Notes to Consolidated Financial Statements
June 30, 2017
Note 1 – Organization and Background
BRT Apartments Corp. (the "Company"), a Maryland corporation, is the successor to BRT Realty Trust, a Massachusetts business trust, pursuant to the conversion on March 18, 2017, of BRT Realty Trust into BRT Apartments Corp. The conversion had no impact on the Company's business or management and was treated as a tax-free exchange under relevant Internal Revenue Service regulations.
The Company owns, operates and develops multi‑family properties and owns and operates other assets, including real estate and a real estate loan. 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 venture partners in transactions in which the Company contributes
70%
to
80%
of the equity. At
June 30, 2017
, the Company owns: (a)
35
multi-family properties with
9,890
units (including
445
units at
two
properties in the lease up stage and
402
units at a property under construction), located in
11
states with a carrying value of
$901,084,000
; and (b) interests in
two
unconsolidated multi-family joint ventures with a carrying value of
$13,925,000
.
The Company also owns and operates various other real estate assets. At
June 30, 2017
, the carrying value of these other real estate assets was
$16,182,000
, including a real estate loan of
$5,650,000
.
Note 2 – Basis of Preparation
The accompanying interim unaudited consolidated financial statements as of
June 30, 2017
, and for the
three and nine
months ended
June 30, 2017
and
2016
, 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, 2017
and
2016
, are not necessarily indicative of the results for the full year. The consolidated balance sheet as of
September 30, 2016
, 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 inter-company 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. 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 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 Dallas, TX and St. Louis, MO were determined not to be a VIEs but are consolidated because the Company has substantive participating 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.
For the
three and nine
months ended June 30, 2016, the Company reclassified approximately
$1,043,000
and
$3,126,000
of tenant utility reimbursements from real estate operating expenses to rental and other revenues from real estate properties to conform with the current period presentation. This reclassification increased total revenues and expenses by
$1,043,000
and
$3,126,000
, respectively, and had no effect on the Company's financial position, results of operations or cash flows.
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 Stock Dividend Distribution
During the
three and nine
months ended
June 30, 2017
and
2016
, the Company did not declare a dividend on its shares.
Stock Based Compensation
The Company's Amended and Restated 2016 Incentive Plan (the "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
Pursuant to the Plan, in June 2016, the Company issued restricted stock units (the "Units") to acquire up to
450,000
shares of common stock (the "Pay for Performance Program"). In March 2021, recipients of the Units are entitled to receive (i) the underlying shares if certain performance metrics 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. Because the Units are not participating securities, for financial statement purposes, 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 are contingently issuable shares but have not been included in the diluted earnings per share as the performance and market criteria have not been met.
Expense is recognized over the
five
year vesting period on the Units which the Company expects to vest. The Company recorded
$110,000
and
$329,000
of compensation expense related to the amortization of unearned compensation with respect to the Units in the
three and nine
months ended
June 30, 2017
, respectively, and
$50,000
in both the
three and nine
months ended
June 30, 2016
. At
June 30, 2017
and September 30, 2016,
$1,643,000
and
$1,972,000
, respectively, has been deferred and will be charged to expense over the remaining vesting period.
Restricted Stock
In January 2017, the Company granted
147,500
shares of restricted stock pursuant to the Plan.
As of
June 30, 2017
, an aggregate of
689,375
shares of unvested restricted stock are outstanding pursuant to the 2016 Incentive Plan and the 2012 Incentive Plan (the "Prior Plan").
No
additional awards may be granted under the Prior Plan. All 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, 2017
and
2016
, the Company recorded $
243,000
and
$221,000
, respectively, of compensation expense related to the amortization of unearned compensation with respect to the restricted stock awards. For the nine months ended
June 30, 2017
and
2016
, the Company recorded
$1,063,000
and
$639,000
, respectively, of compensation expense related to the amortization of unearned compensation with respect to the restricted stock awards. At
June 30, 2017
and September 30, 2016, $
2,599,000
and
$2,089,000
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 vesting period of these shares of restricted stock is
2.6
years.
Stock Buyback
On March 11, 2016, the Board of Directors approved a repurchase program authorizing the Company to repurchase up to
$5,000,000
of shares of common stock through September 30, 2017. During the
nine
months ended
June 30, 2017
, the Company purchased
21,304
shares of common stock at an average market price of
$8.14
per share for a purchase price of approximately
$171,000
.
