BRT REALTY TRUST
60 Cutter Mill Road, Suite 303
Great Neck, NY 11021
(516) 466-3100
www.BRTREALTY.com
A n n u a l R e p o r t
BRT Realty Trust
A National Leader in Short-term Real Estate Lendin g
2011
BRT REALTY TRUST
BRT Realty Trust is a business trust organized in Massachusetts. Our principal business is to originate and hold for invest-
ment, senior mortgage loans secured by commercial and multi-family real estate property in the United States. This includes
originating loans to persons purchasing their own or third party debt, at a discount to the principal amount thereof. The
loans we originate generally have relatively high yields and are short term or bridge loans with an average duration ranging
from six months to one year. We receive an origination fee for the loans that we originate. We conduct our operations to
qualify as a real estate investment trust, or REIT, for federal income tax purposes.
BRT’s shares of beneficial interest trade on the New York Stock Exchange under the symbol “BRT.” As of the close of fiscal 2011
there were 13,940,523 shares outstanding in the hands of approximately 3,825 shareholders.
FINANCIAL HIGHLIGHTS
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Year ended September 30,
Interest and fees on loans
Rental revenue from real estate properties
Recovery of previously provided allowance
Other, primarily investment income
Total revenues
Interest on borrowed funds
Provision for loan loss
Impairment charges
General and administrative expenses
Operating expenses relating to real estate properties
Other expenses
Total expenses
Total revenues less total expenses
Equity in earnings of unconsolidated ventures
Gain on sale of available-for-sale securities
Loss on early extinguishment of debt
Income from discontinued operations (a)
Net income (loss)
Plus: net loss attributable to non-controlling interests
Net income (loss) attributable to common shareholders
Income (loss) from continuing operations
Income from discontinued operations
2011
$ 10,328
3,456
3,595
502
17,881
2,112
–
–
6,149
3,340
2,233
2010
$ 3,877
3,422
365
471
8,135
2,584
3,165
2,625
6,063
3,216
2,191
13,834
19,844
4,047 (11,709)
196
350
1,319
1,586
–
(2,138)
590
1,346
4,924
1,450
$
$
6,374
0.35
0.10
(9,337)
1,322
$ (8,015)
$ (0.62)
0.04
Basic and diluted earnings (loss) per share of beneficial interest
$ (0.58)
Weighted average shares - basic and diluted 14,041,569 13,871,668
$ 0.45
September 30,
Total assets
Earning real estate loans (b)
Non-earning real estate loans (b)
Purchase money mortgage loans
Real estate loans held for sale
Real estate properties
Cash and cash equivalents
Available-for-sale securities at market
Junior subordinated notes
Mortgage payable
Total BRT Realty Trust shareholders’ equity
2011
$ 191,012
67,266
–
–
8,446
59,277
44,025
2,766
37,400
14,417
129,063
2010
$186,266
17,263
35,143
5,340
–
55,843
58,497
10,270
40,815
12,557
124,554
(a) Discontinued operations include impairment charges of $745 in 2010 and gain on sale of real estate
assets of $1,346 and $1,937 in 2011 and 2010, respectively.
(b) Earning and non-earning loans are presented without deduction of deferred fee income and the related allowances for possible losses
TO OUR SHAREHOLDERS:
Fiscal 2011 was a very productive year for us.
In our 2009 Annual Letter to Shareholders we commented that the economy had just completed two of the most difficult
years that any of us could recall and that the recessionary economic environment in those two years brought about substantial
declines in real estate values. We also noted that along with most, if not all, entities engaged in real estate lending, our
company was not immune to the downturn in real estate values. In our 2010 Annual Letter to Shareholders we reported that
we were seeking to resolve our problem loans as promptly as possible by obtaining ownership of the properties securing our
non-performing loans and selling these properties, thereby converting non-performing assets to cash so that we could once
again actively pursue our traditional bridge lending business.
We are pleased to report to you that in fiscal 2011 we resolved all our problem loans and actively engaged in the lending business.
Because the real estate markets have not fully recovered and real estate transactions, our usual source of bridge lending
opportunities, continued to be at low activity levels, we took advantage of available opportunities by making bridge loans to
owners of real property or third party purchasers to allow them to acquire mortgage loans from banks and other lenders
at substantial discounts. We believe that this will continue to be a source of business for us as mortgage loans, secured by
properties which have significantly decreased in value, become available for purchase at a discount as the mortgages mature.
Our operations in fiscal 2011 reflect a substantial turnaround from the three prior fiscal years when the recessionary environment
and the problems in the credit markets created significant disruptions in the real estate markets throughout the United
States. In fiscal 2011:
• We originated $131.3 million of mortgage loans compared to $17.4 million in fiscal 2010 and $12.7 million
in fiscal 2009;
• Our revenues increased by 120% to $17.9 million from $8.1 million in 2010 due to the increase in the average
balance of loans outstanding and the reversal of previously provided loan loss allowances;
• Total expenses declined by 30.3% to $13.8 million primarily due to the decrease in loan loss provisions, impairment
charges and professional fees related to foreclosure activities. At fiscal year-end we did not have any non-earning
real estate loans or any allowances for possible losses against our loan portfolio;
• We restructured our junior subordinated notes by repaying, at par, $5 million of the principal amount outstanding
and obtaining an interest rate reduction on the remaining balance. The restructuring resulted in a decrease
in our interest expense in fiscal 2011 of $508,000 and will reduce our interest costs by approximately $588,000
in fiscal 2012 and $1.72 million in fiscal 2013;
• We concluded a new revolving credit facility for up to $25 million;
• We reported net income attributable to our common shareholders of $6.37 million ($.45 per share), compared to
losses of $8.02 million ($.58 per share) and $47.76 million ($4.10 per share) in 2010 and 2009, respectively; and
• Our per share shareholder’s equity as of September 30, 2011 was $9.18.
