-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LYCdiBfPNah2X6byX3LnXQ/TknB6Igmsipm2FgqPXUTECgxC/kJWq06mVeyY6Oy9 M1riQLFRHCFysrOM+KUlZg== 0000014846-04-000017.txt : 20040513 0000014846-04-000017.hdr.sgml : 20040513 20040513170449 ACCESSION NUMBER: 0000014846-04-000017 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20040331 FILED AS OF DATE: 20040513 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BRT REALTY TRUST CENTRAL INDEX KEY: 0000014846 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 132755856 STATE OF INCORPORATION: MA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-07172 FILM NUMBER: 04803709 BUSINESS ADDRESS: STREET 1: 60 CUTTER MILL RD STREET 2: SUITE 303 CITY: GREAT NECK STATE: NY ZIP: 11021-3190 BUSINESS PHONE: 5164663100 FORMER COMPANY: FORMER CONFORMED NAME: BERG ENTERPRISES REALTY GROUP DATE OF NAME CHANGE: 19750724 10-Q 1 brt10q033104.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 2004 OR [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number 001-07172 BRT REALTY TRUST ---------------- (Exact name of Registrant as specified in its charter) Massachusetts 13-2755856 ------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 60 Cutter Mill Road, Great Neck, NY 11021 ------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (516) 466-3100 ------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act) Yes No X ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of stock, as of the latest practicable date. 7,650,295 Shares of Beneficial Interest, $3 par value, outstanding on May 10, 2004
Part 1 - FINANCIAL INFORMATION Item 1. Financial Statements BRT REALTY TRUST AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Amounts In Thousands) March 31, September 30, 2004 2003 ---- ---- (Unaudited) (Audited) ASSETS Real estate loans - Note 3: Earning interest, including $7,855 and $7,134 from related parties $101,411 $ 63,733 Not earning interest 5,590 3,145 -------- -------- 107,001 66,878 Allowance for possible losses (881) (881) -------- -------- 106,120 65,997 -------- -------- Real estate assets - Note 4: Real estate properties net of accumulated depreciation of $1,580 and $1,462 6,363 6,461 Investment in unconsolidated real estate ventures at equity 7,641 6,930 -------- -------- 14,004 13,391 Valuation allowance (325) (325) -------- -------- 13,679 13,066 -------- -------- Cash and cash equivalents 6,854 21,694 Securities available-for-sale at market - Note 5 44,855 36,354 Other assets 2,381 1,891 -------- -------- Total Assets $173,889 $139,002 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Borrowed funds - Note 6 $ 26,965 $ 4,755 Mortgage payable 2,645 2,680 Accounts payable and accrued liabilities, including deposits of $1,726 and $1,103 3,671 5,635 Dividends payable 3,443 - -------- -------- Total Liabilities 36,724 13,070 -------- -------- Shareholders' Equity - Note 2: Preferred shares, $1 par value: Authorized 10,000 shares, none issued - - Shares of beneficial interest, $3 par value: Authorized number of shares - unlimited, issued - 8,883 shares at each date 26,650 26,650 Additional paid-in capital 81,729 81,151 Accumulated other comprehensive income - net unrealized gain on available-for-sale securities 29,485 19,282 Unearned compensation (968) (406) Retained earnings 11,369 11,154 -------- -------- 148,265 137,831 Cost of 1,233 and 1,381 treasury shares of beneficial interest at each date (11,100) (11,899) -------- -------- Total Shareholders' Equity 137,165 125,932 -------- -------- Total Liabilities and Shareholders' Equity $173,889 $139,002 ======== ======== See Accompanying Notes to Consolidated Financial Statements.
