10-Q 1 brt10q123104.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 December 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 X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of stock, as of the latest practicable date. 7,715,405 Shares of Beneficial Interest, $3 par value, outstanding on February 6, 2005 Part 1 - FINANCIAL INFORMATION Item 1. Financial Statements
BRT REALTY TRUST AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Amounts in Thousands) December 31, September 30, 2004 2004 ---- ---- (Unaudited) (Audited) ASSETS Real estate loans: Earning interest, including $6,824 and $7,305 from related parties $118,360 $132,229 Not earning interest 650 3,096 -------- -------- 119,010 135,325 Allowance for possible losses (881) (881) -------- -------- 118,129 134,444 -------- -------- Real estate assets: Real estate properties net of accumulated depreciation of $1,759 and $1,699 8,742 6,212 Investment in unconsolidated real estate ventures 8,058 7,793 -------- -------- 16,800 14,005 Valuation allowance (325) (325) -------- -------- 16,475 13,680 -------- -------- Cash and cash equivalents 5,528 5,746 Securities available-for-sale at fair value 47,894 41,491 Other assets 2,650 2,644 -------- -------- Total Assets $190,676 $198,005 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Borrowed funds $ 38,892 $ 53,862 Mortgage payable 2,591 2,609 Accounts payable and accrued liabilities, including deposits of $3,484 and $3,164 5,418 5,798 Dividends payable 3,704 3,673 -------- -------- Total Liabilities 50,605 65,942 -------- -------- Shareholders' Equity: Preferred shares, $1 par value: Authorized 10,000 shares, none issued - - Shares of beneficial interest, $3 par value: Authorized number of shares - unlimited, issued - 8,889 and 8,883 shares respectively 26,667 26,650 Additional paid-in capital 81,877 81,769 Accumulated other comprehensive income - net unrealized gain on available-for-sale securities 32,887 26,162 Unearned compensation (840) (900) Retained earnings 10,089 9,482 -------- -------- 150,680 143,163 Cost of 1,231 and 1,288 treasury shares of beneficial interest at each date (10,609) (11,100) -------- -------- Total Shareholders' Equity 140,071 132,063 -------- -------- Total Liabilities and Shareholders' Equity $190,676 $198,005 ======== ======== See Accompanying Notes to Consolidated Financial Statements.
BRT REALTY TRUST AND SUBSIDIARIES Consolidated Statements of Income (Dollar amounts in thousands except per share amounts) Three Months Ended December 31, 2004 2003 ---- ---- Revenues: Interest and fees on real estate loans, including $185 and $171 from related parties $ 4,863 $ 2,570 Operating income from real estate properties 577 528 Other, primarily investment income 593 571 -------- -------- Total Revenues 6,033 3,669 -------- -------- Expenses: Interest - borrowed funds 667 178 Advisor's fees, related party 385 298 General and administrative - including $187 and $163 to related parties 968 798 Other taxes 110 74 Operating expenses relating to real estate properties including interest on mortgages payable of $46 and $64 297 303 Amortization and depreciation 68 67 -------- -------- Total Expenses 2,495 1,718 -------- -------- Income before equity in earnings of unconsolidated real estate ventures, gain on sale of available-for-sale securities, minority interest and discontinued operations 3,538 1,951 Equity in earnings of unconsolidated real estate ventures 55 43 -------- -------- Income before gain on sale of available-for-sale securities, minority interest and discontinued operations 3,593 1,994 Gain on sale of available-for-sale securities 729 720 Minority interest (11) (11) -------- -------- Income before discontinued operations 4,311 2,703 Discontinued Operations Gain on sale of real estate assets - 591 -------- -------- Net income $ 4,311 $ 3,294 ======== ======== Income per share of beneficial interest: Income from continuing operations $ .56 $ .36 Discontinued operations - .08 -------- -------- Basic earnings per share $ .56 $ .44 ======== ======== Income from continuing operations $ .55 $ .35 Discontinued operations - .08 -------- -------- Diluted earnings per share $ .55 $ .43 ======== ======== Cash distributions per common share $ .48 $ .38 ======== ======== Weighted average number of common shares outstanding: Basic 7,662,372 7,513,383 ========= ========= Diluted 7,774,303 7,671,566 ========= ========= 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, 2004 $26,650 $81,769 $26,162 $ (900) $ 9,482 $(11,100) $132,063 Shares issued - purchase plan 17 111 - - - - 128 Distributions - common share ($.48 per share) - - - - (3,704) - (3,704) Exercise of stock options - 1 - - - 491 492 Forfeiture of restricted stock - (4) - 4 - - - Compensation expense - restricted stock - - - 56 - - 56 Net income - - - - 4,311 - 4,311 Other comprehensive income - net unrealized gain on available-for-sale securities (net of reclassi- fication adjustment for gains included in net income of $729) - - 6,725 - - - 6,725 ----- Comprehensive income - - - - - - 11,036 ----------------------------------------------------------------------------------- Balances, December 31, 2004 $26,667 $81,877 $32,887 $ (840) $10,089 $(10,609) $140,071 =================================================================================== See Accompanying Notes to Consolidated Financial Statements.
