BRT Apartments Corp. (MD)

Good day, and welcome to the BRT Apartments Conference Call for the second quarter of 2020. Today's conference is being recorded. At this time, I'd like to turn the conference over to Evelyn Inferner of ICR. You may begin.

Thank you. Good day, everyone, and welcome to BRT Apartments Conference Call. On the call today is Jeffrey Gould, President and Chief Executive Officer of Also available are George Swire, Chief Financial Officer, David Kalish, Senior Vice President, and Ryan Baltimore, Senior Vice President. As a reminder, this call is being webcast through the company's website at www.brtapartments.com. Additionally, the company's 10Q supplemental information and earnings release are available for your review on the Investor Relations section of BRT's website. Before we begin, I'd like to remind everyone that this conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on management's current expectations, assumptions, and beliefs. Forward-looking statements can often be identified by words such as believe, expect, estimate, anticipate, intend, and similar expressions and variations are negative of these words. These forward-looking statements include but are not limited to statements regarding BRT's strategy and expectations for the future. They are not guarantees of future results and are subject to risks, uncertainties, and assumptions that could cause actual results to differ materially from those expressed in any forward-looking statements. Listeners should not place undue reliance on any forward-looking statements and are encouraged to review the company's Form 10Q statement For a more complete discussion of risks and other factors that could affect these forward-looking statements, except as required by law, BRT does not undertake any obligation to publicly update or revise any forward-looking statements. This conference call also includes a discussion of funds from operations or FFO, adjusted funds from operations or AFFO, net operating income or NOI, and information regarding our pro rata share of the revenues, expenses, NOI, assets, and liabilities of DRT's unconsolidated subsidiaries, all of which are non-GAAP financial measures of performance. These non-GAAP measures should be used as a supplement to, and not a substitute for, net income computed in accordance with GAAP. Unless otherwise indicated, or the context otherwise requires, discussions with respect to the operating results at the unconsolidated ventures reflects BRT's pro-rata share of results. For a more complete discussion of these non-GAAP measures, these accompany earnings release, supplemental, and 10-Q. Unless otherwise indicated or the context otherwise requires references to BRT's portfolio or its multifamily portfolio and references to revenues, expenses, NOI, assets, and liabilities, refer to the results and accounts of BRT's wholly owned subsidiaries and its pro rata share of unconsolidated subsidiaries. BRT uses pro rata share to help provide a better understanding of unconsolidated joint ventures. However, the use of pro rata information has limitations and is not representative of our operations and accounts as presented in accordance with GAAP. Accordingly, pro rata information should be used with caution and in conjunction with GAAP data presented in our supplemental and in our reports filed with the SEC. Further, references to the current quarter refer to the quarter ended June 30, 2020, and references to the 2019 quarter refer to the quarter ended June 30, 2019. I would now like to turn the call over to Jeffrey Gould, President, and CEO of BRT Apartments Corp. Please go ahead, Jeff.