BRT REALTY TRUST AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Amounts In Thousands except for Per Share Data) Three Months Ended Six Months Ended March 31, March 31, -------- --------- 2004 2003 2004 2003 ---- ---- ---- ---- Revenues: Interest and fees on real estate loans, including interest from related parties of $180 and $171 for the three month periods, respectively, and $351 and $372 for the six month periods, respectively $ 3,388 $ 2,222 $ 5,958 $ 5,132 Operating income on real estate owned 597 567 1,125 1,114 Other, primarily investment income 614 725 1,185 1,398 ------- -------- -------- ------- Total revenues 4,599 3,514 8,268 7,644 ------- ------- -------- ----- Expenses: Interest on borrowed funds 259 28 428 134 Advisor's fee 341 186 639 420 General and administrative 1,016 744 1,814 1,420 Other taxes 82 115 156 245 Operating expenses relating to real estate owned, including interest on mortgages of $63 and $64 for the three month periods, respectively, and $128 and $131 for the six month periods respectively 478 317 781 628 Amortization and depreciation 77 86 153 171 ------- ------- ------- ------- Total expenses 2,253 1,476 3,971 3,018 ------- ------- ------- ------- Income before equity in earnings of unconsolidated joint ventures and gain on sale 2,346 2,038 4,297 4,626 Equity in earnings of unconsolidated real estate ventures (2) 31 41 94 Net gain on sale of real estate assets - - 591 195 Net realized gain on sale of available-for -sale securities 917 146 1,637 146 ------- ------- ------- ------- Income before minority interest 3,261 2,215 6,566 5,061 Minority interest (10) (10) (21) (20) ------- ------- ------- ------- Net income $ 3,251 $ 2,205 $ 6,545 $ 5,041 ======= ======= ======= ======= Income per share of beneficial interest: Basic earnings per share $ .43 $ .30 $ .87 $ .68 ========= ========= ========= ========= Diluted earnings per share $ .42 $ .29 $ .85 $ .67 ========= ========= ========= ========= Cash distributions per common share $ .45 $ .30 $ .83 $ .60 ========= ========= ========= ========= Weighted average number of common shares outstanding: Basic 7,579,806 7,460,282 7,546,413 7,433,444 ========= ========= ========= ========= Diluted 7,696,940 7,571,689 7,684,184 7,553,921 ========= ========= ========= ========= See Accompanying Notes to Consolidated Financial Statements.
BRT REALTY TRUST AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited) (Amounts In Thousands except for Per Share Data) Accumulated Shares of Additional Other Com- Unearned Beneficial Paid-In prehensive Compen- Retained Treasury Interest Capital Income sation Earnings Shares Total --------- -------- ------ ------ -------- ------ ----- Balances, September 30, 2003 $26,650 $81,151 $19,282 $ (406) $11,154 $(11,899) $125,932 Distributions - common share ($.83 per share) - - - - (6,330) - (6,330) Exercise of stock options - (74) - - - 784 717 Issuance of restricted stock - 660 - (660) - - - Compensation expense - restricted stock - 7 - 98 - - 105 Restricted stock vesting - (15) - - - 15 - Net income - - - - 6,545 - 6,545 Other comprehensive income - net unrealized gain on available-for-sale securities (net of reclassi- fication adjustment for gains included in net income of $1,637) - - 10,203 - - - 10,203 ------ Comprehensive income - - - - - - 16,748 --------------------------------------------------------------------------------------- Balances, March 31, 2004 $26,650 $81,729 $29,485 $ (968) $11,369 $(11,100) $137,165 ======================================================================================= See Accompanying Notes to Consolidated Financial Statements.
BRT REALTY TRUST AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Amounts In Thousands) Six Months Ended March 31, 2004 2003 ---- ---- Cash flows from operating activities: Net income $ 6,545 $ 5,041 Adjustments to reconcile net income to net cash provided by operating activities: Amortization and depreciation 153 171 Restricted stock expense 105 - Net gain on sale of real estate loans and properties (591) (195) Net gain on sale of available-for-sale securities (1,637) (146) Equity in earnings of unconsolidated real estate ventures (41) (94) Increase in straight line rent (76) (76) Increases and decreases from changes in other assets and liabilities (Increase) Decrease in interest and dividends receivable (364) 88 (Increase) Decrease in prepaid expenses (44) 43 Increase (Decrease) in accounts payable and accrued liabilities 31 (427) Increase in deferred costs (75) - Increase (Decrease) in deferred revenues 235 (254) Increase (Decrease) in escrow deposits 358 (255) Other 43 (252) ------- ------- Net cash provided by operating activities 4,642 3,644 ------- ------- Cash flows from investing activities: Collections from real estate loans 46,220 47,902 Additions to real estate loans (86,343) (14,105) Net costs capitalized to real estate assets (84) (79) Proceeds from the sale of real estate 655 214 Investment in real estate ventures (790) (214) Purchase of available-for-sale securities - (1,935) Sales of available-for-sale securities 3,337 434 Increase in deposits payable 115 14 Partnership distributions 120 113 ------- ------- Net cash used in (provided by) investing activities (36,770) 32,344 ------- ------- Cash flows from financing activities: Net change in borrowed funds - credit facility 15,250 (9,245) Net change in borrowed funds - margin account 6,960 (5,500) Payoff/paydown of loan and mortgages payable (34) (32) Cash distribution - common shares (5,599) (2,238) Exercise of stock options 711 494 ------- ------- Net cash provided by (used in) financing activities 17,288 (16,521) ------- -------- Net (decrease) increase in cash and cash equivalents (14,840) 19,467 Cash and cash equivalents at beginning of period 21,694 4,688 ------- ------- Cash and cash equivalents at end of period $ 6,854 $24,155 ======= ======= Supplemental disclosure of cash flow information: Cash paid during the period for interest $ 504 $ 279 ======= ======= Non cash investing and financing activity: Accrued distributions $ 3,443 $ 2,238 ======= ======= See Accompanying Notes to Consolidated Financial Statements.