BRT REALTY TRUST AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Amounts in Thousands) Three Months Ended December 31, 2004 2003 ---- ---- Cash flows from operating activities: Net income $ 4,311 $ 3,294 Adjustments to reconcile net income to net cash provided by operating activities: Amortization and depreciation 100 76 Amortization of restricted stock 60 22 Net gain on sale of real estate loans and properties - (591) Net gain on sale of available-for-sale securities (729) (720) Equity in earnings of unconsolidated real estate ventures (55) (43) Increase in straight line rent (38) (38) Increases and decreases from changes in other assets and liabilities (Increase) in interest and dividends receivable (66) (305) Decrease (Increase) in prepaid expenses 35 (65) (Decrease) Increase in accounts payable and accrued liabilities (108) 174 Increase in deferred costs (15) - (Decrease) Increase in deferred revenues (131) 246 (Decrease) in escrow deposits (221) (75) Other 69 (53) ------- ------- Net cash provided by operating activities 3,212 1,922 ------- ------- Cash flows from investing activities: Collections from real estate loans 39,294 11,333 Sale of participation interests 16,450 - Additions to real estate loans (41,876) (34,751) Net costs capitalized to real estate assets (49) (70) Proceeds from the sale of real estate - 655 Investment in real estate ventures (303) (82) Sales of available-for-sale securities 1,051 1,192 (Increase) Decrease in deposits payable (48) 81 Partnership distributions 93 80 ------- ------- Net cash provided by (used in) investing activities 14,612 (21,562) ------- ------- Cash flows from financing activities: Proceeds from borrowed funds 41,500 33,620 Repayment of borrowed funds (56,470) (26,500) Payoff/paydown of loan and mortgages payable (19) (17) Cash distribution - common shares (3,673) (2,711) Exercise of stock options 492 520 Issuance of shares - stock purchase plan 128 - ------- ------- Net cash (used in) provided by financing activities (18,042) 4,912 ------- ------- Net (decrease) increase in cash and cash equivalents (218) (14,728) Cash and cash equivalents at beginning of period 5,746 21,694 ------- ------- Cash and cash equivalents at end of period $ 5,528 $ 6,966 ======= ======= Supplemental disclosure of cash flow information: Cash paid during the period for interest $ 697 $ 206 ======= ======= Non cash investing and financing activity: Reclass of loan to real estate upon foreclosure $ 2,446 $ - ======= ======= Accrued distributions $ 3,704 $ 2,888 ======= ======= 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 December 31, 2004 and for the three months ended December 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 three months ended December 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, 2004. 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 December 31, 2004, BRT declared a cash distribution to shareholders of $.48 per share. This distribution totaled $3,704,000 and was payable January 3, 2005 to shareholders of record on December 24, 2004. Stock Options 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 Trust's shares of beneficial interest 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 December 31, 2004 2003 ---- ---- Net income to common shareholders as reported $4,311 $3,294 Less: Total stock-based employee compensation expense determined under fair value method for all awards 16 30 ------ ------ Pro forma net income $4,295 $3,264 ====== ====== Pro forma earnings per share of beneficial interest Basic $ .56 $ .43 ====== ====== Diluted $ .55 $ .43 ====== ====== 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. Note 2 - Shareholders' Equity (Continued) Restricted Stock As of December 31, 2004, 59,030 restricted shares were issued under the Trust's 2003 incentive 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 Trust 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 three months ended December 31, 2004, the Trust recorded $56,000 of compensation expense. 