BRT Apartments Corp. (MD)

Good day and welcome to the BRT Apartment Corp conference call for the fourth quarter of 2020. Today's conference is being recorded. At this time, I'd like to turn the floor over to Evelyn Inferno of ICR. Please go ahead.

Thank you. Good day, everyone, and welcome to BRT Apartment's conference call. On the call today is Jeffrey Gould, President and Chief Executive Officer. Also available are George Zweier, 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 supplemental information and earnings release were currently available for your review on the Investor Relations section of BRT's website, and its 10-K will be available on such website on Monday, March 15th. Before we begin, I would 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 or negatives 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 statement. Listeners should not place undue reliance on any forward-looking statements and are encouraged to review the company's Form 10-K 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 revenues, expenses, NOI, assets, and liabilities of BRTs, 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 operating results at the unconsolidated ventures reflects BRT's pro-rata share of such results. For a more complete discussion of our financial results as reported in accordance with GAAP, these non-GAAP measures and these non-GAAP measures see the company's earnings release and supplemental information, which are currently available under the investor relations tab at our website and the 10-K, which will be available at such tab on Monday, March 15th. 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 our unconsolidated joint ventures. However, the use of pro rata information has certain limitations and is not representative of the company's operations and accounts as presented in accordance with GAAP. Accordingly, pro rata information should be used with caution and in conjunction with the GAAP data presented in our supplemental and in our reports filed with the FCC. Further, references to the current quarter refer to the quarter ended December 31, 2020, and references to the 2019 quarter refer to the quarter ended December 31, 2019. References to the current year refer to the year ended December 31, 2020, and references to 2019 refer to the year ended December 31, 2019. I would now like to turn the call over to Jeffrey Gould, President and CEO of BRT Apartments. Please go ahead, Jeff.