BRT REALTY TRUST AND SUBSIDIARIES Notes to Consolidated Financial Statements Note 1 - Basis of Preparation The accompanying interim unaudited consolidated financial statements as of March 31, 2004 and for the three and six months ended March 31, 2004 reflect all normal recurring adjustments which are, in the opinion of management, necessary for a fair statement of the results for such interim periods. The results of operations for the six months ended March 31, 2004 are not necessarily indicative of the results for the full year. Certain items on the consolidated financial statements for the preceding periods have been reclassified to conform with the current consolidated financial statements. The consolidated financial statements include the accounts of BRT Realty Trust, its wholly owned subsidiaries, and its majority-owned or controlled real estate entities. Investments in less than majority-owned entities have been accounted for using the equity method. Material intercompany items and transactions have been eliminated. BRT Realty Trust and its subsidiaries are hereinafter referred to as "BRT" or the "Trust". These statements should be read in conjunction with the consolidated financial statements and related notes which are included in BRT's Annual Report on Form 10-K for the year ended September 30, 2003. 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 financial statements. Actual results could differ from those estimates. Note 2 - Shareholders' Equity Distributions During the quarter ended March 31, 2004, BRT declared a cash distribution to shareholders of $.45 per share. This distribution totaled $3,443,000 and was payable April 1, 2004 to shareholders of record on March 23, 2004. Stock Options During the quarter ended March 31, 2004, 23,125 previously issued options were exercised. Proceeds from the exercise of these options totaled $192,000. The Trust adopted Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25), and related interpretations in accounting for its employee stock options. Under APB 25, no compensation expense is recognized because the exercise price of the Trust's employee stock options equaled the market price of the underlying stock on the date of grant. Note 2 - Shareholders' Equity (Continued) Pro forma information regarding net income and earnings per share is required by FAS No. 123, and has been determined as if the Trust had accounted for its employee stock options under the fair value method. The fair value for these options was estimated at the date of the grant using the Black-Scholes option pricing model with the following weighted-average assumptions for both 2004 and 2003: risk free interest rate of 4.43%, volatility factor of the expected market price of the Company's common stock based on historical results of .207, dividend yield of 5.5% and an expected option life of six years. Pro forma net income and earnings per share calculated using the Black-Scholes option valuation model is as follows:
Three Months Ended Six Months Ended March 31, March 31, --------- --------- 2004 2003 2004 2003 ---- ---- ---- ---- Net income to common shareholders as reported $3,251 $2,205 $6,545 $5,041 Less: Total stock-based employee compensation expense determined under fair value method for all awards 30 31 60 62 ------ ------ ------ ------ Pro forma net income $3,221 $2,174 $6,485 $4,979 ====== ====== ====== ====== Pro forma earnings per share of beneficial interest Basic $ .42 $ .29 $ .86 $ .67 ======== ======== ======== ======= Diluted $ .42 $ .29 $ .84 $ .66 ======== ======== ======== =======
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including expected stock price volatility. Because the Trust's employee stock options have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect the fair value estimated, management believes the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. Restricted Stock During the quarter ended March 31, 2004 the Trust issued 28,230 shares of restricted stock under its 2003 Incentive Plan. The 2003 Incentive Plan was approved by BRT's shareholders at the Annual Meeting of Shareholders' held in March, 2003. As of March 31, 2004 56,280 shares were issued under this plan. The total number of shares allocated to this plan is 350,000. The shares issued vest five years from the date of issuance and under certain circumstances may vest earlier. The Company records compensation expense under APB 25 over the vesting period, measuring the compensation cost based on the market value of the shares on the date of the award of the restricted stock. For the quarter and six months ended March 31, 2004, the Trust recorded $83,000 and $105,000 of compensation expense. This includes $39,000, for both the three and six month periods, of compensation expense recorded due to the accelerated vesting of 1,750 shares of restricted stock. Note 2 - Shareholders' Equity (Continued) Per Share Data Basic earnings per share was determined by dividing net income for the period by the weighted average number of shares of common stock outstanding during each period. 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 common stock or resulted in the issuance of common stock that then shared in the earnings of BRT. The following table sets forth the computation of basic and diluted shares:
Three Months Ended Six Months Ended March 31, March 31, --------- --------- 2004 2003 2004 2003 ---- ---- ---- ---- Basic 7,579,806 7,460,282 7,546,413 7,433,444 Effect of dilutive securities 120,134 111,407 137,771 120,477 ---------- ---------- ---------- ---------- Diluted 7,699,940 7,571,689 7,684,184 7,553,921 ========= ========= ========= =========