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 December 31, 2004 2003 ---- ---- Basic 7,662,372 7,513,383 Effect of dilutive securities 111,931 158,183 --------- --------- Diluted 7,774,303 7,671,566 ========= ========= 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 any 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 December 31, 2004 and 2003, interest income would have increased by approximately $102,000 and $103,000, respectively. In January 2005, as a result of a foreclosure action, title was conveyed on a property that was previously reported as a non-performing loan. Accordingly, at December 31, 2004 the Trust reclassified this loan, with a carrying value of $2,446,000 to real estate assets. Included in real estate loans are four second mortgages and two first mortgages to ventures in which the Trust (through wholly owned subsidiaries) holds a 50% interest. At December 31, 2004, the aggregate balance of these mortgage loans was $6,824,000. Interest earned on these loans totaled $185,000 and $171,000 for the three months ended December 31, 2004 and 2003, respectively. As of December 31, 2004 there were five first mortgage loans outstanding to one borrower. These loans totaled $39,043,000, which is approximately 33% of the Trust's loan portfolio and 20% of the Trust's total assets. All five loans are collateralized by multi-family apartment developments. Two of the loans, with a balance at December 31, 2004 of $10,300,000, are collateralized by properties located in Florida. The remaining loans, with a balance at December 31, 2004 of $28,743,000, are collateralized by properties in Tennessee. All five loans have adjustable interest rates and a combined loan to value ratio of approximately 82%. 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 ---------------- December 31, September 30, 2004 2004 ---- ---- Condensed Balance Sheet ----------------------- Cash and cash equivalents $ 704 $ 327 Real estate investments, net 15,373 15,298 Other assets 414 436 -------- -------- Total assets $ 16,491 $ 16,061 ======== ======== Mortgages payable (1) $ 1,796 $ 2,080 Other liabilities 196 190 Equity 14,499 13,791 -------- -------- Total liabilities and equity $ 16,491 $ 16,061 ======== ======== Trust's equity investment $ 6,209 $ 5,855 ======== ======== Three Months Ended December 31, 2004 2003 ---- ---- Condensed Statement of Operations --------------------------------- Revenues, primarily rental income $ 815 $ 754 ------- ------- Operating expenses (2) 409 362 Depreciation 158 124 Interest expense (1) 40 62 ------- ------- Total expenses 607 548 ------- ------- Net income attributable to members $ 208 $ 206 ======= ======= Trust's share of net income recorded in income statement $ 104 $ 103 ======= ======= (1) Held by the Trust. (2) Includes $47,000 and $38,000 for the three months ended December 31, 2004 and 2003 to related parties. 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 --------------- Amounts in Thousands December 31, September 30, 2004 2004 ---- ---- Condensed Balance Sheet ----------------------- Cash and cash equivalents $ 134 $ 214 Real estate investments, net 17,795 17,984 Other assets 316 240 --------- --------- Total assets $ 18,245 $ 18,438 ========= ========= Mortgages payable (1) $ 18,715 $ 18,765 Other liabilities 342 414 Equity (812) (741) --------- --------- Total liabilities and equity $ 18,245 $ 18,438 ========= ========= Trust's equity investment $ (406) $ (340) ========= ========= Three Months Ended December 31, 2004 2003 ---- ---- Condensed Statement of Operations --------------------------------- Revenues, primarily rental income $ 590 $ 578 --------- --------- Operating expenses (2) 256 288 Depreciation 181 182 Interest expense (3) 360 357 --------- --------- Total expenses 797 827 --------- --------- Net loss attributable to members $ (207) $ (249) ========= ========= Trust's share of net loss recorded in income statement $ (103) $ (124) ========= ========= (1) Includes $2,950,000 second mortgage held by the Trust. (2) Includes $3,000 and $4,000 for the three months ended December 31, 2004 and 2003 to related parties. (3) Includes $83,000 of interest expense on second mortgage in each period. The remaining six ventures contributed $54,000 in equity earnings for the three months ended December 31, 2004.
