluted earnings per share (dollars in thousands, except share amounts):
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Three Months Ended June 30,
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Nine Months Ended June 30,
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2018
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2017
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|
2018
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|
2017
|
Numerator for basic and diluted (loss) earnings per share attributable to common stockholders:
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|
|
|
|
|
Net (loss) income attributable to common stockholders
|
$
|
(4,689)
|
|
$
|
(3,402)
|
|
26,884
|
|
8,139
|
|
|
|
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|
Denominator:
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|
Denominator for basic (loss) earnings per share—weighted average number of shares
|
14,411,940
|
|
14,035,074
|
|
14,224,680
|
|
13,983,495
|
Effect of diluted securities (a)
|
—
|
|
—
|
|
133,333
|
|
—
|
Denominator for diluted (loss) earnings per share—adjusted weighted average number of shares and assumed conversions
|
14,411,940
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|
14,035,074
|
|
14,358,013
|
|
13,983,495
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|
|
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|
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|
Basic (loss) earnings per share
|
$
|
(0.33)
|
|
$
|
(0.24)
|
|
$
|
1.89
|
|
$
|
0.58
|
Diluted (loss) earnings per share
|
$
|
(0.33)
|
|
$
|
(0.24)
|
|
$
|
1.87
|
|
$
|
0.58
|
(a)
For the three months ended June 30, 2018, no shares were included as their effect would have been anti-dilutive.
Note 4 ‑ Real Estate Properties
Real estate properties (including properties held for sale) consist of the following (dollars in thousands):
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June 30, 2018
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September 30, 2017
|
Land
|
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$
|
167,477
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|
$
|
138,094
|
Building
|
|
929,305
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|
808,366
|
Building improvements
|
|
35,394
|
|
31,411
|
Real estate properties
|
|
1,132,176
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|
977,871
|
Accumulated depreciation
|
|
(77,692)
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|
(66,621)
|
Total real estate properties, net
|
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$
|
1,054,484
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|
$
|
911,250
|
A summary of real estate properties owned (including properties held for sale) follows (dollars in thousands):
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|
September 30, 2017
Balance
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Additions
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Capitalized Costs and Improvements
|
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Depreciation
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Sales
|
|
June 30, 2018
Balance
|
Multi-family
|
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$
|
890,300
|
|
$
|
240,374
|
|
$
|
11,629
|
|
$
|
(28,006)
|
|
$
|
(104,396)
|
|
$
|
1,009,901
|
Multi-family development - West Nashville, TN
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10,448
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|
23,715
|
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—
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—
|
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—
|
|
34,163
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Land - Daytona, FL
|
|
8,021
|
|
—
|
|
—
|
|
—
|
|
—
|
|
8,021
|
Shopping centers/Retail - Yonkers, NY
|
|
2,481
|
|
—
|
|
—
|
|
(82)
|
|
—
|
|
2,399
|
Total real estate properties
|
|
$
|
911,250
|
|
$
|
264,089
|
|
$
|
11,629
|
|
$
|
(28,088)
|
|
$
|
(104,396)
|
|
$
|
1,054,484
|
The following table summarizes the allocation of the purchase price of six
properties purchased during the nine
months ended June 30, 2018
(dollars in thousands):
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Purchase Price Allocation
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Land
|
|
$
|
44,040
|
Building and improvements
|
|
184,003
|
Acquisition-related intangible assets
|
|
5,355
|
Total consideration
|
|
$
|
233,398
|
The purchase price of properties acquired, inclusive of acquisition costs, were allocated to the acquired assets based on their estimated relative fair values on the acquisition dates. During the nine months ended June 30, 2018, there have been no changes made to the previously recorded purchase price allocations.