Note 3 - Real Estate Loans Management evaluates the adequacy of the allowance for possible losses periodically and believes that the allowance for losses is adequate to absorb probable losses on the existing portfolio. If all loans classified as non-earning were earning interest at their contractual rates for the three months ended March 31, 2004 and 2003, interest income would have increased by approximately $114,000 and $21,000, respectively. For the six month period ended March 31, 2004 and 2003, respectively, the increase would have been $217,000 and $42,000, respectively. During the three and six month periods ended March 31, 2004 the Trust collected $71,000 of interest on non-earning loans. Included in real estate loans are five second mortgages and two first mortgages to ventures in which the Trust (through wholly owned subsidiaries) holds a 50% interest. At March 31, 2004, the aggregate balance of these mortgage loans was $7,855,000. Interest earned on these loans totaled $180,000 and $182,000 for the three months ended March 31, 2004 and 2003, respectively. For the six months ended March 31, 2004 and 2003 interest earned on these loans totaled $351,000 and $372,000, respectively. As of March 31, 2004 there were three loans outstanding to one borrower. These loans totaled $29,440,000 which is approximately 28% of total loans and 18% of total assets. All three loans are collateralized by multi-family developments. Two of the loans with a balance at march 31, 2004 of $18,940,000 are collateralized by properties located in Florida and the remaining loan with a balance at March 31, 2004 of $10,500,000 is collateralized by a property in Tennessee. All three loans have an adjustable interest rate. Note 4 - Investment in Unconsolidated Joint Ventures at Equity The Trust is a partner in eight unconsolidated joint ventures which own and operate eight properties. In addition to making an equity contribution, the Trust may hold a first or second mortgage on the property owned by the venture. Unaudited condensed financial information for the two most significant joint ventures is shown below.
Blue Hen Venture March 31, September 30, 2004 2003 ---- ---- Condensed Balance Sheet Cash and cash equivalents $ 559 $ 1,211 Real estate investments, net 15,246 14,712 Other assets 292 409 -------- -------- Total assets $ 16,097 $ 16,332 ======== ======== Mortgages payable $ 2,630 $ 3,158 Other liabilities 197 266 Equity 13,270 12,908 -------- -------- Total liabilities and equity $ 16,097 $ 16,332 Trust's equity investment $ 5,579 $ 5,368 ======== ========
Three Months Ended Six Months Ended March 31, March 31, --------- --------- 2004 2003 2004 2003 ---- ---- ---- ---- Condensed Statement of Operations Revenues, primarily rental income $ 748 $ 753 $ 1,502 $ 1,442 ------- ------- ------- ------- Operating expenses 410 414 773 710 Depreciation 125 120 249 237 Interest expense 57 77 119 159 ------- ------- ------- ------- Total expenses 592 611 1,141 1,106 ------- ------- ------- ------- Net income attributable to members $ 156 $ 142 $ 361 $ 336 ======= ======= ======= ======= Trust's share of net income recorded in income statement $ 78 $ 71 $ 180 $ 168 ======= ======= ======= =======
The unamortized excess of the Trust's share of the net equity over its investment in the Blue Hen joint venture that is attributable to building and improvements is being amortized over the life of the related property. The portion that is attributable to land will be recognized upon the disposition of the land. Note 4 - Investment in Unconsolidated Joint Ventures at Equity (Continued)
Rutherford Glen March 31, September 30, 2004 2003 ---- ---- Condensed Balance Sheet Cash and cash equivalents $ 159 $ 195 Real estate investments, net 18,343 18,632 Other assets 247 293 -------- -------- Total assets $ 18,749 $ 19,120 ======== ======== Mortgages payable $ 18,864 $ 18,966 Other liabilities 371 481 Equity (486) (327) -------- -------- Total liabilities and equity $ 18,749 $ 19,120 ======== ======== Trust's equity investment $ (222) $ (120) ======== ========
Three Months Ended Six Months Ended March 31, March 31, --------- --------- 2004 2003 2004 2003 ---- ---- ---- ---- Condensed Statement of Operations Revenues, primarily rental income $ 587 $ 578 $ 1,165 $ 1,175 ------- ------- ------- ------- Operating expenses 278 264 566 491 Depreciation 182 182 364 364 Interest expense 362 364 719 731 ------- ------- ------- ------- Total expenses 822 810 1,649 1,586 ------- ------- ------- ------- Net income attributable to members $ (235) $ (232) $ (484) $ (411) ======== ======== ======== ======== Trust's share of net income recorded in income statement $ (118) $ (116) $ (242) $ (205) ======== ======== ======== ========
Note 5 - Available-For-Sale Securities Included in available-for-sale securities are 1,033,500 shares of Entertainment Properties Trust (NYSE:EPR), which have a cost basis of $13,575,000 and a fair value at March 31, 2004 of $42,280,485. The shares held by the Trust represent approximately 4.39% of the outstanding shares of Entertainment Properties Trust as of April 27, 2004. During the quarter ended March 31, 2004 the Trust sold 25,700 shares of EPR. These shares, which had a cost basis of $337,000, were sold for $995,000 resulting in a gain of $658,000. Also included in available-for-sale securities are 75,400 shares of Atlantic Liberty Financial Corp. (NASDAQ:ALFC), which have a cost basis of $1,145,000 and a fair market value of $1,459,000. The shares held by the Trust represent approximately 4.41% of the outstanding shares of Atlantic Liberty as of December 31, 2003. Note 5 - Available-For-Sale Securities (Continued) During the quarter ended March 31, 2004 the Trust sold 58,550 shares of ALFC. These shares, which had a cost basis of $889,000, were sold for $1,148,000 resulting in a gain of $259,000. Note 6 -Borrowed Funds On March 30, 2004 the Trust amended it's existing $30 million credit line with North Fork Bank