Thank you, Evelyn. I would like to welcome everyone to BRT's fourth quarter conference call. Let me start off by saying that although 2020 brought about uncertainty in the market, we are pleased with the way our team at BRT and at the properties have stepped up and performed during these times. We were proactive and remained cautious and conservative with our capital deployment, and as a result, had strong performance in 2020. We are confident that we are in a position to resume growth activities when the market is right, as cap rates continue to remain compressed. We remain diligent with regard to safety protocols and continue to put the staff and tenants' health as our top priority. With respect to our portfolio, as of March 1, 2021, we owned or had an interest in 39 multifamily properties consisting of 11,042 units in 11 states, 31 properties owned by unconsolidated joint ventures, and eight properties wholly owned by BRT. BRT's equity interest in these unconsolidated subsidiaries, over which BRT actively oversees the management, generally ranges from 50% to 90%. We did not buy or sell any multifamily properties in the current quarter. Let's turn to our financial performance. BRT generated FFO of approximately $5 million in the current quarter, or 29 cents per diluted share, compared to $3.5 million in the 2019 quarter, or 21 cents per diluted share. For the year, FFO grew to $17 million, or 99 cents per diluted share, compared to $12.01 million, or 74 cents per diluted share in 2019. AFFO increased to $5.6 million for the current quarter, or 33 cents per diluted share, compared to $4.9 million or $0.30 per diluted share in the 2019 quarter. This represents a 10% increase in AFFO on a per diluted share basis. For the year, AFFO increased to $19.2 million or $1.12 per diluted share compared to $16.6 million or $1.03 per diluted share in 2019. Total rental revenues for our portfolio increased to $27.5 million as compared to $26.5 million in the 2019 quarter, and real estate operating expenses for the portfolio increased to $12.6 million as compared to $12.1 million in the 2019 quarter. For the year, total rental revenues for our portfolio increased to $107.9 million as compared to $102.2 million in 2019, and real estate operating expenses for the portfolio increased to $50.7 million as compared to $48.7 million in 2019. NOI for our portfolio rose 3.5% to $14.9 million for the current quarter from $14.4 million for the 2019 quarter. NOI for our portfolio increased 6.9% to $57.2 million for the current year from $53.5 million in 2019. The year-over-year increase was due to increased rental income at our two properties that were in lease-up and increased rental revenue at our same-store properties due to increased rental rates. On the value-add front, for the quarter, 45 units were upgraded at an average cost of approximately $6,700 per unit, yielding an estimated annualized return on investment of approximately 21%. For the year, we completed improvements on 248 units, yielding an estimated return on investment of approximately 18%. 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 continue to anticipate that in the near term, it will be a continued slowdown in the number of units that we reposition at our properties as the adverse economic impacts of the pandemic continue to unfold. which could impact our ability to achieve rent increases from repositioned units. Although we have slowed our value-added strategy for the time being, we believe the 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 showed resilience in the current quarter and the year due to higher occupancy, higher tenant retention, and higher rental rates. Our same-store pool in the current quarter is comprised of 36 properties with 10,037 units. Eight of those properties totaling 1,880 units are wholly owned assets. The remaining 28 assets totaling 8,157 units are unconsolidated joint ventures. Same-store revenues for our portfolio grew to $25.1 million in the current quarter, representing a 3.2% increase from $24.3 million in the 2019 quarter. Contributing to this increase was an increase in same-store rental rate over the prior year quarter from $1,082 to $1,091 per unit. Same-store expenses rose to $11.5 million in the current quarter, representing an increase of 3.6% from $11.2 million in the 2019 quarter. Same-store NOI for the portfolio increased to $13.6 million in the current quarter, an increase of 2.9% from $13.2 million in the 2019 quarter. For the year, our same store pool was comprised of 32 properties with 9,005 units. Seven of these properties totaling 1,688 units are wholly owned assets. The remaining 25 assets totaling 7,317 units are unconsolidated joint ventures. Same store revenues grew to $87.7 million in the current year, representing a 3.1% increase from $85.1 million in 2019, driven by strong occupancies, higher lease renewals, and a 2.7% per unit rental rate increase to $1,097 from $1,068 per unit for 2019. Same-store expenses rose to $41.7 million in the current year, representing an increase of 5.2% from $39.6 million in 2019. Same-store NOI for the portfolio increased to $46 million in the current year, an increase of 1.2% from $45.5 million in 2019. In February 2021, we entered into an agreement to sell our 80% interest in Anatole Apartments, Daytona Beach, Florida, to a joint venture partner for approximately $7.4 million. We anticipate the transaction will close in March or April 2021. We estimate that we will recognize a gain on sale of our partnership interest of approximately $2 million from such sale. Also, on March 3, 2021, we entered into an agreement to sell Kendall Manor, Houston, Texas, to an unrelated third party for approximately $24.5 million and anticipate the transaction will close in April or May 2021. We estimate that we will recognize a gain on the sale of this property of approximately $7.5 million. Turning to the balance sheet, at December 31, 2020, we had $19.9 million of cash and cash equivalents, total assets of $366 million, total debt of $167.5 million, and total stockholders' equity of $177.8 million. At March 1, 2021, our available liquidity was approximately $36.1 million, including $17.3 million of cash and cash equivalents, $8.8 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 $17 million of cash and cash equivalents, which is used for day-to-day working capital purposes. At a minimum, we intend to maintain one month of expenses and debt service at each of our properties. The aggregate mortgage debt for our wholly owned properties combined with our pro rata share of mortgage debt for our unconsolidated joint ventures total $659 million, has a weighted average interest rate of approximately 4% and a weighted average remaining term to maturity of seven years. On March 11th, Our board approved our quarterly dividend of 22 cents per share, which is equivalent to an annualized yield of 4.9% based on our stock price of $18.04 as of the close of business on March 10th, 2021. We are optimistic about the year ahead, but are approaching the market in the near term with caution as we continue to actively monitor our portfolio. We remain focused and determined as a company, and I am proud of the team's effort, particularly in these unusual times. We are pleased with our performance to date and will stay diligent as we continue throughout the year. Thank you for joining us today on our conference call. And with that, I'll turn the call over to the operator for your questions. Operator?

Thank you. At this time, we'll be conducting the 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 Gaurav Mehta with National Security. Please proceed with your question.

Yeah, thanks. Good morning. First question on the dispositions. I was hoping if you could provide some more color on the drivers for selling those two properties and maybe touch upon the kind of pricing you received.

Yes. Good morning, Gaurav. How are you? Yes, sure. So basically, there are times that we've obviously considered sales. In this particular case, these were both properties that we considered to be sort of at the end of our investment life in that we were seeing and having margin concerns as to operating expenses going up, somewhat older properties in need of capital improvements. And as far as our concern is value-add possibilities, we're limited. So in these two particular cases, we move forward to sell these assets. Our partner believed in more of a positive growth opportunity, and one we're selling to the partner and the other we're selling to third parties. And we're happy with both outcomes. Cap rates, as you know, are as low as I've seen them, even pre-COVID. So the cap rates and the returns that we've got on our NOI and anticipated NOI were in the low fours. So we were very pleased with that.

Okay, great. Second question, I was hoping if you could comment on the new and renewal rates that you're getting in your market, maybe post-fourth quarter. I'm sorry, I didn't hear your question. the new and renewal rates that you're getting in your markets for your portfolio?

Renewal, yeah. Renewal rates, it's a really property-specific response. Some we're getting, frankly, minimal. We're in the typical 45% to 50%, and some, I would say, are higher. Ryan, I think Ryan has a better specific answer.