As result of the damage caused by Hurricane Harvey in 2017, the Company reduced the carrying value of Retreat at Cinco Ranch, located in Katy, TX by $3,471,000 and, because the Company believed it was probable that it would recover such sum from its insurance coverage, recorded a receivable for the same amount. Through June 30, 2018
,
the Company received $7,384,000 in insurance recoveries related to Hurricane Harvey, of which $3,227,000 is recorded as a gain on insurance recovery in the nine
months ended June 30, 2018
and $686,000 has been recognized as rental income (
i.e.,
$98,000 in 2017 and $294,000 and $588,000 in the three and nine
months ended June 30, 2018
,
respectively.)
Note 5 ‑ Acquisitions and Dispositions
Property Acquisitions
The table below provides information regarding the Company's purchases of multi-family properties for the nine
months ended June 30, 2018 (dollars in thousands):
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Location
|
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Purchase Date
|
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No. of Units
|
|
Purchase Price
|
|
Acquisition Mortgage Debt
|
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Initial BRT Equity
|
|
Ownership Percentage
|
|
Capitalized Acquisition Costs
|
Madison, AL
|
|
12/7/2017
|
|
204
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|
$
|
18,420
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|
$
|
15,000
|
|
$
|
4,456
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|
80
|
%
|
|
$
|
247
|
Boerne, TX (a)
|
|
12/14/2017
|
|
120
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|
12,000
|
|
9,200
|
|
3,780
|
|
80
|
%
|
|
244
|
Ocoee, FL
|
|
2/7/2018
|
|
522
|
|
71,347
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|
53,060
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|
12,370
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|
50
|
%
|
|
1,047
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Lawrenceville, GA
|
|
2/15/2018
|
|
586
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|
77,229
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|
54,447
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|
15,179
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50
|
%
|
|
767
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Daytona, FL
|
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4/30/2018
|
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208
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|
20,500
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|
13,608
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|
6,900
|
|
80
|
%
|
|
386
|
Grand Prairie, TX
|
|
5/17/2018
|
|
281
|
|
30,800
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|
18,995
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|
7,300
|
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50
|
%
|
|
411
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|
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|
|
1,921
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$
|
230,296
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|
$
|
164,310
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|
$
|
49,985
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|
|
|
$
|
3,102
|
_________________________________
(a) Includes $500 for the acquisition of a land parcel adjacent to the property.
In the quarter ended June 30, 2018
,
the Company purchased its partner's 2.5% equity interest in Avalon Apartments, located in Pensacola, FL, for $250,000. The property is now wholly owned by the Company.
The table below provides information regarding the Company's purchases of multi-family properties during the nine months ended June 30, 2017 (dollars in thousands):
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Location
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Purchase Date
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No. of Units
|
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Purchase Price
|
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Acquisition Mortgage Debt
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Initial BRT Equity