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 common shares 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 shares were exercised or converted into common shares or resulted in the issuance of common shares that share in the earnings of the Company. Diluted earnings (loss) per share is determined by dividing net income (loss) applicable to common stockholders for the applicable period by the weighted average number of shares of common stock outstanding during such period. For the three and
nine
months ended
June 30, 2017
, 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,
2017
and
2016
, were
14,035,074
and
13,932,515
, respectively, and for the
nine
months ended
June 30, 2017
and
2016
, were
13,983,495
and
14,055,436
, respectively.
Note 4 ‑ Real Estate Properties
Real estate properties (including properties held for sale) consist of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
September 30, 2016
|
Land
|
|
$
|
141,215
|
|
|
$
|
128,409
|
|
Building
|
|
799,849
|
|
|
684,133
|
|
Building improvements
|
|
31,254
|
|
|
25,717
|
|
Real estate properties
|
|
972,318
|
|
|
838,259
|
|
Accumulated depreciation
|
|
(60,703
|
)
|
|
(44,687
|
)
|
Total real estate properties, net
|
|
$
|
911,615
|
|
|
$
|
793,572
|
|
A summary of real estate properties owned (including properties held for sale) follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
Balance
|
|
Additions
|
|
Capitalized Costs and Improvements
|
|
Depreciation
|
|
Sales
|
|
June 30, 2017
Balance
|
Multi-family
|
$
|
783,085
|
|
|
$
|
224,449
|
|
|
$
|
7,136
|
|
|
$
|
(21,548
|
)
|
|
$
|
(92,037
|
)
|
|
$
|
901,085
|
|
Land - Daytona, FL
|
8,021
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8,021
|
|
Shopping centers/Retail - Yonkers, NY
|
2,466
|
|
|
|
|
|
125
|
|
|
(82
|
)
|
|
—
|
|
|
2,509
|
|
Total real estate properties
|
$
|
793,572
|
|
|
$
|
224,449
|
|
|
$
|
7,261
|
|
|
$
|
(21,630
|
)
|
|
$
|
(92,037
|
)
|
|
$
|
911,615
|
|
The following table summarizes the preliminary allocations of the purchase price of
eight
properties purchased between August 1, 2016 and
June 30,
2017 and the finalized allocation of the purchase price of such properties, as adjusted as of
June 30,
2017 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preliminary Purchase Price Allocation
|
|
Adjustments
|
|
Finalized Purchase Price Allocation
|
Land
|
|
$
|
35,743
|
|
|
$
|
(1,550
|
)
|
|
$
|
34,193
|
|
Building and improvements
|
|
276,122
|
|
|
341
|
|
|
276,463
|
|
Acquisition-related intangible assets
|
|
3,013
|
|
|
1,209
|
|
|
4,222
|
|
Total consideration
|
|
$
|
314,878
|
|
|
$
|
—
|
|
|
$
|
314,878
|
|
Depreciation expense recorded related to purchase price allocation adjustments were
$0
and
$784,000
for the three and nine months ended June 30, 2017, respectively.
Note 5 ‑ Acquisitions and Dispositions
Property Acquisitions
The table below provides information for the
nine
months ended
June 30,
2017
regarding the Company's purchases of multi-family properties (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location
|
|
Purchase Date
|
|
No. of Units
|
|
Purchase Price
|
|
Acquisition Mortgage Debt
|
|
Initial BRT Equity
|
|
Ownership Percentage
|
|
Capitalized Acquisition Costs
(b)
|
Fredricksburg, VA
|
|
11/4/2016
|
|
220
|
|
|
$
|
38,490
|
|
|
$
|
29,900
|
|
|
$
|
8,720
|
|
|
80
|
%
|
|
$
|
643
|
|
St. Louis, MO
|
|
2/28/2017
|
|
53
|
|
|
8,000
|
|
|
6,200
|
|
|
2,002
|
|
|
75.5
|
%
|
|
134
|
|
St. Louis, MO
|
|
2/28/2017
|
|
128
|
|
|
27,000
|
|
|
20,000
|
|
|
6,001
|
|
|
75.5
|
%
|
|
423
|
|
Creve Coeur, MO
|
|
4/4/2017
|
|
174
|
|
|
39,600
|
|
|
29,000
|
|
|
9,408
|
|
|
78
|
%
|
|
569
|
|
West Nashville, TN (a)
|
|
6/2/2017
|
|
402
|
|
|
5,228
|
|
|
—
|
|
|
4,800
|
|
|
58
|
%
|
|
—
|
|
Farmers Branch, TX
|
|
6/29/2017
|
|
509
|
|
|
85,698
|
|
|
55,200
|
|
|
16,200
|
|
|
50
|
%
|
|
992
|
|
|
|
|
|
1,486
|
|
|
$
|
204,016
|
|
|
$
|
140,300
|
|
|
$
|
47,131
|
|
|
|
|
$
|
2,761
|
|
_______________________________
(a) This
44.0
acre land parcel was purchased for development.