The favorable results that we experienced in fiscal 2011 should not be taken as an indication that the economy and real estate
industry have fully recovered. The origination of satisfactory bridge loans is challenging. We are, however, confident that we
will originate a reasonable number of bridge loans in fiscal 2012.
As of December 31, 2011 we had approximately $75 million in cash and marketable securities on hand and continue to evaluate
the profitable long-term usage of our cash resources in addition to usage in our bridge lending operations. We have decided
to finance the acquisition of residential (and to a lesser extent commercial) real property by making equity investments in joint
ventures with other real estate professionals who have the opportunity to acquire quality real estate but require substantial equity
to do so due to the limitations institutional lenders have placed on the amount they will lend against a particular property, i.e.,
the loan-to-value ratios are significantly less than they were before the economic crisis resulting in a need for “gap” equity. As
a part of our basic business model of financing the acquisition, upgrading or change of use of real estate, we will bridge the
difference between the mortgage debt obtainable by a joint venture partner and such co-venturer’s equity in the transaction by
investing as an equity participant in the acquiring entity. These are intended to be substantially longer term investments which
will afford us the opportunity to put our capital to work, hopefully provide us with a satisfactory annual cash flow and allow us
to participate in the longer term incremental value of the property. As of the writing of this letter we have not concluded any of
such investments, but have a number of potential transactions in the negotiation stage.
Finally we want to bring you up to date on the activities of our Newark Joint Venture. In addition to holding a mortgage secured
by the Venture’s properties, we currently own a 50.1 % equity interest in the Joint Venture which owns two assemblage sites
in downtown Newark, New Jersey (Teachers’ Village and Market Street) and additional properties in downtown Newark. We
make reference to pages 6 through 10 of our Form 10-K for the 2011 fiscal year (included as a part of this Annual Report) for
a discussion of the Newark Joint Venture and our economic interest in the Newark Joint Venture. The Joint Venture has been
concentrating on the Teachers Village project, which contemplates the development of a mix of residential, educational and
retail facilities. Plans have been finalized and permits issued for the construction of the first building of development. The
Joint Venture has obtained a commitment for construction financing for the first two buildings of the Teacher’s Village project
and we are optimistic that construction of these two buildings will commence in the first few months of 2012.
Our entire team put in substantial efforts on behalf of our company in 2011. We are grateful for their hard work and we thank them.
We thank our Board of Trustees for their time and effort and their advice and guidance and we thank you, our shareholders, for
your confidence and support.
A Very Happy and Healthy New Year to all.
Fredric H. Gould
Chairman of the Board
January 9, 2012
Jeffrey A. Gould
President and Chief Executive Officer
Certain statements contained in this letter are “forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements are subject to risks, uncertainties and other factors
that could cause actual results to differ materially from future results expressed or implied by such forward-looking
statements. For additional information about the Trust, please see the Trust’s most recent Annual Report on Form
10-K for the fiscal year ended September 30, 2011 included herein and other documents filed by the Trust with the
Securities and Exchange Commission.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(cid:1) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2011
Or
(cid:2) 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
(State or other jurisdiction
of incorporation or organization)
60 Cutter Mill Road, Great Neck, New York
(Address of principal executive offices)
13-2755856
(I.R.S. employer identification no.)
11021
(Zip Code)
516-466-3100
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Shares of Beneficial Interest, $3.00 Par Value
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
NONE
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes (cid:2) No (cid:1)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the
Act. Yes (cid:2) No (cid:1)
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 (cid:1) No (cid:2)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes (cid:1) No (cid:2)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this
chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K (cid:2)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or
a smaller reporting company. See definitions of ‘‘large accelerated filer,’’ ‘‘accelerated filer’’ and ‘‘smaller reporting company’’
in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer (cid:2)
Non-accelerated filer (cid:2)
Smaller reporting company (cid:2)
Accelerated filer (cid:1)
Indicate by check mark whether registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes (cid:2) No (cid:1)
The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant was
approximately $53.8 million based on the last sale price of the common equity on March 31, 2011, which is the last business
day of the registrant’s most recently completed second quarter.
As of November 30, 2011, the registrant had 13,940,523 Shares of Beneficial Interest outstanding, excluding treasury
shares.
Portions of the proxy statement for the annual meeting of shareholders of BRT Realty Trust to be filed not later than
January 28, 2012 are incorporated by reference into Part III of this Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
TABLE OF CONTENTS
Form 10-K
Item No.
Page(s)
PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.
3.
4.
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Removed and Reserved . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.
6.
7.
Market for the Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management’s Discussion and Analysis of Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . .
8.
9.
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes In and Disagreements With Accountants on Accounting and Financial
Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . .
11.
12.
13.
14.
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certain Relationships and Related Transactions, and Director Independence . . . . . .
Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15.
Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
2
15
21
23
23
23
24
24
26
27
36
36
36
36
37
38
38
38
38
38
39
39
39
42
i
Forward-Looking Statements
This Annual Report on Form 10-K, together with other statements and information publicly
disseminated by us, contains certain forward looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. We intend such forward-looking statements to be covered by the safe harbor provisions 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 relate to expectations, beliefs, projections, future plans and strategies, anticipated events or
trends concerning matters that are not historical facts. Forward looking statements are generally
identifiable by use of words such as ‘‘may,’’ ‘‘will,’’ ‘‘will likely result,’’ ‘‘shall,’’ ‘‘should,’’ ‘‘could,’’
‘‘believe,’’ ‘‘expect,’’ ‘‘intend,’’ ‘‘anticipate,’’ ‘‘estimate,’’ ‘‘project’’ or similar expressions or variations
thereof.