Thank you, Evelyn. I would like to welcome everyone to BRT's second quarter conference call. Demand for rental housing in the regions of the country where most of our properties are located remains stable during the current quarter. We collected 98% of the rent billed at our multifamily properties for the current quarter and collected 98% of rent billed in July 2020. We have also remained current on all our financial obligations. We believe that the multi-family sector remains a strong asset class and is showing its resilience in these uncertain times. At the same time, we anticipate a slowdown in our acquisition activities and the implementation of our value-add strategy as we can remain cautious with respect to additional capital deployments due to the continuing economic uncertainties related to the pandemic. Our primary near-term focus is occupancy, collections, and maintaining a strong cash position while keeping the safety of our staff and residents a top priority. We have also continued to follow closure, reopening, and social distance guidelines established by the CDC and governmental authorities with respect to all of our properties, including related amenity spaces at the properties, as well as our corporate offices. Moving now to an overview of the portfolio, As of August 1, 2020, we owned or had interest in 39 multifamily properties consisting of 11,042 units in 11 states, including properties in lease-up and properties owned by unconsolidated joint ventures. Eight properties are wholly owned by BRT. The balance are owned through unconsolidated joint ventures, with BRT generally owning a 65% to 80% equity interest in these properties. We did not buy or sell any multifamily properties during the current quarter. The net loss attributed to common stockholders was $4.2 million or 25 cents per diluted share in the current quarter versus a net loss of $4.3 million or 27 cents per diluted share in the 2019 quarter. FFO grew to $4.2 million in the current quarter or 24 cents per diluted share compared to $3.5 million in the 2019 quarter or 22 cents per diluted share. AFFO increased to $4.7 million for the current quarter, or 27 cents per diluted share, compared to $3.87 million, or 24 cents per diluted share in the 2019 quarter. On a per share diluted basis, AFFO was 12.7% higher in the current quarter than in the 2019 quarter. Total rental revenues for our portfolio increased by 3.9% to $26.6 million as compared to $25.6 million in the 2019 quarter, and real estate operating expenses for the portfolio declined by 1.6% to $12.3 million as compared to $12.5 million in the 2019 quarter. The NOI for our portfolio rose 9.6% to $14.3 million for the current quarter, from $13.1 million for the 2019 quarter. Our renewal percentage for our multifamily property portfolio for the current quarter was 58%. Rental rates on renewals increased an average of 2.2% and increases in rental rates on new leases averaged 0.2%. Excluding the value add units, rental rates for new leases remained unchanged. Given the economic pressures associated with the pandemic, When setting rents, we are trying to balance the impact on our residents with our obligations to our stockholders. On the value-add front for the current quarter, 60 units were repositioned at an average of approximately $7,000 per unit, yielding an estimated annualized return on investment of approximately 14%. As reflected in our supplemental financial information, a portion of the cost may have been incurred in a prior period, but we report the return on investment when the unit is released. We anticipate that in the near term, there will be a slowdown in the number of units that we reposition at our properties as the adverse economic impacts of the pandemic continue to unfold, which may impact our ability to achieve rent increases from repositioned units. That being said, we estimate that our portfolio has approximately 700 units in the renovation pipeline over the next several years, and that the value-add strategy will continue to be a positive factor in our ability to drive same-store rent and NOI growth over the long term. Our same-store pool in the current quarter is comprised of 33 properties with 9,317 units, seven of those properties totaling 1,688 units are wholly owned assets. The remaining 26 assets, totaling 7,629 units, are unconsolidated joint ventures. Same store revenues for our portfolio grew to $22.4 million in the current quarter, representing a 2.4% increase from $21.8 million in the 2019 quarter, whereas same store expenses rose to $10.5 million in the current quarter, representing an increase of only 1.4% from $10.4 million in the 2019 quarter. Same-store NOI for the portfolio increased to $11.9 million in the current quarter, a 3.4% increase from $11.5 million in the 2019 quarter. Same-store rental rate for our multifamily property portfolio grew 3.9% to $1,097 per unit for the current quarter from $1,056 per unit for the 2019 quarter. Turning to the balance sheet, at June 30, 2020, we had $16.9 million of cash and cash equivalents, total assets of $385.6 million, total debt of $168.9 million, and total stockholder equity of $195.2 million. At August 1, 2020, our available liquidity was approximately $32.9 million, including $13.3 million of cash and cash equivalents, $9.6 million representing restricted cash for property improvements, and up to $10 million available for working capital under our credit facility. In addition, our unconsolidated joint ventures have approximately $14.7 million of cash and cash equivalents, which is used for day-to-day work and capital purposes. The aggregate mortgage debt for our wholly owned properties, combined with our share of mortgage debt for our unconsolidated joint ventures, totals $659.5 million, has a weighted average interest rate of 4.04%, and a weighted average remaining term to maturity of 7.2 years. On July 9th, we paid our quarterly dividend of 22 cents per share, which is equivalent to an annualized yield of 8.3% based on our stock price of $10.62 as of the close of business on August 3rd, 2020. While the nationwide economic hardships resulting from the pandemic did not have a material impact on our operational results for the current quarter, We continue to closely monitor each of our properties and markets in order to be proactive in bringing a resolution to any challenges that may emerge. We remain focused and determined as a company, and I am proud of the team's efforts, particularly in these unusual times. Thank you for joining us today on our conference call. With that, I will turn the call over to the operator for your questions. Operator?

Thank you. At this time, we'll be conducting a question-and-answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of Rob Stevenson with Danny. Please proceed with your question.

Good morning, guys. Jeff, you talked about the 2.2% on renewals and the 0.2% on new leases. I believe that was the second quarter. Can you talk about what you're seeing thus far in July and August, similarly on renewals and new leases?

Yeah, Rob, how are you? Yeah, we're seeing more of the same. We're very focused on occupancy and keeping our occupancy levels somewhere around 94%, 95%, what we typically like. and we are sacrificing at times some slight bumps and rents to keep same. So I think we'll continue more of that. There is some slight downward pressure and occupancy, but rental rates have been more or less flat or only slight increases. We do have a couple of properties that are seeing some more generous growth, but for the most part I would say we're sticking with more or less lower rental rates, lower rental increases right now.

Okay, and have you guys had to use any concessions? I mean, you guys don't have really much that's in lease up. I mean, in terms of just on existing stabilized communities, have the markets that you're operating in, the submarkets, had any deterioration to the point where you've actually had to use concessions or just, you know, holding rental rate flat was enough to get stuff leased?