primarily to increase the maximum borrowing to $45 million. The credit line has a maturity date of April 1, 2006. A fee of $75,000 was paid to North Fork Bank in connection with this amendment. The Trust may extend the term of the facility for two one year periods for a fee of $75,000. Borrowings under this facility are secured by specific receivables and the credit agreement provides that the amount borrowed will not exceed 65% of the collateral pledged. As of March 31, 2004 BRT had provided collateral that would permit BRT to borrow up to approximately $31,300,000 under the facility. At March 31, 2004 BRT had $16,250,000 outstanding under the facility. Interest charged on the outstanding balance is at prime plus 1/2%. For the three and six months ended March 31, 2004 the average outstanding balance on the credit line was $12,481,000 and $8,208,000, respectively, and interest expense for the three and six month periods ended March 31, 2004 was $141,000 and $188,000, respectively. In addition to its credit facility BRT has the ability to borrow funds through a margin account. In order to maintain the account BRT pays an annual fee, equal to .3% of the market value of the pledged securities, which is included in interest expense. At March 31, 2004, there was an outstanding balance under the facility of $10,715,000. The average outstanding balance for the three and six months ended March 31, 2004 was $11,249,000 and $9,915,000, respectively, and the average interest rate paid was 4.15% and 4.77%, respectively. Interest expense for the three and six months ended March 31, 2004 was $118,000 and $240,000, respectively, which includes the fees charged to maintain the margin account. At March 31, 2004, marketable securities with a fair value of $42,280,000 were pledged as collateral. Note 7 - Comprehensive Income
Comprehensive income for the three month period ended was as follows: Three Months Ended Six Months Ended March 31, March 31, --------- --------- 2004 2003 2004 2003 ---- ---- ---- ---- Net income $ 3,251 $ 2,205 $ 6,545 $ 5,041 Other comprehensive income - Unrealized gain on available - for-sale securities 5,677 3,870 10,203 5,796 ------- -------- ------- -------- Comprehensive income $ 8,928 $ 6,075 $16,748 $10,837 ======= ======= ======= =======
Accumulated other comprehensive income, which is solely comprised of the net unrealized gain on available-for-sale securities was $29,485,000 and $18,222,000 at March 31, 2004 and 2003, respectively. Note 8 - Recent Accounting Pronouncements Accounting for Stock-Based Compensation The Financial Accounting Standards Board issued Statement No. 148 to amend Statement No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, Statement No. 148 amends the disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. However, the Company has continued to account for options in accordance with the provision of APB Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations. See Note 2 for pro forma net income information. Consolidation of Variable Entities Interest In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, "Consolidation of Variable Interest Entities", which explains how to identify variable interest entities ("VIE") and how to assess whether to consolidate such entities. The provisions of this interpretation apply to the first fiscal year or interim period beginning after March 15, 2004. Management has reviewed its unconsolidated joint ventures to determine if any of them represent variable interest entities which would require consolidation by the Trust pursuant to the interpretation and had determined that none of its joint ventures meet the criteria for consolidation under the interpretation. Accounting for Certain Financial Instruments With Characteristics of Both Liabilities and Equity. In May, 2003 the FASB issued SFAS No. 150 "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity, and is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. As a result of further discussion by FASB on October 8, 2003, the FASB clarified that minority interests in consolidated partnerships with specified finite lives should be reclassified as liabilities and presented at fair market value unless the interests are convertible into the equity of the parent. Fair market value adjustments occurring subsequent to July 1, 2003 would be recorded as a component of interest expense. At their October 29, 2003 meeting, the FASB agreed to indefinitely defer the implementation of a portion of SFAS No. 150 regarding the accounting treatment for minority interests in finite life partnerships. Therefore, until a final resolution is reached, the Company will not implement this aspect of the standard. If the Company were to adopt this aspect of the standard under its current provisions, it is not expected to have a material impact on the Company's financial statements. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements With the exception of historical information, this report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933. We intend such forward-looking statements to be covered by the safe harbor provision for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and include this statement for purposes of complying with these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words "may", "will", "believe", "expect", "intend", "anticipate", "estimate", "project", or similar expressions or variations thereof. Forward-looking statements should not be relied on since they involve known and unknown risks, uncertainties and other factors which are, in some cases, beyond our control and which could materially affect actual results, performance or achievements. Investors are cautioned not to place undue reliance on any forward-looking statements. Liquidity and Capital Resources We are primarily