Forward-looking statements contained in this Annual Report on Form 10-K are based on our
beliefs, assumptions and expectations of our future performance taking into account all information
currently available to us. These beliefs, assumptions and expectations can change as a result of many
possible events or factors, not all of which are known to us or within our control, and which could
materially affect actual results, performance or achievements. Factors which may cause actual results to
vary from our forward-looking statements include, but are not limited to:
(cid:127) factors described in this Annual Report on Form 10-K, including those set forth under the
captions ‘‘Risk Factors’’ and ‘‘Business’’;
(cid:127) availability of mortgage origination opportunities acceptable to us;
(cid:127) national and local economic and business conditions;
(cid:127) general and local commercial real estate property conditions;
(cid:127) defaults by borrowers in paying debt service on outstanding loans;
(cid:127) limitation of credit by institutional lenders;
(cid:127) impairment in the value of real estate property we own and real estate property securing our
loans;
(cid:127) changes in Federal government policies;
(cid:127) changes in Federal, state and local governmental laws and regulations;
(cid:127) increased competition from entities engaged in mortgage lending;
(cid:127) changes in interest rates; and
(cid:127) the availability of and costs associated with sources of liquidity.
We caution you not to place undue reliance on forward-looking statements, which speak only as of
the date of this Annual Report on Form 10-K. Except to the extent required by applicable law or
regulation, we undertake no obligation to update these forward-looking statements to reflect events or
circumstances after the date of the filing of this Annual Report on Form 10-K or to reflect the
occurrence of unanticipated events.
1
Item l. Business.
General
PART I
Our primary business is to originate and hold for investment senior mortgage loans secured by
commercial and multi-family real estate property in the United States. This includes originating loans
to persons purchasing their own or third party mortgage debt, at a discount to the principal amount
thereof. The loans we originate generally have relatively high yields and are short-term or bridge loans
with a duration ranging from six months to one year. We receive an origination fee for the loans we
originate. We conduct our operations to qualify as a real estate investment trust, or REIT, for federal
income tax purposes.
The unprecedented disruptions in the credit markets and the economic recession from the latter
part of 2007 through 2010 caused significant declines in the value of real estate property assets and loss
of liquidity, both long and short term, from the capital markets. These conditions had an adverse effect
on our business, requiring us, from the latter part of fiscal 2008 through a substantial portion of
fiscal 2010, to refocus our business activities from originating loans to servicing our loan portfolio. As
we resolved a substantial portion of the problems in our loan portfolio, we began, in the second half of
fiscal 2010 as the economy improved, to shift our emphasis back to our primary lending business. As a
result, in fiscal 2011, we originated $131.3 million in loans, generated $17.9 million in revenue (of
which $10.3 million was from interest on loans and loan fee income) and earned net income
attributable to common shareholders of $6.4 million, compared to, in fiscal 2010, $17.4 million of loan
originations, $8.1 million of revenues (of which $3.9 million was from interest on loans and loan fee
income) and a net loss attributable to common shareholders of $8 million. In fiscal 2011, we also:
(cid:127) entered into a revolving credit facility with availability of up to $25 million; and
(cid:127) restructured our junior subordinated notes by repaying $5.0 million of the principal amount
outstanding and obtaining an interest rate reduction. We estimate that this will reduce the
interest costs associated with these notes by approximately $588,000 and $1.72 million in
fiscal 2012 and 2013, respectively.
We also own and operate various real estate assets. Information regarding our loan origination and
real estate segments is included in Note 14 to our Consolidated Financial Statements and is
incorporated herein by this reference.
We were organized as a business trust under the laws of the Commonwealth of Massachusetts in
June 1972. Our address is 60 Cutter Mill Road, Suite 303, Great Neck, New York 11021, telephone
number 516-466-3100. Our website can be accessed at www.brtrealty.com, where copies of our Annual
Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on 8-K and other filings
with the Securities and Exchange Commission (‘‘SEC’’) can be obtained free of charge. These SEC
filings are added to the website as soon as reasonably practicable.
2
Our Loan Portfolio
The following summarizes certain characteristics of our loan portfolio as of the dates indicated:
(Dollars in Thousands)
Number of senior loans outstanding . . . . . . . . . . . . . . . .
Principal amount of loans earning interest . . . . . . . . . . .
Principal amount of purchase money mortgage loans(1) .
Principal amount of non-interest earning loans . . . . . . . .
Real estate loan held for sale(2) . . . . . . . . . . . . . . . . . .
Percent of loans secured by New York area properties . .
Weighted average contractual interest rate . . . . . . . . . . .
. . . . . .
Percentage of loan portfolio not earning interest
Weighted average term to maturity(3) . . . . . . . . . . . . . .
September 30,
2011
2010
13
$67,266
—
—
$8,446
71%
11.5%
—
4.75 months
12
$17,263
$5,340
$35,143
—
70%
9.5%
61%
4.5 months
(1) We provided such loans to facilitate the sale of real estate properties acquired in
foreclosure proceedings.
(2) This loan, net of deferred fees, represented a 50% interest in a loan with a principal
balance of approximately $17 million. In October 2011, pursuant to a Federal Bankruptcy
Court approved joint plan of reorganization, we and our loan participant sold our rights
to the loan for net proceeds of approximately $23.5 million. At the same time, we
provided $15 million of financing in connection with the sale, which financing was repaid
in December 2011.
(3) Without giving effect to extension options.
In fiscal 2011, we originated $131.3 million of new loans and an aggregate of $66.1 million loans
were repaid. We also sold $46.1 million in loans. Interest on our loans is payable to us monthly. Our
loans frequently require that our borrowers pay us monthly escrow amounts that are adequate to pay,
when due, real estate tax installments on the properties securing our loans. We may also require and
hold funds in escrow for the payment of casualty insurance premiums. At September 30, 2011, our
three largest loans outstanding of approximately $22.8 million (which was repaid in November 2011),
$11.9 million and $9.5 million represented approximately 11.9%, 6.2% and 5.0%, respectively, of our
total assets. There were no other loans in our portfolio that, at such date, represented more than 4.5%
of our total assets.