Generally speaking, holding them flat was enough to get them leased with maybe minimal concession, if any, on current portfolio. You touched on the development aspect, and on the lease-up, yes, we are doing some concessions on our lease-up properties, but on the existing asset base, very little, if any.

Okay. Okay. And then you talked a little bit about slowing some of the renovations given the economically viable portion of it. Are you still going to wind up taking advantage in some of your properties to do some on vacancy while you have an opportunity to do so? Or is it basically even on select properties, it's still not making economic sense and sort of hit the pause button here for a bit?

Yeah, fair question. I'll tell you, it's a mixed bag answer. In some of our locations, every time we get a vacancy, we're continuing to do the upgrades and getting the bumps. Some properties, we're getting very few turnover of leases because the renewal rates are so high and there's very few apartments coming available. So that's a mixed bag. But generally speaking, where we have the opportunity, where we can get a good return on investment, we are doing the renovations and plan to do do so going forward and get the rental bumps. As you can see, the 14% is not where we were used to. We were reporting previous quarters maybe 20% or so, somewhere in that range. So it's a little bit down, but as long as it's rewarding and worthwhile, we plan to do the full renovation that we typically do. In this case, it's about $7,000. And we adjusted, obviously, according to property by property. So it really depends on what properties we're talking about and what the rental bumps we can get.

Okay, and then last one for me. You guys haven't bought anything since earlier in the year since all the accounting restatements. How are you guys thinking about the structure of acquisitions going forward? Do you have a significant preference for only buying wholly owned assets, still happy to buy assets and have them be unconsolidated, and any differences in your thought on dispositions between the wholly owned and the unconsolidated buckets going forward?

Yeah, well, there's two answers to that. Let me start with the existing base. What we're planning to do with our existing joint venture agreements is we're going to sit down and consult with our JV partners and see what we can do in our existing structures to maybe make some modifications so that we can hopefully consolidate some of the existing portfolio. As far as going forward, yes, we definitely plan to discuss with the accounting firm and others as to what we're going to do by way of changing agreements and doing what we need to do so we can consolidate. I don't want to get crazy with the idea of having to change our business plan because of it, but we would like to try to modify the agreement so that we can consolidate when we have joint venture partners. And as far as buying direct, yeah, we do plan a strategy and would like to pursue a more direct strategy in addition to the joint venture strategy. So no, we don't plan on giving up the joint venture strategy at all But I think we will see potentially more of a direct strategy with brokers and buying direct going forward when we get back into acquisitions.

Okay. Thanks. Appreciate the time this morning.

Thank you, Rob.

Thank you. Our next question comes from the line of Gaurav Mehta with National Securities. Please proceed with your question.

Thanks. Good morning. Jeff, I was hoping if you would comment on how the fiscal stimulus may have helped your tenants to make the rent payments and what kind of impact are you expecting to see in the even if we don't have any more stimulus going forward?

Yeah, Gaurav, good question. You know, for us at this point, we've been trying to do our best sort of demographic studies and see within our properties, you know, the amount of unemployment. On a recurring basis, obviously you know what their employment is like when they move into a property, but difficult once they're in as far as keeping a good sound idea of unemployment. But we think it's fairly minimal, those that are unemployed, as a general rule. We've done a pretty good demographic study as to what type of employment they have, whether in their retail or medical and so forth. I would say that for those that are unemployed and the share of the tenancy that we have, The stimulus checks have been probably very meaningful, and I think that's helped support such a good positive collection aspects that we've had at 98%. So we're watching it very carefully, and I wouldn't say that there's not some concern. There is some concern as to what's going to happen with Congress as to what they're going to do with stimulus or Trump's plan, et cetera. So we're watching it closely, but I don't think it will have a dramatic impact on us, but could have some minor impact on us.

Okay. And I guess in terms of the transaction market, I was wondering if you could offer some general comments on what you're seeing as far as buyer and seller disconnect and the pricing of the assets in your market.

Yeah, so what we're seeing or what we're hearing, I should say, because we are speaking with brokers and our partners fairly readily, There's very few transactions going on, generally speaking. I can't imagine the percentage that it's down, but it seems like a different world as to how many properties are being bought, sold, etc. We had a property that we were considering selling, which we pulled from the market, which was sort of in process. Conversation we had that we would probably have to sell at maybe a 5% discount, something like that. I think, generally speaking... multifamily as a sector is really not being impacted anywhere near obviously the retail, commercial office, hotel aspects. There's really not a lot of distress. So I would say if you're buying property right now, the discount is minimal, if any, but maybe slight. And there's very few to really have so many good numbers for you because I haven't seen many properties that have transacted post-COVID. I mean, some deals have closed but they were really early in process pre-COVID or early stages. So I would say the impact is pretty minor in the apartment sector.

Okay, thank you. That's all I had.