Yeah, hey, Gaurav. So also just in terms of new leases and renewals in terms of the actual rent increase, we've seen about 2% to 3% year over year. As Jeff mentioned, it is property-specific in properties where we feel there might be more occupancy pressure. We've kept rents relatively flat. And in other properties where occupancy has been strong, we've been able to push rents. So we're very pleased with the 2% to 3%. In fact, we were expecting it to be a little bit less. We were pleased with the performance of the portfolio for the year. So we were in the 2% to 3% on both the renewals and new leases on a blended basis.

And as far as renewal percentage, I mean, with COVID and all, people have been less likely for sure to move. So we've had a higher percentage generally than we had pre-COVID.

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

All right, thank you.

Thank you. Our next question comes in line of Jim Sullivan with BTID. Please proceed with your question.

Thank you. Jeff, you ended your prepared comments with the general comment on the outlook saying that you were optimistic for the coming year. And I wonder if you could just tell us what kind of, well, maybe the two or three things that that give you that optimism about 2021?

Yeah, well, I think what we're doing now at this point, as I said, it's a difficult environment to buy. Hopefully that will change over the, you know, maybe three to six months from now. But right now, spreads where cap rates are make it difficult to acquire property. With that being said, we are considering a few more sales. and taking advantage of the opportunities we have with these cap rates being where they are. You know, with potential proceeds from these sales, I think we will look into acquisitions. And if they're timely and make sense, we're going to do it. We're going to look at possible partner buyouts, which could be a real interesting opportunity for us. And we're considering using some of the proceeds to, as a deleverage scenario, which we believe on a long-term basis will be beneficial to the company. You know, taking some embedded unrealized gains, I think at this point, is a worthwhile endeavor where we think that either the value-add component of the deal has been completed. We have a few jobs that we've really done a great job completing the value-add strategy. And... And those may be opportunities for potential sale. But we believe that there'll be rental breakthrough. We believe in the economy coming back with vaccines. And we're pretty excited about the year ahead, 2021. I will say that we probably will have, and we anticipate on the negative side, some tax and insurance increases for 2021, which will affect AFFO. And we had some favorable tax outcomes this past year. And we continue to fight taxes and insurance. But those are one areas where I'm not thrilled about. But it's the way it is. But obviously, everyone should know that we do anticipate that as a possibility. But we think the road ahead in the coming months, again, with vaccine, the economy coming back, is a great opportunity. And we're excited about what's ahead.

Jeff, kind of in that vein, when you talk about selling assets and buying assets, I wonder if you could kind of give us your sense for which markets you're the most optimistic about in the, you know, the next one or two years in terms of internal growth. And conversely, you know, which markets where you currently have exposure you might be looking to lighten up?

Yeah, good question. We like our footprint a lot. We are, you know, we're obviously dedicated and really focused on the southeast, which is The place to be, as far as we're concerned, and people, I think, are starting to recognize that more and more, the flight of money going to the southeast is quite incredible. So I think we're going to stay in our general footprint, an area that we like where there's population growth, where there's employment growth. So the areas that you see in our supplemental and you see we're basically going from Texas through the southeast up through the mid-Atlantic, We are considering one or two new markets, but I think we're pretty much, for the most part, are going to stay in our foothold where we believe and we know how to operate and have positive tailwinds. As far as, I guess, markets that we don't want to be in, everyone has read about core markets, and that's never something we've been involved in. I will say that downtown St. Louis is one property in our portfolio that that we're not pleased with. It's just it's the typical story of what's going on in core markets, where people aren't living and working downtown. And that particular property has suffered a little bit. Fortunately, that's one of the only or few that we're concerned about. I think it will bounce back again as the vaccines come back. But I would say probably St. Louis is a market that we're not particularly thrilled with right now. But Yeah, as to come, that's where we're going to basically stay where we are for the most part.

And just – go ahead. Sure. Just kind of follow up on that. Obviously, you mentioned the strife of the Sunbelt. You do have a presence in Ohio. Are you content with that market and likely to continue to hold that and or expand your position in Ohio?

Yeah, Ohio has been interesting, and obviously you're right. It's an outlier for us. We love the asset. How we got there is through a partner. But long story short, we now own the asset. It's got long-term, very long-term HUD financing. The property performed exceptionally well. We have very low rate for a long period of time in a very good market. So, no, I don't plan on getting it. As a matter of fact, we've gotten lots of inquiries about selling that asset as well as others. And we have no interest in selling it right now. We think it's a great long-term hold. So that is one that's going to kind of stick out. as outside of the southeast market, but one that we like a lot.

Okay, great. Thanks.

You're welcome. 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, I just want to thank you all for joining us today and for your continued support. I ask that you all stay safe and have a good day. Thank you.

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