With respect to certain loans originated by us, the borrower funds an interest reserve out of the
loan proceeds, from which all or a portion of the interest payments due to us are made for a specified
period of time. It is our policy to lend at a floating rate of interest based on a spread over the prime
rate, with a stated minimum interest rate, though we originate fixed rate loans as circumstances dictate.
At September 30, 2011, approximately 82% of the principal amount of our outstanding loans had a
floating rate of interest and the balance were fixed rate mortgages. At September 30, 2010,
approximately 43% of the principal amount of our outstanding loans had a floating rate of interest and
57% were fixed rate mortgages. There was a higher percentage of fixed rate loans at September 30,
2010 because in fiscal 2009 we provided senior purchase money mortgages with a fixed rate of interest
to facilitate the sale of properties acquired by us in foreclosure and, in certain loan work-out situations
in fiscal 2009 and 2010, we converted existing floating interest rate loans to fixed rate loans to reduce
the risk of borrower defaults.
3
The following table sets forth information regarding mortgage loans outstanding at September 30,
2011, all of which are earning interest (excluding loan held for sale):
NUMBER
OF
LOANS
EARNING
INTEREST
PERCENTAGE
(Dollars in thousands)
Multi-family residential . . . . . . . . . . . . . . . . . .
Office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7
2
1
2
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12
$26,300
24,975
11,874
4,117
$67,266
39.2%
37.1%
17.6%
6.1%
100%
Loan Default
In the event of a default by a borrower on a loan, we will, in substantially all cases, foreclose on
the loan or other collateral held by us and may seek to protect our investment by, among other things,
enforcing our rights against any guarantor(s) of such loan or through negotiations with the borrower or
other interested parties. Once a loan becomes non-performing, we generally do not receive interest
payments, thereby reducing our revenues, cash flow, net income and taxable income. Foreclosure
proceedings in certain jurisdictions can take considerable time, and may extend for as long as two
years. In addition, if a borrower files for protection under the United States bankruptcy laws during the
foreclosure process, the delays may be longer. In a foreclosure proceeding, we will typically seek to
have a receiver appointed by the court or an independent third party property manager appointed with
the borrower’s consent in order to preserve the property’s income stream and provide for the
maintenance of the property. From time-to-time, we make cash advances to the borrower, a court
appointed receiver or an independent third-party manager for emergency repair items and for real
estate taxes. At the conclusion of the foreclosure or negotiated workout process, the rents collected by
the receiver or the third party manager, as the case may be, less costs and expenses of operating the
property and the receiver’s or manager’s fees are remitted to us.
Financing Arrangements
Joint Venture/Participation Arrangements
In June 2011, our wholly-owned subsidiary entered into a joint venture with an affiliate of
Torchlight Investors, LLC. The joint venture was organized to purchase loans we originated and
through September 30, 2011, the venture had purchased $20.2 million of such loans. As of
September 30, 2011, the joint venture held $15.4 million in principal amount of such loans, of which
$3.1 million or 20% constituted our interest in the venture. In November 2011, the parties to the joint
venture terminated our obligation to sell loans to this venture.
In December 2011, we entered into an arrangement with 512 Lending, LLC pursuant to which
each of us, with specified exceptions, must present to the other the opportunity (but not the obligation)
to participate in loans such party originates. The arrangement expires in December 2014, subject to
earlier termination by either party on not less than 60 days’ notice for any reason. It is generally
anticipated that:
(cid:127) 512 Lending will fund between 50% to 80% of the principal amount of loans we originate and
in which they elect to participate and we will fund up to 20% of the principal amount of loans
they originate and in which we elect to participate.
(cid:127) The originating lender will be entitled to retain an annual servicing fee of 0.5% of the principal
amount of performing loans and 1.0% of the principal amount of non-performing loans.
4
(cid:127) The originating lender takes the first half point of any origination fee and the balance of such
fee is shared by the parties based on their percentage participation in the loan.
(cid:127) Each of the originating lender and the non-originating lender shall receive on an applicable
loan, distributions of monies on a pro-rata basis based upon their applicable participation
percentages until such time as the non-originating lender receives an internal rate of return of
10% per year compounded quarterly, at which time the non-originating lender shall receive
further distributions based upon 75% of its participation percentage and the originating lender
will receive the balance of sums to be distributed with respect to such loan.
Credit Facility
A subsidiary of ours is able to borrow funds to originate loans and for its general corporate
purposes through a senior secured revolving credit facility with Capital One, National Association. The
maximum amount that may be borrowed is the lesser of $25 million and the borrowing base. The
borrowing base is generally equal to 40% to 65% (depending on, among other things, the type of
property secured by the eligible mortgage receivables pledged to the lender and the operating income
of the related property) of such receivables. Interest accrues on the outstanding balance at the greater
of (i) 4% plus LIBOR and (ii) 5.50%. The facility matures in June 2014 and, subject to the satisfaction
of specified conditions, the outstanding balance may be converted at our option into an 18 month term
loan. We paid, and in each of June 2012 and 2013 will pay, an $82,500 fee to maintain this facility. We
have guaranteed our subsidiary’s obligations under this facility and at November 30, 2011, no amount
was outstanding thereunder.
Our Real Estate Assets
At September 30, 2011, we owned real estate properties having a book value of $59.3 million.
These properties primarily represent assemblage sites and additional properties located in downtown
Newark, NJ (vacant land, vacant buildings, retail, office and parking) owned by a consolidated joint
venture in which we have a 50.1% interest. See ‘‘—Newark Joint Venture.’’