|
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Ownership Percentage
|
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Capitalized Acquisition Costs
|
Fredricksburg, VA
|
|
11/4/2016
|
|
220
|
|
$
|
38,490
|
|
$
|
29,940
|
|
$
|
8,720
|
|
80
|
%
|
|
$
|
643
|
St. Louis, MO
|
|
2/28/2017
|
|
128
|
|
27,000
|
|
20,000
|
|
6,001
|
|
75.5
|
%
|
|
423
|
St. Louis, MO
|
|
2/28/2017
|
|
53
|
|
8,000
|
|
6,200
|
|
2,002
|
|
75.5
|
%
|
|
134
|
Creve Coeur, MO
|
|
4/4/2017
|
|
174
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|
39,600
|
|
29,000
|
|
9,408
|
|
78.0
|
%
|
|
569
|
West Nashville, TN
|
|
6/2/2017
|
|
402
|
|
5,228
|
|
—
|
|
4,800
|
|
58.0
|
%
|
|
—
|
Farmers Branch, TX
|
|
6/29/2017
|
|
509
|
|
85,698
|
|
55,200
|
|
16,200
|
|
50.0
|
%
|
|
992
|
|
|
|
|
1,486
|
|
$
|
204,016
|
|
$
|
140,340
|
|
$
|
47,131
|
|
|
|
$
|
2,761
|
Property Dispositions
The following table is a summary of real estate properties disposed of by the Company during the nine months ended June 30, 2018 (dollars in thousands):
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Location
|
Sale
Date
|
|
No. of
Units
|
|
Sales Price
|
|
Gain on Sale
|
|
Non-controlling partner portion of gain
|
Melbourne, FL
|
10/25/2017
|
|
208
|
|
$
|
22,250
|
|
$
|
12,519
|
|
$
|
2,504
|
Palm Beach Gardens, FL
|
2/25/2018
|
|
542
|
|
97,200
|
|
41,830
|
|
20,593
|
Valley, AL
|
2/23/2018
|
|
618
|
|
51,000
|
|
9,712
|
|
4,547
|
New York, NY
|
1/18/2018
|
|
1
|
|
470
|
|
439
|
|
—
|
|
|
|
1,369
|
|
$
|
170,920
|
|
$
|
64,500
|
|
$
|
27,644
|
The following table is a summary of the real estate properties disposed of by the Company during the nine months ended June 30, 2017 (dollars in thousands):
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|
|
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|
|
|
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|
|
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|
|
|
|
|
|
Location
|
Sale
Date
|
|
No. of
Units
|
|
Sales Price
|
|
Gain on Sale
|
|
Non-controlling partner portion of gain
|
Greenville, SC
|
10/19/2016
|
|
350
|
|
$
|
68,000
|
|
$
|
18,483
|
|
$
|
9,329
|
Panama City, FL
|
10/26/2016
|
|
160
|
|
14,720
|
|
7,393
|
|
3,478
|
Atlanta, GA
|
11/21/2016
|
|
350
|
|
36,750
|
|
8,905
|
|
4,166
|
Hixson,TN
|
11/30/2016
|
|
156
|
|
10,775
|
|
608
|
|
152
|
New York, NY
|
12/21/2016
|
|
1
|
|
465
|
|
449
|
|
—
|
|
|
|
1,017
|
|
$
|
130,710
|
|
$
|
35,838
|
|
$
|
17,125
|
Impairment Charges
The Company reviews each real estate asset owned, including those held through investments in unconsolidated joint ventures, for impairment when there is an event or a change in circumstances indicating that the carrying amount may not be recoverable. The Company measures and records impairment losses, and reduces the carrying value of properties, when indicators of impairment are present and the expected undiscounted cash flows related to those properties are less than their carrying amounts. In cases where the Company does not expect to recover its carrying costs on properties held for use, the Company reduces its carrying costs to fair value, and for properties held for sale, the Company reduces its carrying value to the fair value less costs to sell. During the three and nine months ended June 30, 2018 and 2017, no impairment charges were recorded.
Note 6 - Variable Interest Entities
The Company conducts a large portion of its business with joint venture partners. Many of the Company's consolidated joint ventures that own properties were determined to be VIEs because the voting rights of some equity partners are not proportional to their obligations to absorb the expected loses of the entity and their rights to receive expected residual returns. It was determined that the Company is the primary beneficiary of these joint venture because it has a controlling financial interest in that it has the power to direct the activities of the VIE that most significantly impacts the entity's economic performance and it has the obligation to absorb losses of the entity and the right to receive benefits from the entity that could potentially be significant to the VIE.