(b) See Note 15.
The table below provides information for the nine months ended
June 30, 2016
regarding the Company's purchases of multi-family properties (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location
|
|
Purchase Date
|
|
No. of Units
|
|
Purchase Price
|
|
Acquisition Mortgage Debt
|
|
Initial BRT Equity
|
|
Ownership Percentage
|
|
Expensed 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
41.5
acre land parcel was purchased for development. The initial equity includes funds contributed in connection with commencement of construction.
Property Dispositions
The following table is a summary of the real estate properties disposed of by the Company in the
nine
months ended
June 30,
2017 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location
|
Sale
Date
|
|
No. of
Units
|
|
Sales Price
|
|
Gain on Sale
|
|
Non-controlling partner portion of gain
|
Greenville, NC
|
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
|
|
In July 2017, the Company sold
three
properties located in Humble and Pasadena, Texas for
$39,000,000
. The Company anticipates recognizing, in the quarter ending September 30, 2017, an aggregate gain on the sale of the properties of approximately
$16,700,000
, of which approximately
$7,400,000
will be allocated to non-controlling interests. In connection with the sale, we also incurred approximately
$662,000
of mortgage prepayment costs of which approximately
$290,000
will be allocated to non-controlling interests.
The following table is a summary of the real estate properties disposed of by the Company 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
|
|
Note 6 –Real Estate Loan
As a result of the sale of the Company's interest in the Newark Joint Venture in February 2016, the mortgage loan owed to the Company by the venture (the "NJV Loan Receivable"), which, prior to the sale, was eliminated in consolidation, is reflected as a real estate loan on the consolidated balance sheets. At September 30, 2016, the principal balance of the NJV Loan Receivable was
$19,500,000
.
In February 2017, the Company received (i) a
$13,600,000
principal paydown of the NJV Loan Receivable and (ii)
$2,606,000
, representing all the interest (
i.e.
, current and deferred) due through the repayment date. In connection with this transaction, the Company released certain properties from the mortgages securing the NJV Loan Receivable. This receivable, bears interest, payable monthly at a rate of
11%
per year, is secured by several properties in Newark, NJ, and matures in October 2017. At
June 30, 2017
, the principal balance of the NJV Loan Receivable is
$5,650,000
.
Note 7 - Real Estate Property Held For Sale
At June 30, 2017,
three
properties located in Humble and Pasadena, TX are under contract for sale and are classified as real estate properties held for sale. The properties have an aggregate carrying value of
$21,515,000
. The sale of these properties was completed in July 2017.
At September 30, 2016, the Sandtown Vista property in Atlanta, GA and the Spring Valley property in Panama City, FL were held for sale. The Sandtown Vista property, which had a carrying value of
$27,076,000
, was sold on November 21, 2016. The Spring Valley property, which had a carrying value
$6,920,000
, was sold on October 26, 2016.
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
During the
nine
months ended
June 30, 2017
, the Company purchased interests in
two
unconsolidated joint ventures: (i) a
$5,670,000
investment for a
32%
interest in a venture which owns a
374
unit multi-family property; and (ii) an
$8,665,000
investment for a
46%
interest in a venture that contemplates the construction of
339
multi-family units. The properties owned by these ventures are located in Columbia, SC. Construction financing for this development project has been secured.