Note 5 - Available-For-Sale Securities Included in available-for-sale securities are 1,009,600 shares of Entertainment Properties Trust (NYSE:EPR), which have a cost basis of $13,262,000 and a fair value at December 31, 2004 of $44,978,000. The shares held by the Trust represent approximately 3.97% of the outstanding shares of Entertainment Properties Trust as of October 14, 2004. 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 $1,753,000. The shares held by the Trust represent approximately 4.48% of the outstanding shares of Atlantic Liberty Financial Corp. as of September 30, 2004. Note 6 -Borrowed Funds BRT maintains a $60 million credit line with North Fork Bank. The facility has a maturity date of July 1, 2006. The Trust may extend the term of the facility for two one year periods for a fee of $150,000 for each extension. Borrowings under this facility are secured by specific real estate loans and the credit agreement provides that the amount borrowed will not exceed 65% of the collateral pledged. As of December 31, 2004 we provided collateral that would permit us to borrow $52,348,000 under the facility. At December 31, 2004 BRT had $29,550,000 outstanding under the facility. Interest charged on the outstanding balance is at prime plus 1/2% (5.75% at December 31, 2004). For the three months ended December 31, 2004 and 2003 the average outstanding balance on the credit line was $35,588,000 and $3,980,000, respectively. As of January 27, 2005 we pledged collateral that would permit us to borrow the entire $60 million under the facility, of which $56,550,000 was outstanding. 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 December 31, 2004, there was an outstanding balance under the facility of $9,342,000. The average outstanding balance for the three months ended December 31, 2004 and 2003 was $10,242,000 and $8,596,000, respectively, and the average interest rate paid was 5.50% and 5.57%, respectively. At December 31, 2004, marketable securities with a fair value of $44,978,000 were pledged as collateral. Note 7 - Comprehensive Income Comprehensive income for the three month period ended was as follows: Three Months Ended December 31, 2004 2003 ---- ---- Net income $ 4,311 $ 3,294 Other comprehensive income - Unrealized gain on available - for-sale securities 6,725 4,526 -------- ------- Comprehensive income $ 11,036 $ 7,820 ======== ======= Accumulated other comprehensive income, which is comprised solely of the net unrealized gain on available-for-sale securities, was $32,887,000 and $23,808,000 at December 31, 2004 and 2003, respectively. 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. Overview We are primarily engaged in the business of originating and holding for investment senior and junior real estate mortgages secured by income producing property. We also purchase and hold for investment senior and junior participations in existing mortgage loans originated by others and sell senior, junior and pari passu participations in real estate mortgage loans originated by us. We may also participate as both lender to and an equity participant in joint ventures which acquire real property. Our investment policy emphasizes short-term mortgage loans. 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 $111,391,000 are due and payable to us during the twelve months ending December 31, 2005, including $650,000 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 $60 million revolving credit facility with North Fork Bank. The maturity date of the facility is July 1, 2006 and may be extended at our option for two one year terms. Borrowings under the facility are secured by specific real estate loans and the agreement provides that the amount borrowed will not exceed 65% of qualified first mortgages pledged to North Fork Bank. Interest is charged on the outstanding balance at prime plus 1/2% (currently 5.75% per annum). At December 31, 2004 we pledged collateral that would permit us to borrow $52.3 million under the facility, of which $29,550,000 was outstanding. As of January 27, 2005 we pledged collateral that would permit us to borrow the entire $60 million under the facility, of which $56,550,000 was outstanding. We also have the ability to borrow on margin, using the shares we own in Entertainment Properties Trust as collateral. At December 31, 2004 there was approximately $15,700,000 available under this facility, of which $9,342,000 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 three months ended December 31, 2004, we generated cash of $3,212,000 from operations, $39,294,000 from real estate loan collections, $16,450,000 from the sale of participation interests and $1,051,000 from the sale of securities. These funds, in addition to cash on hand, were used primarily to fund real estate loan originations of $41,876,000, repay borrowings of $14,970,000 and pay shareholder dividends of $3,673,000. Our cash and cash equivalents were $5,528,000 at December 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 December 31, 2004 there were five loans outstanding to one borrower. These loans totaled $39,043,000, which is approximately 33% of total loans and 20% of total assets. Results of Operations Interest and fees on loans increased by $2,293,000, or 89%, to $4,863,000 for the three months ended December 31, 2004 from $2,570,000 for the three months ended December 31, 2003. During the current quarter the average balance of loans outstanding increased by approximately $46.6 million accounting for an increase in interest income of $1,407,000. We also realized an increase in interest income of $420,000 resulting from the collection of interest in excess of the stated rate on a loan that went into default the previous fiscal year but was paid off in full in the current quarter. Recent increases in the prime rate have caused the average interest rate earned on the loan portfolio to increase to 11.92% in the three months ended December 31, 2004 from 11.15% in the three months ended December 31, 2003 which caused interest income to increase by $164,000. We also realized in increase in fee income of $302,000. Approximately 50% of this increase, or $115,000, is the result of fee amortization on the larger loan portfolio. The remaining increase is primarily the result of accelerated amortization from the repayment of loans. Operating income on real estate owned increased $49,000, or 9%, for the three month period ended December 31, 2004 to $577,000 from $528,000 in the three month period ended December 31, 2003. The increase was primarily