The following is a summary of the carrying amounts with respect to the consolidated VIEs and their classification on the Company's consolidated balance sheets (amounts in thousands):
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|
|
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|
|
|
|
|
|
June 30, 2018
(unaudited)
|
|
September 30, 2017
|
ASSETS
|
|
|
|
|
Real estate properties, net of accumulated depreciation of $53,918 and $52,873
|
|
$
|
655,889
|
|
$
|
707,546
|
Cash and cash equivalents
|
|
7,041
|
|
8,626
|
Deposits and escrows
|
|
9,916
|
|
13,873
|
Other assets
|
|
6,629
|
|
8,148
|
Real estate properties held for sale
|
|
—
|
|
8,969
|
Total Assets
|
|
$
|
679,475
|
|
$
|
747,162
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
Mortgages payable, net of deferred costs of $4,200 and $5,170
|
|
$
|
500,912
|
|
$
|
558,568
|
Accounts payable and accrued liabilities
|
|
10,893
|
|
14,419
|
|
|
|
|
|
Total Liabilities
|
|
$
|
511,805
|
|
$
|
572,987
|
Note 7 - Real Estate Property Held For Sale
At September 30, 2017, Waverly Place Apartments, Melbourne, FL, with a book value of $8,969,000, was held for sale. This property was sold on October 25, 2017. The Company did not have any properties that met the criteria for held-for-sale classification at June 30, 2018.
Note 8 - Restricted Cash
Restricted cash represents funds held for specific purposes and are therefore not generally available for general corporate purposes. The restricted cash reflected on the consolidated balance sheets represents funds that are held by or on behalf of the Company specifically for capital improvements at certain multi-family properties.
Note 9 – Investment in Unconsolidated Ventures
The Company has interests in unconsolidated joint ventures that own multi-family properties. The table below provides information regarding these joint ventures at June 30, 2018
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location
|
|
Number of Units
|
|
Carrying Value
|
|
Mortgage Debt
|
|
Percent Ownership
|
Columbia, SC
|
|
374
|
|
$
|
4,739
|
|
$
|
40,584
|
|
32
|
%
|
Columbia, SC (a)
|
|
339
|
|
8,665
|
|
28,422
|
|
46
|
%
|
Forney, TX (b)
|
|
313
|
|
6,924
|
|
25,350
|
|
50
|
%
|
Other investments
|
|
N/A
|
|
214
|
|
N/A
|
|
N/A
|
|
|
1,026
|
|
$
|
20,542
|
|
$
|
94,356
|
|
|
________________________
(a) Reflects land purchased for a development project at which construction of 339
units is planned. Construction financing for this project of up to $47,426 has been secured. Such financing bears interest at 4.08%
and matures in June 2020.
(b) This interest is held through a tenancy-in-common.
The net loss from these ventures was $127,000 and $307,000 for the three months ended June 30, 2018 and 2017, respectively, and was $215,000 and $307,000 for the nine months ended June 30, 2018 and 2017, respectively.
Note 10 – Debt Obligations
Debt obligations consist of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
September 30, 2017
|
Mortgages payable
|
|
$
|
790,205
|
|
$
|
704,171
|
Junior subordinated notes
|
|
37,400
|
|
37,400
|
Deferred mortgage costs
|
|
(7,040)
|
|
(6,727)
|
Total debt obligations, net of deferred costs
|
|
$
|
820,565
|
|
$
|
734,844
|
Mortgages Payable
During the nine months ended June 30, 2018, the Company obtained the following mortgage debt in connection with the related property acquisitions (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location
|
|
Closing Date
|
|
Acquisition Mortgage Debt
|
|
Interest Rate
|
|
Interest only period
|
|
Maturity Date
|
Madison, AL
|
|
12/7/17
|
|
$
|
15,000
|
|
4.08
|
%
|
|
60 months
|
|
January 2028
|
Boerne, TX (a)
|
|
12/14/17
|
|
9,200
|
|
LIBOR+ 2.39%
|
|
|
36 months
|
|
January 2028
|
Ocoee, FL
|
|
2/7/18
|
|
53,060
|
|
3.90
|
%
|
|
84 months
|
|
January 2028
|
Lawrenceville, GA
|
|
2/15/18
|
|
54,447
|
|
3.97
|
%
|
|
120 months
|
|
March 2028
|
Daytona Beach, FL
|
|
4/30/18
|
|
13,608
|
|
3.94
|
%
|
|
24 months
|
|
May 2025
|
Grand Prairie, TX
|
|
5/17/18
|
|
18,995
|
|
4.37
|
%
|
|
60 months
|
|
July 2028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
164,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
_____________________________
(a) The Company entered into an agreement related to this loan to cap LIBOR at 3.86%. See Note 13.