Thank you. Our next question comes from the line of Barry Oxford with DA Davidson. Please proceed with your question.

Great. Thanks, guys. I just want to build on the joint venture question a little bit. If you guys are going to consolidate maybe a little bit, and also by calling your own departments going forward, what will you use for as a source of equity so that you don't run up your debt levels?

I'm sorry, Barry. If we go direct, is that your question?

Yeah. Right. Exactly. Because you've been using the joint ventures, and that's been obviously a great source of equity. But if you're going to rely more on your balance sheet, you know, where's that equity component going, coming from, you know, under the assumption you don't want to run up your debt levels?

Yeah, so we're very careful and focused on our debt levels. You know, we're providing typically between 65% and 80% of the equity anyway. So, you know, the differential is not that significant. But we won't buy, obviously, unless we have the capital resources where we can buy with fair and reasonable debt. We're going to, you know, we're basically, when we look at properties to sell, either because we're at the end of the value-add scenario or, you know, potentially development properties we may want to sell or for whatever other reason, as we have capital, the first focus will be on liquidity. And then we plan to recycle that cash either through the JV model or direct. But the difference in dollars for us or cash needed obviously will be focused on, and I don't think it will be a significant hurdle at all to buy direct as opposed to buying with partners, you know, going forward. So I don't see that as a problem.

Great. Thanks, guys. Appreciate it.

Thank you. Our next question comes from the line of Craig Pucera with Wunderlich Securities. Please proceed with your question.

Yeah. Hey, good morning, guys. I know you – I do want to follow up on a couple questions that we went over earlier just to drill down a bit. I know you've slowed down the redevelopment considerably from last year. I think you were doing closer to maybe 200 to even 250, and we did 60 this quarter. Do you have a sense of how much more you're going to – are you going to basically maintain it at that level, or are we looking at seeing a further drop in the value-add units the rest of the year?

I guess it remains to be seen. Part of it, again, like I said earlier, it really depends on availability of units and where in the markets we're getting this availability. We're very focused on renewal rates. I mean, that's a big piece of what's happening right now. We'd like to give it up a little bit even more. considering people are not as likely to move. But we plan on continuing to do the strategy. I would say that if I had to guess, I would say it's probably going to be similar to what we're doing now, as opposed to what you saw a few quarters back. We're sort of watching it carefully. So if I had to forecast, I would say probably better to forecast something similar to what we've done currently. But it sort of remains to be seen as to the properties that we're getting the units back and the upgrades that we plan to do associated with obviously the rental rates that we can get if we perform those renovations.

Okay. And moving back to your tenant base and sort of unemployment, as you surveyed them, do you have a sense of what the overall unemployment is roughly in your portfolio today?

It would be only a guess. And I would say from some response we've got, again, this is a guess, this is not material, I would say we're probably in the neighborhood of about 10 to 15%, something like that. But again, surveying that is very, very difficult. We've done a very good study on, you know, other aspects of, you know, again, what they're doing in the workforce. you know, and those type of questions, but hard to get full comprehensive data on true unemployment property by property other than speaking with the managers who are hopefully speaking with each and every tenant and getting some feedback from them.

Okay, great. I just want to double check on your liquidity. In the press release, I think it said you guys have about $13 million of cash on hand. In the queue, I think it's closer to $10 million. Which is correct?

I think one might be an update. The queue would be June 30, and then there would be an update for August in the press release.

Okay. I think they both reference August.

Yes. Okay. Just the dates may be off. The only difference would be probably a dividend payment. Okay. I can check on and get back to you?

Sure. Okay. Well, yeah, and I guess, I mean, when you're talking about the transaction market being somewhat, you know, frozen, you know, are you looking at any other alternatives to increase your liquidity?

Alternatives, yeah, basically the alternatives as far as liquidity and focus, we're not looking at potential sales to increase liquidity. We're doing it that makes sense for us, and there's been a few properties that we've been considering that which will help us, obviously, with the sale having for liquidity. Other than that, obviously, we have our lines of credit that are fully available to us. But we feel we're in a pretty good and comfortable liquidity position right now and with no stress that we're really concerned about currently. I wouldn't be surprised going forward if with a couple more sales we'll have even more liquidity. And at that point, we're going to get back into the cycle of looking at properties and opportunities going forward.

Okay, thanks. Thank you.

Thank you. Ladies and gentlemen, that concludes our question and answer session. I'll turn the floor back to Mr. Gould for any final comments.

Yeah, well, let me thank you all for your time today. I would suggest that you refer to our supplemental for a lot of additional detailed information. Excellent transparency, we believe, as far as the portfolio. And if you have further questions, I suggest you reach out to us by going to investors at BRTapartments.com. Other than that, I just ask you all to have a good day and stay safe. And thank you for your time.

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