Generally, our policy is to sell properties we acquire in foreclosure proceedings after completing
necessary repairs and maintenance and engaging in leasing activities, if required. We may retain a
property if we determine that holding it will result in a substantial increase in its market value. We may
provide senior purchase money mortgage loans at competitive fixed interest rates, if necessary, in order
to consummate a sale which we deem to be beneficial to us. In fiscal 2011 and 2010, we did not
provide any senior purchase money mortgage financing. In fiscal 2009 and early fiscal 2012 we provided
$17.8 million and $15 million of such financing, respectively.
Although we experienced a significant increase in our origination activity in fiscal 2011, the
recovery in the economy and commercial real estate activity has not resulted in our origination levels
approaching the levels we experienced in fiscal 2007 and 2008. This has resulted in a significant
increase in our cash availability to approximately $80.5 million at December 5, 2011. Accordingly, we
are considering using a portion of our available cash to acquire, with joint venture partners, multi-
family residential properties located throughout the United States or other real estate assets in the New
York metropolitan area. We believe this activity will provide stable and acceptable yields. We have not
acquired any such properties to date and there is no assurance that any such acquisition will positively
affect our operations.
5
Newark Joint Venture
Background
Two of our wholly-owned subsidiaries are members of a joint venture (which we refer to as the
Newark Joint Venture) with two members that are not affiliated with us. The Newark Joint Venture
owns two assemblage sites (i.e., Market Street and Teachers Village) and additional properties located
in downtown Newark, NJ. The assemblage sites are surrounded by a variety of governmental,
educational, cultural and entertainment institutions and facilities. In close proximity to both assemblage
sites is Rutgers University, the New Jersey Institute of Technology, University of Medicine and
Dentistry of New Jersey, Essex County College, Seton Hall Law School, the New Jersey Performing
Arts Center, the Prudential Arena (home of the National Hockey League New Jersey Devils and
temporary home of the National Basketball Association New Jersey Nets), the Essex County Court
Complex, Newark’s City Hall and a Federal Courthouse. Both assemblage sites are within walking
distance of Newark Penn Station, which provides access to Amtrak and New Jersey Transit trains and
are accessible to local bus routes. The assemblage sites are served by various highways, including the
Garden State Parkway, Interstate-95, Interstate-78 and Interstate-280.
The Newark Joint Venture intends to redevelop all or a portion of the sites, particularly the
assemblage sites, with personnel hired by the Newark Joint Venture or with development partners or
sell some of its sites to developers or end users. The assets, liabilities and results of operations of the
Newark Joint Venture are consolidated with our financial statements. Accordingly, the assets of the
Newark Joint Venture are included in our real estate properties, and our two loans aggregating
$27 million to the Newark Joint Venture (which are secured by substantially all of the real estate assets
of the Newark Joint Venture), are eliminated in consolidation and are not included in our outstanding
loans. The properties owned by the Newark Joint Venture have adequate insurance coverage for their
current use.
Immediately prior to the formation of the Newark Joint Venture, we held loans aggregating
approximately $38 million, secured by substantially all of the properties conveyed to the Newark Joint
Venture by our borrowers. We entered into loan work-out negotiations with our borrowers and, as a
result of such negotiations, entered into the Newark Joint Venture. In connection with the work-out of
our loans and the formation of the Newark Joint Venture, our loans were refinanced with a mortgage
loan of $27 million (which we currently, as described below, hold as two separate mortgage loans), with
the balance of our loans converted into a $6.9 million preferred capital account interest and a 50.1%
membership interest in the Newark Joint Venture, providing us with a separate capital account of
$3.9 million. The other members caused all the properties secured by our loans, and additional
properties (unencumbered by our loans) and contract rights to acquire additional properties, all located
in downtown Newark, NJ, to be contributed to the Newark Joint Venture for which the other members
received a 49.9% membership interest in the Newark Joint Venture (with a separate capital account of
$3.9 million). Our loans are the senior mortgage loans with respect to a majority of the properties
owned by the Newark Joint Venture.
In connection with an $8.6 million financing facility (of which $4.0 million is outstanding) provided
by an institutional lender with respect to the Teachers Village project, our $27 million mortgage loan
was bi-furcated into a $7.5 million loan secured by most of the Teachers Village properties and a
$19.5 million loan secured by substantially all of the other properties owned by the Newark Joint
Venture. The $7.5 million loan matured in September 2011 and is in the process of being extended
until March 2012. The $19.5 million loan matures on June 3, 2014, with a two-year extension option.
These loans provide for an interest rate of 11% per annum, of which 6% is paid currently and 5%
accrues and is to be paid at maturity. See ‘‘—Information and Activities Relating to Assemblage Sites’’
for a summary of the material terms of the financing provided by an institutional lender.
6
Current Property Information
The following table sets forth, as of September 30, 2011, information regarding the properties
owned in fee by the Newark Joint Venture:
ASSEMBLAGE
OR PROPERTY
NUMBER OF
PROPERTIES
TYPE OF
PROPERTY
RENTABLE
SQUARE
FEET(1)
ANNUAL
REAL
ESTATE
TAXES
NUMBER
OF
PERCENT
TENANTS LEASED
PRINCIPAL
TENANTS
Market Street . . . .
Teachers Village . .
13(2) Office and retail
10(4) Retail, office
303,406(2) $404,784
$420,762
227,571
19(3)
4
47% None
34% (6)
and parking(5)
Beaver Street
Property . . . . . .
Lincoln Park
Property . . . . . .
1
2
Retail
8,160
$ 11,933
Retail, office
and parking
97,493
$101,955
1
3
25% None
83% (7)
(1) Rentable square feet includes 418,818 square feet of retail and office space and 217,812 square
feet of land used for parking.
(2) Two of the Market Street properties are subject to third party mortgages. One mortgage, which is
secured by a property which contains approximately 11% of the rentable square feet of this
assemblage, has an outstanding principal balance of approximately $900,000, provides for interest
only payments of 7% per annum and matures in January 2015. The other mortgage is secured by a
property which contains approximately 3% of the rentable square feet of this assemblage, has an
outstanding principal balance of approximately $1.2 million, provides for interest only payments of
7% per annum and matures in April 2012.