Note 10 – Debt Obligations
Debt obligations consist of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
September 30, 2016
|
Mortgages payable
(a)
|
|
$
|
698,091
|
|
|
$
|
621,382
|
|
Junior subordinated notes
|
|
37,400
|
|
|
37,400
|
|
Deferred mortgage costs
|
|
(7,141
|
)
|
|
(6,275
|
)
|
Total debt obligations, net of deferred costs
|
|
$
|
728,350
|
|
|
$
|
652,507
|
|
___________________________________
(a) Excludes mortgages payable held for sale of
$27,052,000
at September 30, 2016.
Mortgages Payable
During the
nine
months ended
June 30, 2017
, the Company obtained the following mortgage debt in connection with the following property acquisitions (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location
|
|
Closing Date
|
|
Acquisition Mortgage Debt
|
|
Interest Rate
|
|
Interest only period
|
|
Maturity Date
|
|
Fredricksburg, VA
|
|
11/4/16
|
|
$
|
27,639
|
|
|
3.68
|
%
|
|
N/A
|
|
February 2027
|
|
Fredricksburg, VA
|
|
11/4/16
|
|
2,261
|
|
|
4.84
|
%
|
|
N/A
|
|
February 2027
|
|
St. Louis, MO
|
|
2/28/17
|
|
20,000
|
|
|
4.79
|
%
|
|
6 years
|
|
March 2027
|
|
St. Louis, MO
|
|
2/28/17
|
|
6,200
|
|
|
4.84
|
%
|
|
6 years
|
|
March 2027
|
|
Creve Coeur, MO
|
|
4/4/17
|
|
29,000
|
|
|
LIBOR + 2.50%
|
|
|
N/A
|
|
July 2018
|
(a)
|
Farmers Branch, TX
|
|
6/29/17
|
|
55,200
|
|
|
4.22
|
%
|
|
5 years
|
|
July 2028
|
|
|
|
|
|
$
|
140,300
|
|
|
|
|
|
|
|
|
|
(a) Mortgage contains nine month extension option.
During the
nine
months ended
June 30, 2017
, the Company 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
|
Decatur, GA
|
|
5/30/17
|
|
$
|
4,941
|
|
|
5.32
|
%
|
|
December 2022
|
The Company has
two
construction loans that have been, or will be, used to finance
two
separate construction projects. Information regarding these loans at June 30, 2017 is set forth below(dollars in thousand):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location
|
|
Closing Date
|
|
Maximum Loan Amount
|
|
Amount outstanding
|
|
Interest Rate
|
|
Maturity Date
|
|
Extension Option
|
N Charleston, SC (1)
|
|
10/13/2015
|
|
$
|
30,265
|
|
|
$
|
27,289
|
|
|
LIBOR + 1.70%
|
|
10/13/2019
|
|
1 year
|
Nashville,TN
|
|
6/2/2017
|
|
47,426
|
|
|
—
|
|
|
LIBOR + 2.85%
|
|
6/2/2020
|
|
N/A
|
|
|
|
|
$
|
77,691
|
|
|
$
|
27,289
|
|
|
|
|
|
|
|
(1) This property is currently in lease up.
Junior Subordinated Notes
At
June 30, 2017
and
September 30, 2016
, the Company's junior subordinated notes had an outstanding principal balance of
$37,400,000
, before deferred financing costs of
$387,000
and $
402,000
, respectively. At
June 30, 2017
, the interest rate on the outstanding balance is
three
month LIBOR +
2.00%
or
3.17%
.
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, including the amortization of deferred costs, for the three months ended
June 30, 2017
and
2016
, was
$300,000
and
$322,000
, respectively, and for the
nine
months ended
June 30, 2017
and
2016
, was
$862,000
and
$1,248,000
, respectively.
Note 11 – Related Party Transactions
Majestic Property Management Corp., a related party, provides management services to the Company for certain properties owned by the Company and joint ventures in which the Company participates. These fees amounted to
$9,000
and
$7,000
for the
three months ended June 30, 2017
and
2016
, and
$25,000
and
$26,000
for the
nine
months ended
June 30, 2017
and
2016
, respectively.