caused by an increase in rent received in the current three month period due to increased occupancy and increased percentage rents on a property we own located in Rock Springs, Wyoming. Interest expense on borrowed funds increased to $667,000 in the three months ended December 31, 2004, from $178,000 in the three months ended December 31, 2003, an increase of $489,000, or 276%. The increase is the result of an increase in the level of borrowings to fund our increased loan portfolio. In the current three month period ended December 31, 2004, the average balance of borrowed funds increased from $12.6 million to $45.8 million an increase of $33.2 million, causing an increase of $414,000 in interest expense. The remaining increase of $75,000 is the result of higher interest rates paid on our line of credit and margin account and greater amortization of deferred fees associated with increases in our credit line availability with North Fork Bank. Our combined borrowing rate increased from 5.25% in the quarter ended December 31, 2003 to 5.42% for the quarter ended December 31, 2004. The Advisor's fee, which is calculated based on invested assets, increased $87,000, or 29%, in the three months ended December 31, 2004 to $385,000 from $298,000 in the three months ended December 31, 2003. In the three month period ended December 31, 2004, when compared to the three month period ended December 31, 2003, 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 $170,000, or 21%, from $798,000 in the three months ended December 31, 2003 to $968,000 in the three months ended December 31, 2004. The increase was the result of several factors. Payroll and payroll related expenses increased $112,000, as a result of increased commissions paid to loan originators and increased restricted stock amortization. There was also an increase of $24,000 in expenses allocated to us, primarily legal and accounting expenses, pursuant to a Shared Services Agreement among us and related entities. In addition, we experienced increased accounting and audit fees of $40,000 primarily the result of Sarbanes-Oxley compliance work and an $18,000 increase in insurance costs related to directors and officers liability insurance. Offsetting these increases was a decline in legal expenses of $66,000 resulting from the reimbursement of legal costs on two loans that were previously reported non-performing and which were paid off in full in the current quarter. Other taxes increased $36,000, or 50%, in the three months ended December 31, 2004 from $74,000 in the three months ended December 31, 2003 to $110,000. This increase is primarily the result of an increase in the amount of excise tax recorded in the current period. The excise tax is based on taxable income that has been generated but not yet distributed. Equity in earnings of unconsolidated ventures increased $12,000, or 29%, in the three months ended December 31, 2004 to $55,000 from a $43,000 in the three months ended December 31, 2003. During the current period we realized a reduction in the losses being generated by one of the Trust's joint ventures which owns and operates a multi-family apartment complex in the Atlanta, Georgia area. In the current three month period the Trust sold 23,900 shares of Entertainment Properties Trust which resulted in net proceeds of $1,043,000 against a cost basis of $314,000 and a gain on sale of available-for-sale securities of $729,000. In the prior three month period the Trust sold 35,600 shares of Entertainment Properties Trust which resulted in net proceeds of $1,188,000 and had a cost basis of $468,000 and a gain on sale of available-for-sale securities of $720,000. In the prior three month period the gain on sale of real estate assets of $591,000 resulted from the sale of two cooperative apartment units. There were no sales in the quarter ended December 31, 2004. 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 December 31, 2004, approximately 88% of our loan portfolio was variable rate based primarily on the prime rate. Changes in the prime interest rate would have an effect on our net interest income accordingly. 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 $610,000 positive effect on income before taxes and a one percent decline in interest rates would have approximately a $328,000 negative effect on income before taxes. In addition, we originate loans with short maturities and maintain a strong capital position. At December 31, 2004 our loan portfolio was primarily secured by properties located in the New York metropolitan area, New Jersey, Florida, Tennessee and Indiana and it is 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. Senior Vice-President-Finance and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2004. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of December 31, 2004 are effective. There has been no changes in our internal control over financial reporting during the quarter ended December 31, 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting or in othre factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. 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 December 14, 2004 BRT filed an 8-K attaching a copy of its press release reporting the results of operations for the quarter and year ended September 30, 2004. 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 February 8, 2005 /s/ Jeffrey A. Gould --------------- --------------------------- Date Jeffrey A. Gould, President February 8, 2005 /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 December 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 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: February 8, 2005 /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 December 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 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: February 8, 2005 /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 December 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 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: February 8, 2005 /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 December 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: February 8, 2005 /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 December 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: February 8, 2005 /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 December 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: February 8, 2005 /s/ George Zweier ----------------------------------- George Zweier Chief Financial Officer