(3) Leases representing 93% of the leased space of the Market Street assemblage are month-to-month
or have cancellation, relocation or demolition provisions. Many of these leases are at below market
rentals.
(4) One of the properties at the Teachers Village assemblage is subject to two third party mortgages.
These mortgages are secured by a property which contains 53,781 square feet of rentable space
(including 6,217 square feet of basement space) and is leased to a charter school and two retail
tenants. Further, such mortgages have an outstanding principal balance aggregating approximately
$6.3 million, provide for an interest rate of 6% per annum rate, are being amortized over the term
of the charter school lease and mature in 2030. A third mortgage is secured by the balance of the
properties at this assemblage, has an outstanding principal balance of $4.0 million (which may
increase up to $8.6 million), provides for an interest rate of 17% per annum and matures in
March 2012.
(5) The Newark Joint Venture is in the process of attempting to redevelop the Teachers Village, with
charter schools and residences for teachers and ground floor retail space. As part of its
redevelopment plan, the Newark Joint Venture leased 35,848 rentable square feet of space at this
assemblage site to a charter school pursuant to a 20 year lease. The lease commenced on
October 1, 2009. The charter school is currently in operation. See ‘‘—Information and Activities
Relating to Assemblage Sites.’’
(6) Friends of Team Academy Charter School.
(7) The two principal tenants are LA Parking Corp., the manager of an approximately 38,000 square
foot parking lot and Newark Teachers’ Union which occupies a parking lot of approximately 41,000
square feet.
7
The following table sets forth as of September 30, 2011, a schedule of the annual lease expirations
of the Newark Joint Venture’s real estate assets and the contributions to 2012 contractual rental
income provided by such leases (assumes that none of the tenants exercise renewal or cancellation
options, if any):
LEASE
EXPIRATION
Month-to-month . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . .
2021 and thereafter . . . . . . . . .
TOTAL . . . . . . . . . . . . . . . . . .
NUMBER OF
LEASES
EXPIRING(1)
9
6
3
—
1
1
5
—
1
—
1
27
SQUARE
FOOTAGE
OF
LEASES
EXPIRING
170,622
17,182
21,435
—
5,260
5,260
45,970
—
1,460
—
35,848
303,037
PERCENTAGE
OF TOTAL
LEASED
SQUARE FEET
PROJECTED
2012
RENTAL
INCOME(2)
PROJECTED
%
OF 2012
RENTAL
INCOME(2)
56%
6%
7%
—
2%
2%
15%
—
—
—
12%
$ 169,188
221,816
106,752
—
62,400
24,860
344,748
—
31,800
—
666,928
10%
14%
7%
—
4%
2%
21%
—
2%
—
40%
100%
$1,628,492
100%
(1) With respect to the assemblage sites, there are nine leases which are month-to-month and 13
leases which contain cancellation, relocation or demolition provisions.
(2) Assumes all month-to-month tenants remain in occupancy for the entire 2012 calendar year.
Information and Activities Relating to Assemblage Sites
The Market Street assemblage is an approximately 68,000 square foot site, representing
approximately 303,400 rentable square feet. The site is bounded by Market Street, Campbell Street,
Washington Street and University Avenue in downtown Newark, New Jersey. Potential redevelopment
opportunities with respect to this site include an office complex with a retail component, a medical
office complex containing offices, research laboratories and other medical related services, a retail
center, corporate headquarters, university offices, classrooms and/or dormitories, or a combination of
one or more of these uses. The Newark Joint Venture may redevelop this site for its own account, but
will only do so if it has entered into long-term lease transactions with credit worthy lessees and has
obtained satisfactory assurances that it will obtain necessary construction financing. Alternatively, the
Newark Joint Venture may enter into a joint venture with a development partner or sell all or portions
of the site. Although the Newark Joint Venture has conducted discussions and responded to requests
for bid proposals with various parties concerning the development of portions of the site, which have
included build to suit construction for potential users on a sale/leaseback or long-term lease basis and
the sale of portions of the property to end users and/or developers, the Newark Joint Venture has not
entered into any understandings or agreements concerning the redevelopment of all or any portion of
the site and there is no assurance that it will be able to conclude any such arrangement or obtain the
financing necessary to proceed with any arrangement which it may conclude.
The Teachers Village assemblage encompasses an area bounded by Branford Street to the north,
Treat Place to the east, Hill Street to the south and Washington Street to the west, and is adjacent to
Halsey Street. The Teachers Village site aggregates approximately 228,000 square feet, of which
approximately 179,500 square feet is comprised of existing parking lots and vacant buildings to be
demolished or rehabilitated and the balance is comprised of existing structures under lease. The project
8
contemplates a mix of residential, educational and retail facilitates and will include both the renovation
of an existing nine story structure and the construction of approximately six additional buildings. Two of
the buildings are being designed for occupancy by three charter schools and the remaining buildings are
being designed to provide approximately 200 residential rental units. It is contemplated that the ground
floor level of the charter school buildings and the residential buildings will provide for approximately
65,000 square feet of retail space. The project can be constructed and financed in stages.