The allocation of expenses for the shared facilities, personnel and other resources used by the Company is determined in accordance with a shared services agreement by and among the Company and related parties. Amounts paid pursuant to the agreement are included in general and administrative expenses on the consolidated statements of operations. The Company reimbursed Gould Investors L.P., a related party,
$84,000
and
$47,000
, for the
three months ended June 30, 2017
and
2016
, respectively, and
$266,000
and
$134,000
for the
nine
months ended
June 30, 2017
and
2016
, respectively, for services provided under the agreement.
Management of many of the Company's multi-family properties (including
two
unconsolidated multi-family properties) is performed by the Company's joint venture partners or their affiliates (none of these joint venture partners is Gould Investors L.P. or its affiliates). Management fees to these related parties for the three months ended
June 30, 2017
and 2016 were
$726,000
and
$525,000
, respectively, and for the nine months ended
June 30, 2017
and 2016, were
$2,022,000
and
$1,312,000
, 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. Acquisition fees to these related parties for the
three months ended June 30, 2017
and
2016
, were
$1,255,000
and
$892,000
, respectively, and for the
nine
months ended June 30, 2017 and
2016
were
$1,904,000
and
$1,331,000
, respectively.
During the three months ended December 31, 2015, the Company borrowed
$8,000,000
from Gould Investors L.P., a related party. Interest for the three and
nine
months ended
June 30,
2016 was
$62,000
and
$86,000
, respectively. This loan was repaid on February 24, 2016.
Note 12 - Segment Reporting
Management determined that the Company 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 Company's other real estate assets and a real estate loan.
The following tables summarize the Company's segment reporting for the periods indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2017
|
|
|
Multi-Family
Real Estate
|
|
Other
Assets
|
|
Total
|
Revenues:
|
|
|
|
|
|
|
Rental and other revenues from real estate properties
|
|
$
|
26,269
|
|
|
$
|
404
|
|
|
$
|
26,673
|
|
Other income
|
|
—
|
|
|
188
|
|
|
188
|
|
Total revenues
|
|
26,269
|
|
|
592
|
|
|
26,861
|
|
Expenses:
|
|
|
|
|
|
|
Real estate operating expenses
|
|
13,142
|
|
|
141
|
|
|
13,283
|
|
Interest expense
|
|
7,054
|
|
|
126
|
|
|
7,180
|
|
General and administrative
|
|
2,263
|
|
|
46
|
|
|
2,309
|
|
Depreciation
|
|
7,532
|
|
|
29
|
|
|
7,561
|
|
Total expenses
|
|
29,991
|
|
|
342
|
|
|
30,333
|
|
Total revenue less total expenses
|
|
(3,722
|
)
|
|
250
|
|
|
(3,472
|
)
|
Equity in (loss) earnings from unconsolidated joint ventures
|
|
(331
|
)
|
|
24
|
|
|
(307
|
)
|
(Loss) income from continuing operations
|
|
(4,053
|
)
|
|
274
|
|
|
(3,779
|
)
|
Provision for taxes
|
|
41
|
|
|
—
|
|
|
41
|
|
(Loss) income from continuing operation, net of taxes
|
|
(4,094
|
)
|
|
274
|
|
|
(3,820
|
)
|
Net loss (income) attributable to non-controlling interests
|
|
451
|
|
|
(33
|
)
|
|
418
|
|
Net loss attributable to common stockholders
|
|
$
|
(3,643
|
)
|
|
$
|
241
|
|
|
$
|
(3,402
|
)
|
Segment Assets at June 30, 2017
|
|
$
|
962,259
|
|
|
$
|
17,125
|
|
|
$
|
979,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2016
|
|
|
Multi-Family
Real Estate
|
|
Other Assets
|
|
Total
|
Revenues:
|
|
|
|
|
|
|
Rental and other revenues from real estate properties
|
|