engaged in the business of originating and holding for investment senior and junior real estate mortgages secured by income producing property. Our investment policy emphasizes short-term mortgage loans. We also purchase senior and junior participations in short term mortgage loans and originate participating mortgage loans and loans to joint ventures in which we are an equity participant. Repayments of real estate loans in the amount of $98,285,000 are due and payable to us during the twelve months ending March 31, 2005, including $5,590,000 currently not earning interest and due on demand. The availability of mortgage financing secured by real property and the market for selling real estate is cyclical. Since these are the principal sources for the generation of funds by our borrowers to repay our outstanding real estate loans, we cannot project the portion of loans maturing during the next twelve months which will be paid or the portion of loans which will be extended for a fixed term or on a month to month basis. We maintain a $45,000,000 revolving credit facility with North Fork Bank. Borrowings under the facility are secured by specific receivables and the agreement provides that the amount borrowed will not exceed 65% of qualified first mortgage loans pledged to North Fork Bank. As of March 31, 2004, we had provided collateral that would permit us to borrow $31,300,000 under the facility. Interest is charged on the outstanding balance at prime plus 1/2% (currently 4 1/2% per annum). The facility matures April 1, 2006 and may be extended, at our option, for two one year terms. At March 31, 2004, there was $16,250,000 outstanding on this facility. We also have the ability to borrow on margin, using the shares we own in Entertainment Properties Trust as collateral. At March 31, 2004 there was approximately $16,912,000 available under this facility, which at May 12, 2004 was approximately $13,543,000 due to a decline in the market value, of which $10,715,000 was outstanding. The amount available under the facility will be reduced if the market value of the stock of Entertainment Properties Trust declines. During the six months ended March 31, 2004, we generated cash of $4,642,000 from operations, $46,220,000 from real estate loan collections, $22,210,000 from borrowings on existing facilities and $3,337,000 from the sale of securities. These funds, in addition to cash on hand, were used primarily to fund real estate loan originations of $86,343,000 and pay shareholder dividends of $5,599,000. Our cash and cash equivalents were $6,854,000 at March 31, 2004. We will satisfy our liquidity needs from cash and liquid investments on hand, the credit facility with North Fork Bank, the availability in our margin account collateralized by shares of Entertainment Properties Trust, interest and principal payments received on outstanding real estate loans and net cash flow generated from the operation and sale of real estate assets. As of March 31, 2004 there were three loans outstanding to one borrower. These loans totaled $29,440,000 which is approximately 28% of total loans and 18% of total assets. Results of Operations Interest and fees on loans increased by $1,166,000, or 52%, to $3,388,000 for the three months ended March 31, 2004 from $2,222,000 for the three months ended March 31, 2003. During the current quarter the average balance of loans outstanding increased by approximately $45.7 million accounting for an increase in interest income of $1,266,000. A decrease in the average interest rate earned on the loan portfolio to 11.05% in the three months ended March 31, 2004 from 11.63% in the three months ended March 31, 2003 caused interest income to decrease by $89,000. We also realized a $81,000 increase in fee income in the current quarter primarily due to increased amortization resulting from the larger loan portfolio. This increase in fee income was offset by a $92,000 exit fee received on the payoff of a loan in the prior year's quarter. For the six months ended March 31, 2004, interest and fees on loans increased $826,000, or 16%, from $5,132,000 to $5,958,000. During the six months ended March 31, 2004 the average balance of loans outstanding increased by $22.3 million resulting in an increase in interest income of $1,256,000. A decrease in the average interest rate earned on the loan portfolio from 11.91% for the six months ended March 31, 2003 to 11.09% for the six months ended March 31, 2004 caused a decrease in interest income of $304,000. We also realized a $69,000 increase in the current quarter in fee income due primarily to increased amortization resulting from the larger loan portfolio. These increases was offset by a $92,000 exit fee received on the payoff of a loan and $105,000 of interest income that was recognized upon the payoff in full of a previously non-earning loan in the prior six month period. Operating income on real estate owned increased $30,000 or 6% for the three month period ended March 31, 2004 to $597,000 from $567,000 in the three month period ended March 31, 2003. The increase was primarily caused by increased percentage rents received from tenants in the current three month period. For the current six month period operating income from real estate owned was relatively unchanged from the prior year. Other revenues, primarily investment income, decreased to $614,000 in the three months ended March 31, 2004, from $725,000 in the three months ended March 31, 2003, a decline of $111,000, or 15%. For the six months ended March 31, 2004 other revenues, primarily investment income, decreased by $213,000, or 15%, from $1,398,000 to $1,185,000. In both the three and six month periods ended March 31, 2004, we received less dividend income from our investment in Entertainment Properties Trust shares. This was