The cost of the entire Teachers Village project was, in September 2011, estimated by the Newark
Joint Venture to be approximately $150 million. The Newark Joint Venture is proceeding with the
project on the assumption that it will develop the site for its account, although it may in the future
elect to partner with a developer or developers for all or a portion of the project. If it proceeds with
the development on its own, the Newark Joint Venture contemplates that the project will be financed
by a combination of public (federal, state and local) and private sources. Potential public financing
sources include, without limitation, New Market Tax Credits, Urban Transit Hub Tax Credits and
Economic Recovery Growth Grants. Private financing would be provided by conventional construction
financing, if available. An institutional lender has agreed to provide the Newark Joint Venture with up
to $8.6 million in financing secured by a pledge of 100% of the equity interests of the borrowing entity
and a subordinate mortgage encumbering the Teachers Village properties. The loan bears interest at
the rate of 17% per annum and matures in March 2012, subject to the right to extend to March 2012
upon satisfaction of specified conditions. The loan proceeds can only be used for the project’s ‘‘soft
costs’’ (including, without limitation, the cost of architects, engineers, specified consultants, permits and
legal and accounting fees). Through September 30, 2011, the Newark Joint Venture has drawn down
$4.0 million of the committed amount. The balance of the funds may be drawn in two tranches upon
satisfaction of specified conditions applicable to the particular tranche, including without limitation,
conditions relating to the Newark Joint Venture having obtained governmental approvals with respect
to specified financing and grant arrangements, guaranties as to rental payments from tenants or
prospective tenants (or their affiliates) of the contemplated structures and the receipt of term sheets
and/or commitments with respect to construction financing for the project. The Trust and its joint
venture partners each have severally guaranteed up to 25% of any amount drawn down under this
facility and the amount drawn down under this facility is subordinate to the Trust’s mortgage of
$7.5 million applicable to the Teachers Village properties.
No assurance can be given that sufficient financing will be obtained to complete the Teachers
Village project or any portion thereof, that our $7.5 million loan with respect to the Teachers Village
project will be repaid or that the Teachers Village will be profitable for us. In addition, since it is
contemplated that a substantial portion of the financing required for the project will be debt financing,
the profit which the joint venture partners receives, if any, will only be received after completion of the
construction and repayment of all the debt, which will be a significant period of time from the present.
Terms of the Newark Joint Venture Operating Agreement
The following is a summary of the material provisions of the amended and restated limited liability
company operating agreement of the Newark Joint Venture:
Membership Interests. We own 50.1% of the membership interests in the Newark Joint Venture,
and the other members (collectively, the ‘‘Other Member’’) own 49.9% of the membership interests in
the Newark Joint Venture.
Manager. An affiliate of the other members is the manager of the Newark Joint Venture and is
responsible for the day to day management activities of the Newark Joint Venture, but our consent is
required for all major decisions affecting the Newark Joint Venture and its properties. We may remove
the manager upon six months advance written notice or immediately upon the occurrence of certain
significant events.
9
Fees to the Manager. Until such time as the current manager is no longer the manager of the
Newark Joint Venture, the Newark Joint Venture shall pay to the current manager an asset
management fee and a property management fee aggregating $890,000 per annum, payable monthly in
advance.
Mandatory Capital Calls. Members are required to make pro rata capital contributions to the
Newark Joint Venture for any projected budget shortfalls.
Buy-Sell. Commencing on December 3, 2013 or, under specified circumstances, December 3,
2015, either member group may provide the other member group with written notice setting forth the
amount they will pay to purchase all of the assets of the Newark Joint Venture. The member group
which receives such notice has the option to (i) sell their membership interests in the Newark Joint
Venture to the other members for their pro rata portion of the asset purchase price set forth in the
written notice, or (ii) purchase the other members’ membership interests in the Newark Joint Venture
for their pro rata portion of the asset purchase price set forth in the written notice. If the acquirer is
the Other Member, then the Other Member is required to, among other things, pay in full our
mortgage and our preferred equity interest at closing.
Right of First Refusal and Tag-along Rights. At any time, either member group may provide the
other member group with written notice setting forth the sale price at which it desires to sell all or a
portion of its membership interests. The member group which received such notice may purchase the
offered membership interests at the price set forth in the notice. If they do not elect to purchase the
membership interest in accordance with the terms of the notice, the offering members may secure
another person to purchase its offered membership interests within 180 days. The group of members
which received the sale notice may tag-along in a sale to such other person and sell their pro rata
portion of the membership interests.
Distributions. The Newark Joint Venture may not distribute any cash flow to its members until
our $27 million loan (which has been eliminated in consolidation) has been fully repaid, including
accrued interest. Once it has been fully repaid, the cash flow of the Newark Joint Venture will generally
be distributed as follows: (i) first, to each member pro rata in an amount equal to their unreturned
additional capital contributions, (ii) second, to our members until we receive a 10% return on our
preferred capital contributions, (iii) third, to our members until we receive an amount equal to our
preferred capital contributions, and (iv) fourth, to each member pro rata until such members receive a
10% return on their additional capital contributions, (v) fifth, to the members pro rata an amount
equal to their common capital contributions, and (vi) the remainder shall be distributed as follows:
(a) 10% to the managing member, and (b) 90% pro rata to the other members pro rata.
Manager of the Newark Joint Venture
The manager of the Newark Joint Venture is RBH Group LLC; its managing member and
President is Ron Beit-Halachmy. Mr. Beit-Halachmy, 39 years of age, has over 17 years of experience
in the real estate industry and has been involved for more than ten years in acquiring sites in Newark,
New Jersey. He was the managing member of the entities which acquired all of the real property
currently owned by the Newark Joint Venture. Mr. Beit-Halachmy earned a BA in Economics from the
University of Wisconsin and a law degree from New York Law School.
Our Investment Strategy
Our long-term objective is to provide our shareholders with returns over time, including capital
appreciation and cash distributions, by originating loans secured by a diversified portfolio of
commercial and multi-family real property. Inasmuch as we had, at December 31, 2010, approximately
10
$70 million in net loss operating carry forwards, we do not anticipate paying cash dividends until we
have fully used these loss carry forwards.
Our loan originations in fiscal 2011, 2010 and 2009 were $131.3 million, $17.4 million and,
$12.7 million, respectively. Our originations in fiscal 2011 were higher than in fiscal 2010 and 2009 due
to increased demand for our short term bridge loans which we believe was due to a more favorable
economic climate in the most recent fiscal year. In light of the economic uncertainty and the decline in
our loan originations in the last six months of fiscal 2011 from the prior six months, no assurance can
be given that we will be able to maintain in the future the levels of loan originations we achieved in
fiscal 2011.