The Company has construction loans financing two separate construction projects. Information regarding these loans at June 30, 2018 is set forth below (dollars in thousand):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location
|
|
Closing Date
|
|
Maximum Loan Amount
|
|
Amount outstanding
|
|
Interest Rate
|
|
Maturity Date
|
|
Extension Option
|
N Charleston, SC (a)
|
|
10/13/2015
|
|
$
|
30,265
|
|
$
|
30,265
|
|
LIBOR + 1.70%
|
|
|
10/13/2019
|
|
1 year
|
Nashville,TN
|
|
6/2/2017
|
|
47,426
|
|
8,679
|
|
LIBOR + 2.85%
|
|
|
6/2/2022
|
|
N/A
|
|
|
|
|
$
|
77,691
|
|
$
|
38,944
|
|
|
|
|
|
|
_____________________
(a) This property has achieved 90% occupancy during the quarter ended June 30, 2018 and as of July 1, 2018 is considered stabilized.
Junior Subordinated Notes
At June 30, 2018, and September 30, 2017, the Company's junior subordinated notes had an outstanding principal balance of $37,400,000, before deferred financing costs of $367,000 and $382,000, respectively. At June 30, 2018, the interest rate on the outstanding balance is three month LIBOR + 2.00% or 4.36%.
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, 2018 and 2017, which includes amortization of deferred costs, was $386,000 and $300,000, respectively, and for the nine months ended June 30, 2018 and 2017, was $1,058,000 and $862,000, respectively.
Note 11 – Related Party Transactions
The Company has retained certain of its executive officers and Fredric H. Gould, a director, to provide, among other things, the following services: participating in the Company's multi-family property analysis and approval process (which includes service on the investment committee), providing investment advice, long-term planning and consulting with executives and employees with respect to other business matters, as required. The aggregate fees paid for these services in the three months ended June 30, 2018 and 2017 were $317,000 and $302,000, respectively, and for the nine months ended June 30, 2018 and 2017 were $936,000 and $891,000, respectively.
Management of certain properties owned by the Company and certain joint venture properties is provided by Majestic Property Management Corp. ("Majestic Property"), a company wholly owned by Fredric H. Gould, under renewable year-to-year agreements. Certain of the Company's officers and directors are also officers and directors of Majestic Property. Majestic Property may also provide real estate brokerage and construction supervision services to these properties. These fees amounted to $6,000 and $9,000 for the three months ended June 30, 2018 and 2017, respectively, and for the nine months ended June 30, 2018 and 2017, were $25,000 and $25,000, respectively.
The Company shares facilities, personnel and other resources with One Liberty Properties, Inc., Majestic Property, and Gould Investors L.P. Certain of our executive officers and/or directors also serve in management positions, and have ownership interests, in One Liberty, Majestic Property and/or Georgetown Partners Inc., the managing partner of Gould Investors L.P. The allocation of expenses for the facilities, personnel and other resources shared by the Company, One Liberty, Majestic Property and Gould Investors is computed in accordance with a shared services agreement by and among the Company and these entities and is included in general and administrative expense on the consolidated statements of operations. For the three months ended June 30, 2018 and 2017, net allocated general and administrative expenses reimbursed by the Company to Gould Investors L.P. pursuant to the shared services agreement aggregated $160,000 and $84,000, respectively, and for the nine months ended June 30, 2018 and 2017 were $388,000 and $266,000, respectively.