the result of the sale of a portion of our shares during the current fiscal period. Interest expense on borrowed funds increased to $259,000 in the three months ended March 31, 2004 from $28,000 in the three months ended March 31, 2003, an increase of $231,000, or 821%. For the six months ended March 31, 2004 interest on borrowed funds increased $ 294,000 to $428,000 from $134,000 in the six month period ended March 31, 2003, an increase of 220%. The increase in both periods is a result of an increase in the level of borrowings compared to the prior period to fund our increased loan portfolio. In the current three month period ended March 31, 2004, the average balance of borrowed funds increased from $29,000 to $23.7 million an increase of $23.6 million and for the six month period ended March 31, 2004 the average balance of borrowed funds increased $13.9 million from $4.2 million to $18.1 million. The Advisor's fee, which is calculated based on invested assets, increased $155,000, or 83%, in the three months ended March 31, 2004 to $341,000 from $186,000 in the three months ended March 31, 2003. In the six months ended March 31, 2004 the fee increased $219,000, or 52%, from $420,000 in the six months ended March 31, 2003 to $639,000. In both of these periods, we experienced a large increase in the outstanding balance of invested assets, primarily loans, the basis upon which the fee is calculated. General and administrative fees increased $272,000, or 37%, from $744,000 in the three months ended March 31, 2003 to $1,016,000 in the three months ended March 31, 2004. For the six months ended March 31, 2004 general and administrative expenses increased $394,000, or 28%, from $1,420,000 in the six month period ended March 31, 2003 to $1,814,000 in the six months ended March 31, 2004. The increases in both periods are the result of an increase in payroll and payroll related expenses which resulted from the increased volume of loan originations. There were also increases in advertising expense and legal services allocated to us pursuant to a shared services among us and related entities in both periods, also the result of the increased level of originations. In addition compensation expense was incurred in both the three and six month periods ended March 31, 2004, the result of restricted stock that was issued. The prior three and six month periods do not have a comparable expense. Other taxes declined $33,000, or 29%, in the three months ended March 31, 2004 from $115,000 in the three months ended March 31, 2003 to $82,000. For the six months ended March 31, 2004 other taxes decreased $89,000, or 36%, to $156,000 from $245,000. The amount in both periods represents the payment of federal excise taxes which are based on taxable income generated but not yet distributed. Operating expenses relating to real estate increased $161,000, or 50%, from $317,000 in the three months ended March 31, 2003 to $478,000 in the three months ended March 31, 2004. For the six months ended March 31, 2004 operating expenses related to real estate increased $153,000, or 24%, from $628,000 to $781,000. The increase in both periods is primarily due to increased legal and other professional expenses incurred in connection with a litigation related to a property sold by BRT in which BRT is involved as a defendant. Equity in earnings of unconsolidated ventures decreased $33,000, or 105%, in the three months ended March 31, 2004 to $(2,000) from $31,000 in the three months ended March 31, 2003. For the six months ended March 31, 2004 equity in earnings of unconsolidated ventures decreased $53,000, or 57%, from $94,000 to $41,000. In both periods the decline is due to a loss generated by one of the Trust's joint ventures. This venture, which owns and operates a multifamily apartment complex in the Atlanta Georgia area, continues to show losses due to a weak rental market in the Atlanta area. For the six month period ended March 31, 2004 gain on sale of real estate assets increased to $591,000 from $195,000 in the period ended March 31, 2003. In the current six month period the gain resulted from the sale of two cooperative apartment units. In the prior year six month period the gain resulted from the sale of one cooperative apartment unit. Gain on sale of available-for-sale securities increased to $917,000 in the three month period ended March 31, 2004 from $146,000. In the current three month period the Trust sold 58,500 shares of Atlantic Liberty Financial and 25,700 shares of Entertainment Properties Trust which resulted in net proceeds of $2,143,000 against a cost basis of $1,226,000. For the six month period ended March 31, 2004 gain on sale of available-for-sale securities increased $1,491,000 from $146,000 to $1,637,000. In the current six month period the Trust sold 58,500 shares of Atlantic Liberty Financial and 61,300 shares of Entertainment Properties which resulted in net proceeds of $3,337,000 and had a cost basis of $1,700,000. Item 3. Quantitative and Qualitative Disclosures About Market Risks Our primary component of market risk is interest rate sensitivity. Our interest income and to a lesser extent our interest expense is subject to changes in interest rates. We seek to minimize these risks by originating loans that are indexed to the prime rate, with a stated minimum interest rate, and borrowing, when necessary, from our available credit line which is also indexed to the prime rate. At March 31, 2004, approximately 79% of our loan portfolio was variable rate based primarily on the prime rate. Any changes in the prime interest rate could have a positive or negative effect on our net interest income. When determining interest rate sensitivity, we assume that any change in interest rates is immediate and that the interest rate sensitive assets and