$
|
23,323
|
|
|
$
|
356
|
|
|
$
|
23,679
|
|
Other income
|
|
—
|
|
|
608
|
|
|
608
|
|
Total revenues
|
|
23,323
|
|
|
964
|
|
|
24,287
|
|
Expenses:
|
|
|
|
|
|
|
Real estate operating expenses
|
|
11,831
|
|
|
155
|
|
|
11,986
|
|
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
|
|
27,400
|
|
|
252
|
|
|
27,652
|
|
Total revenues 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
|
|
Income from continuing operations
|
|
6,572
|
|
|
712
|
|
|
7,284
|
|
Net income attributable to non-controlling interests
|
|
(1,776
|
)
|
|
(28
|
)
|
|
(1,804
|
)
|
Net income attributable to common stockholders
|
|
$
|
4,796
|
|
|
$
|
684
|
|
|
$
|
5,480
|
|
Segment Assets at June 30, 2016
|
|
$
|
757,522
|
|
|
$
|
30,599
|
|
|
$
|
788,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended June 30, 2017
|
|
|
Multi-Family
Real Estate
|
|
Other
Assets
|
|
Total
|
Revenues:
|
|
|
|
|
|
|
Rental and other revenues from real estate properties
|
|
$
|
75,229
|
|
|
$
|
1,175
|
|
|
$
|
76,404
|
|
Other income
|
|
(9
|
)
|
|
989
|
|
|
980
|
|
Total revenues
|
|
75,220
|
|
|
2,164
|
|
|
77,384
|
|
Expenses:
|
|
|
|
|
|
|
Real estate operating expenses
|
|
37,241
|
|
|
397
|
|
|
37,638
|
|
Interest expense
|
|
19,016
|
|
|
1,253
|
|
|
20,269
|
|
General and administrative
|
|
7,150
|
|
|
146
|
|
|
7,296
|
|
Depreciation
|
|
21,547
|
|
|
83
|
|
|
21,630
|
|
Total expenses
|
|
84,954
|
|
|
1,879
|
|
|
86,833
|
|
Total revenue less total expenses
|
|
(9,734
|
)
|
|
285
|
|
|
(9,449
|
)
|
Equity in (loss) earnings from unconsolidated joint ventures
|
|
(331
|
)
|
|
24
|
|
|
(307
|
)
|
Gain on sale of real estate
|
|
35,389
|
|
|
449
|
|
|
35,838
|
|
Loss on extinguishment of debt
|
|
(799
|
)
|
|
—
|
|
|
(799
|
)
|
Income from continuing operations
|
|
24,525
|
|
|
758
|
|
|
25,283
|
|
Provision for taxes
|
|
1,470
|
|
|
29
|
|
|
1,499
|
|
Income from continuing operations, net of taxes
|
|
23,055
|
|
|
729
|
|
|
23,784
|
|
Net income attributable to non-controlling interests
|
|
(15,544
|
)
|
|
(101
|
)
|
|
(15,645
|
)
|
Net income attributable to common stockholders
|
|
$
|
7,511
|
|
|
$
|
628
|
|
|
$
|
8,139
|
|
Segment Assets at June 30, 2017
|
|
$
|
962,259
|
|
|
$
|
17,125
|
|
|
$
|
979,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended June 30, 2016
|
|
|
Multi-Family
Real Estate
|
|
Other Assets
|
|
Total
|
Revenues:
|
|
|
|
|
|
|
Rental and other revenues from real estate properties
|
|
$
|
68,961
|
|
|
$
|
1,030
|
|
|
$
|
69,991
|
|
Other income
|
|
—
|
|
|
2,641
|
|
|
2,641
|
|
Total revenues
|
|
68,961
|
|
|
3,671
|
|
|
72,632
|
|
Expenses:
|
|
|
|
|
|
|
Real estate operating expenses
|
|
34,729
|
|
|
448
|
|
|
35,177
|
|
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
|
|
77,846
|
|
|
925
|
|
|
78,771
|
|
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 stockholders before reconciling adjustment
|
|
$
|
10,767
|
|
|
$
|
4,936
|
|
|
15,703
|
|
Reconciling adjustment:
|
|
|
|
|
|
|
Discontinued operations, net of non-controlling interest
|
|
|
|
|
|
12,679
|
|
Net income attributable to common stockholders
|
|
|
|
|
|
$
|
28,382
|
|
Segment Assets at June 30, 2016
|
|
$
|
757,522
|
|
|
$
|
30,599
|
|
|
$
|
788,121
|
|
Note 13 – 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, 2017
and
September 30, 2016
, the estimated fair value of the notes is lower than their carrying value by approximately
$15,939,000
and
$16,549,000
based on a market interest rate of
6.76%
and
6.37%
, respectively.