Management of many of the Company's multi-family properties (including two multi-family properties owned by two unconsolidated joint ventures) is performed by the Company's joint venture partners or their affiliates. None of these joint venture partners is Gould Investors L.P., Majestic Property or their affiliates. Management fees to these related parties for the three months ended June 30, 2018 and 2017 were $926,000 and $726,000, respectively, and for the nine months ended June 30, 2018 and 2017 were $2,693,000 and $2,022,000, respectively. In addition, the Company may pay an acquisition fee to a joint venture partner in connection with a property purchased by such joint venture. Capitalized acquisition fees paid to these related parties for the three months ended June 30, 2018 and 2017 were $513,000 and $1,255,000, respectively, and for nine months ended June 30, 2018 and 2017, were $2,043,000 and $1,904,000, respectively.
Note 12 – Fair Value of Financial Instruments
Financial Instruments Not Carried 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, 2018 and September 30, 2017, the estimated fair value of the notes is lower than their carrying value by approximately $12,608,000 and $15,705,000 based on a market interest rate of 7.33% and 6.37%, respectively.
Mortgages payable: At June 30, 2018, the estimated fair value of the Company’s mortgages payable is lower than their carrying value by approximately $27,252,000, assuming market interest rates between 4.10% and 5.83% and at September 30, 2017, the estimated fair value of the Company's mortgages payable was lower than their carrying value by approximately $11,400,000 assuming market interest rates between 3.78% and 5.02%. Market interest rates were determined using rates which the Company believes reflects institutional lender yield requirements at the balance sheet dates.
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 Carried at Fair Value
The Company’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 Company does not currently own any financial instruments that are classified as Level 3. Set forth below is information regarding the Company’s financial assets and liabilities measured at fair value as of June 30, 2018 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying and Fair Value
|
|
Fair Value MeasurementsUsing Fair Value Hierarchy
|
|
|
|
|
|
Level 1
|
|
Level 2
|
Financial Assets:
|
|
|
|
|
|
Interest rate swaps
|
$
|
3,473
|
|
—
|
|
$
|
3,473
|
Interest rate cap
|
5
|
|
—
|
|
5
|
Total Financial Assets
|
$
|
3,478
|
|
—
|
|
$
|
3,478
|
|
|
|
|
|
|
Financial Liabilities:
|
|
|
|
|
|
Interest rate swap
|
$
|
—
|
|
—
|
|
$
|
—
|
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, 2018, these derivatives are included in other assets on the consolidated balance sheet.
Although the Company 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, 2018, the Company 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 Company 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 Company's objective in using interest rate derivatives is to manage its exposure to interest rate movements. To accomplish this objective, the Company 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 Company 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 on our consolidated balance sheets and is subsequently reclassified into earnings in the period that the hedged transaction affects earnings. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings.
As of June 30, 2018, the Company 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
|
|
Fixed Rate
|
|
Maturity
|
Interest rate cap on LIBOR
|
|
$
|
9,200
|
|
3.86
|
%
|
|
January 1, 2021
|
Interest rate swap
|
|
1,657
|
|
5.25
|
%
|
|
April 1, 2022
|
Interest rate swap
|
|
26,316
|
|
3.61
|
%
|
|
May 6, 2023
|
Interest rate swap
|
|
27,000
|
|
4.05
|
%
|
|
September 19, 2026
|
The table below presents the fair value of the Company’s derivative financial instruments as well as its classification on the consolidated balance sheets as of the dates indicated (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives as of:
|
|
|
|
|
|
|
June 30, 2018
|
|
|
|
September 30, 2017
|
|
|
Balance Sheet Location
|
|
Fair Value
|
|
Balance Sheet Location
|
|
Fair Value
|
Other Assets
|
|
$
|
3,478
|
|
Other Assets
|
|
$
|
1,460
|
Accounts payable and accrued liabilities
|
|
$
|
—
|
|
Accounts payable and accrued liabilities
|
|
$
|
14
|
As of June 30, 2018, the Company 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 Company’s interest rate swaps on the consolidated statements of comprehensive (loss) income for the dates indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
Nine Months Ended
June 30,
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
|
|
Amount of gain (loss) recognized on derivative in Other Comprehensive Income
|
|
$
|
444
|
|
$
|
(309)
|
|
$
|
2,034
|
|
$
|
2,739
|
|
|
|
|
Amount of gain (loss) reclassified from Accumulated Other Comprehensive Income into Interest expense
|
|
$
|
46
|
|
$
|
(80)
|
|
$
|
2
|
|
$
|
(336)
|
|
|
|
|
No
gain or loss was recognized related to hedge ineffectiveness or to amounts excluded from effectiveness testing on the Company's cash flow hedges during the three and nine months ended June 30, 2018 and June 30, 2017. The Company estimates an additional $432,000
will be reclassified from other comprehensive loss as a decrease to interest expense over the next twelve months.