liabilities existing at the beginning of the period remain constant over the period being measured. We assessed the market risk for our variable rate mortgage receivables and variable rate debt and believe that a one percent increase in interest rates would have approximately a $479,000 positive effect on income before taxes and a one percent decline in interest rates would also have approximately a $174,000 positive effect on income before taxes. In addition, we originate loans with short maturities and maintain a strong capital position. At March 31, 2004 our loan portfolio was primarily secured by properties located in the New York metropolitan area, New Jersey, California, Delaware and Maryland it is therefore, subject to risks associated with the economies of these localities. Item 4. Controls and Procedures As required under Rules 13a-15 (e) and 15d-15 (e) under the Securities Exchange Act of 1934, we carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of March 31, 2004 are effective. There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) during the six months of the fiscal year ending March 31, 2004 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 31.1 Certification of President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Exhibit 31.2 Certification of Senior Vice President-Finance pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Exhibit 31.3 Certification of Vice President and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Exhibit 31.4 Certification of President and Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Exhibit 31.5 Certification of Senior Vice President-Finance pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Exhibit 31.6 Certification of Vice President and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K On February 12, 2004 BRT filed an 8-K attaching a copy of its press release reporting the results of operations for the three months ended December 31, 2003. On March 15, 2004 BRT filed an 8-K reporting an increase in the size of the Board of Trustees of BRT and the election of Mr. Jeffrey Rubin to the Board of Trustees. On March 31, 2004 BRT filed an 8-K attaching a copy of its press release reporting that on Mach 30, 2004 BRT amended its $30 million credit facility with North Fork Bank. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BRT REALTY TRUST Registrant May 13, 2004 /s/ Jeffrey A. Gould - ------------ --------------------------- Date Jeffrey A. Gould, President May 13, 2004 /s/ George Zweier - ------------ ---------------------------- Date George Zweier, Vice President and Chief Financial Officer (principal financial officer) EXHIBIT 31.1 CERTIFICATION I, Jeffrey A. Gould, President and Chief Executive Officer of BRT Realty Trust, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q for the quarter ended March 31, 2004 of BRT Realty Trust; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 13, 2004 /s/ Jeffrey A. Gould -------------------- Jeffrey A. Gould President and Chief Executive Officer EXHIBIT 31.2 CERTIFICATION I, David W. Kalish, Senior Vice President-Finance of BRT Realty Trust, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q for the quarter ended March 31, 2004 of BRT Realty Trust; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 13, 2004 /s/ David W. Kalish ------------------- David W. Kalish Senior Vice President-Finance EXHIBIT 31.3 CERTIFICATION I, George Zweier, Vice President and Chief Financial Officer of BRT Realty Trust, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q for the quarter ended March 31, 2004 of BRT Realty Trust; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 13, 2004 /s/ George Zweier ---------------------- George Zweier Vice President and Chief Financial Officer EXHIBIT 32.1 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 (SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002) The undersigned, Jeffrey A. Gould, the Chief Executive Officer of BRT Realty Trust, (the "Registrant"), does hereby certify, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge, based upon a review of the Quarterly Report on Form 10-Q for the quarter ended March 31, 2004 of the Registrant, as filed with the Securities and Exchange Commission on the date hereof (the "Report"): (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. Date: May 13, 2004 /s/ Jeffrey A. Gould --------------------- Jeffrey A. Gould Chief Executive Officer EXHIBIT 32.2 CERTIFICATION OF SENIOR VICE PRESIDENT-FINANCE PURSUANT TO 18 U.S.C. SECTION 1350 (SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002) The undersigned, David W. Kalish, Senior Vice President-Finance of BRT Realty Trust, (the "Registrant"), does hereby certify, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge, based upon a review of the Quarterly Report on Form 10-Q for the quarter ended March 31, 2004 of the Registrant, as filed with the Securities and Exchange Commission on the date hereof (the "Report"): (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. Date: May 13, 2004 s/ David W. Kalish -------------------------------- David W. Kalish Senior Vice President-Finance EXHIBIT 32.3 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 (SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002) The undersigned, George Zweier, the Chief Financial Officer of BRT Realty Trust, (the "Registrant"), does hereby certify, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge, based upon a review of the Quarterly Report on Form 10-Q for the quarter ended March 31, 2004 of the Registrant, as filed with the Securities and Exchange Commission on the date hereof (the "Report"): (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. Date: May 13, 2004 /s/ George Zweier ----------------------- George Zweier Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----