Mortgages payable: At
June 30, 2017
, the estimated fair value of the Company’s mortgages payable is lower than their carrying value by approximately
$11,880,000
assuming market interest rates between
3.78%
and
5.02%
and at
September 30, 2016
, the estimated fair value of the Company's mortgages payable was greater than their carrying value by approximately
$10,629,000
assuming market interest rates between
3.05%
and
4.25%
. 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 Measured 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, 2017
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying and Fair Value
|
|
Fair Value Measurements
Using Fair Value Hierarchy
|
|
|
Level 1
|
|
Level 2
|
Financial Assets:
|
|
|
|
|
|
Interest rate swaps
|
$
|
1,489
|
|
|
—
|
|
|
$
|
1,489
|
|
|
|
|
|
|
|
Financial Liabilities:
|
|
|
|
|
|
Interest rate swap
|
$
|
17
|
|
|
—
|
|
|
$
|
17
|
|
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, 2017
, these derivatives are included in other assets and other accounts payable and accrued liabilities 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, 2017
, 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 14 – 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) 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 Company's variable-rate debt.
As of
June 30, 2017
, 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 swap
|
|
$
|
1,475
|
|
|
5.25
|
%
|
|
April 1, 2022
|
Interest rate swap
|
|
26,400
|
|
|
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, 2017
|
|
September 30, 2016
|
Balance Sheet Location
|
|
Fair Value
|
|
Balance Sheet Location
|
|
Fair Value
|
Other Assets
|
|
$
|
1,489
|
|
|
Other Assets
|
|
$
|
—
|
|
Accounts payable and accrued liabilities
|
|
$
|
17
|
|
|
Accounts payable and accrued liabiltities
|
|
$
|
1,602
|
|
As of
June 30, 2017
, 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,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Amount of gain recognized on derivative in Other Comprehensive Income (loss)
|
|
$
|
(309
|
)
|
|
$
|
(906
|
)
|
|
$
|
2,739
|
|
|
$
|
(935
|
)
|
Amount of gain (loss) reclassified from Accumulated
Other Comprehensive Income (loss) into Interest Expense
|
|
$
|
(80
|
)
|
|
$
|
(50
|
)
|
|
$
|
(336
|
)
|
|
$
|
(65
|
)
|
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, 2017
and
June 30, 2016
. The Company estimates an additional
$126,000
will be reclassified from other comprehensive income (loss) as an increase 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.
As of
June 30, 2017
, the fair value of the derivative in a net liability position, which includes accrued interest, but excludes any adjustment for nonperformance risk related to these agreement, was
$17,000
. As of
June 30, 2017
, the Company has not posted any collateral related to these agreements. If the Company had been in breach of these agreements at
June 30, 2017
, it could have been required to settle its obligations thereunder at its termination value of
$17,000
.
Note 15 – New Accounting Pronouncements
In January 2017, the Financial Accounting Standards Board ("FASB") issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The ASU clarifies the definition of a business with the objective of adding guidance to assist companies and other reporting organizations with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or business combinations. The ASU is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. Early adoption is permitted. The Company elected early adoption effective for the quarter ended December 31, 2016. The Company's net income was favorably impacted as a result of the capitalization of acquisition costs - in prior periods, property acquisition costs were expensed during the period incurred. During the
three and nine
months ended
June 30, 2017
, capitalized acquisition costs were
$1,561,000
and
$2,761,000
, respectively, without giving effect to non-controlling interests.
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 Company is currently evaluating the impact of this new standard 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 periods beginning after December 15, 2015, including interim periods within those periods, with early adoption permitted. The Company adopted this guidance in the quarter December 31, 2016 and its adoption did not have a material effect on its consolidated financial statements.
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. 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 defines a five step process 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 thereafter, 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 retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). The Company is currently evaluating the impact of our pending adoption of ASU 2014-09 on our consolidated financial statements and have not yet determined the method by which it will adopt the standard in 2018.
Note 16 – Subsequent Events
Subsequent events have been evaluated and any significant events, relative to our consolidated financial statements as of
June 30, 2017
that warrant additional disclosure, have been included in the notes to the consolidated financial statements.