Credit-risk-related Contingent Features
The agreement between the Company and its derivative counterparties provides that if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, the Company could be declared in default on its derivative obligations.
Note 14 – New Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update No. 2014-09,
Revenue from Contracts with Customers
(ASU 2014-09), prescribes a single, common revenue standards which supersedes nearly all existing revenue recognition guidance under U.S. GAAP, including most industry-specific requirements. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 outlines a five step model to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. The standard is effective for annual periods beginning after December 15, 2017, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the
application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a modified retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). Substantially all of the Company's revenue is derived from its leases and therefore falls outside of the scope of this guidance. The Company intends to implement the standard using the modified retrospective approach as of October 1, 2018. It is anticipated that there will be no cumulative effect required to be recognized in retained earnings at the date of application nor will there be a material effect on the Company's consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02
, Leases.
ASU 2016-02 supersedes the current accounting for leases and while retaining two distinct types of leases, finance and operating, (i) requires lessees to record a right of use asset and a related liability for the rights and obligations associated with a lease, regardless of lease classification, and recognize lease expense in a manner similar to current accounting (ii) eliminates most real estate specific lease provisions, and (iii) aligns many of the underlying lessor model principles with those in the new revenue standard. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 and early adoption is permitted. We are required to adopt ASU 2016-02 using the modified retrospective approach which requires us to record leases existing as of or are entered into after the beginning of the earliest comparative period presented in the financial statements under the new lease standard. We believe our adoption of the new leasing standard will result in an immaterial increase in the assets and liabilities on our consolidated balance sheets, with no material impact to our consolidated statements of income and comprehensive income.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force), which provides specific guidance on eight cash flow classification issues and how to reduce diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The effective date of the standard will be fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, and early adoption is permitted. The Company is currently evaluating the new guidance to determine the impact, if any, on the consolidated financial statements.
In November 2016, the FASB issued ASU Update No. 2016-018, Statement of Cash Flows (Topic 230): Restricted Cash, (a consensus of the Emerging Issues Task Force). The new standard requires that the statement of cash flows explain the change during the period in the combined total of cash, cash equivalents, and amounts generally described as restricted cash equivalents. Entities will also be required to reconcile such total to amounts on the balance sheet and disclose relevant information about the nature of the restrictions on the basis of their individual facts and circumstances. The effective date of the standard will be fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, and early adoption is permitted.
In July 2018, the FASB issued ASU Update No. 2018-11 (an updated to ASU No. 2016-02), Leases (Topic 842): Targeted Improvements. This amendment provides a new practical expedient that allows lessors, by class of underlying asset, to avoid separating lease and associated non-lease components within a contract if certain criteria are met: (i) the timing and pattern of transfer for the non-lease component and the associated lease component are the same and (ii) the stand-alone lease component would be classified as an operating lease if accounted for separately. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018.
Note 15 – Subsequent Events
Subsequent events have been evaluated and any significant events, relative to our consolidated financial statements as of June 30, 2018, that warrant additional disclosure, have been included in the notes to the consolidated financial statements.