We pursue lending opportunities with purchasers and prospective purchasers of commercial and
multi-family real estate properties and property owners who require short-term financing for renovation
or repositioning of a real estate asset. We also originate loans to persons purchasing their own
mortgage debt or purchasing third party mortgage debt, in each case at a discount to the principal
amount thereof. The purchase of third party mortgage debt is generally structured as a repurchase
agreement pursuant to which we purchase the mortgage and our counterparty is obligated to
repurchase such mortgage within a specified period.
Our investment policy emphasizes the origination of short-term real estate loans secured by senior
liens on real property. As of September 30, 2011, other than one mezzanine loan in principal amount
of $2 million, our loan portfolio only consisted of first mortgage loans or pari passu participations in
first mortgage loans. Our lending activities focus on operating properties such as multi-family
residential properties, residential properties being converted to condominium ownership, office
buildings, retail, shopping centers, mixed use buildings, hotels/motels, and industrial buildings.
We also will, on a limited basis, provide senior loans secured by unimproved land, but generally
require that the unimproved land collateralizing our loan has proper entitlements and that zoning is in
place for the intended purpose. We also originate and hold for investment loans secured by improved
commercial or multi-family residential property which is vacant, pending renovation or repositioning
and sale or leasing of the property. Pursuant to, among other things, our arrangement with 512
Lending, we may sell senior, junior or pari passu participation in loans we originate and acquire senior,
junior or pari passu participations in loans originated by others. We also invest in the securities of
other REITs.
From time-to-time we originate junior commercial loans, invest in loans as a junior participant or
sell senior participations in loans we originate. When we invest in junior loans or hold junior
participations, the collateral securing our loan is subordinate to the liens of senior loans or senior
participations. It is possible that the amount which may be recovered by us in cases in which we hold a
junior position may be less, or significantly less, than our total investment.
We have historically solicited loans secured by real estate property located within the continental
United States. We may expand our lending activities to include loans secured by properties located in
Canada and Puerto Rico.
Our Origination Process and Underwriting Criteria
We originate loans in a number of ways. We primarily rely on relationships developed by our
officers and loan originators with real estate investors, commercial real estate brokers, mortgage
brokers and bankers. We also advertise, use the internet and attend trade shows in order to develop
relationships with potential borrowers and real estate brokers, mortgage brokers and bankers.
When underwriting a loan, the primary focus of our analysis is the value of a property, which we
evaluate by considering a number of factors, including location, current use and potential for
alternative use, current and potential net operating income, if any, the local market for condominium
11
conversion, if conversion to condominium ownership is contemplated, comparable sales prices, existing
zoning regulations and intended use, if the loan is to be secured by undeveloped land, and local
demographics. We also examine the experience of our potential borrower’s principals in real estate
ownership and management and, if applicable, real estate development.
Loan approvals are based on a review of property information as well as other due diligence
activities undertaken by us. Those activities may include a site visit to the property, an in-house
property valuation, a review of the results of operations of the property (historical and projected, if
any) or, in the case of an acquisition of the property by our prospective borrower, a review of projected
results of operations for the property, and a review of the financial condition and a credit report and
background check of the principals of the prospective borrower. We do not obtain independent
property appraisals, but instead rely on our in-house activities described above. If management
determines that an environmental assessment of the underlying property is necessary, then such an
assessment is conducted by an experienced third-party service provider. Before a loan commitment is
issued, the loan must be reviewed and approved by our loan committee. Loan approval occurs after the
assent of not less than four of the seven members of our loan committee, all of whom are executive
officers of ours. We generally obtain a non-refundable cash deposit for legal, travel, and other expenses
from a prospective borrower prior to or at the time of issuing a loan commitment, and our loan
commitments are generally issued subject to receipt by us of title documentation and title insurance, in
a form satisfactory to us, for the underlying property. The approval of our board of trustees is required
for each loan which exceeds $20,000,000 in principal amount, and the approval of our board of trustees
is also required where loans by us to one borrower exceed $50,000,000, in the aggregate.
We require either a personal guarantee or a ‘‘walk-away guarantee’’ from the principal or
principals of the borrower, in substantially all of the loans originated by us. A ‘‘walk-away guarantee’’
generally provides that the full guarantee of the principal or principals of the borrower terminates if
the borrower conveys title to the property to us within a negotiated period of time after a loan default
if the payment of mortgage interest to us, real estate taxes and other operating expenses are current.
The ‘‘walk-away guarantee’’ is intended to provide an incentive to the principals of a borrower, in a
situation where our borrower has defaulted, to have the collateral deeded to us in lieu of foreclosure,
thereby reducing the cost of foreclosure proceedings. By complying with the terms of the ‘‘walk-away
guarantee,’’ the principals of the borrower can avoid the risk of being personally responsible for any
difference between the amount owed to us and the amount we recover in a foreclosure proceeding. If
we make more than one loan to a borrower, we may require that all or some of the outstanding loans
to that borrower be cross-collateralized. In our judgment, the ‘‘walk-away guarantees’’ we have secured
upon the origination of certain loans have provided us with leverage in negotiating loan paydowns from
‘‘walk away guarantors’’ and assisted in expediting the foreclosure process.
Junior Subordinated Notes
On March 15, 2011, we entered into certain arrangements with respect to our junior subordinated
notes due 2036, pursuant to which we, among other things, redeemed $5,000,000 of the outstanding
notes at 100% of their principal amount and reduced the interest rate thereon as set forth below:
Interest Period
Prior Interest Rate
New Interest Rate
March 15, 2011 through July 31, 2012 . . . . . . . . . . . . . . . . . . .
August 1, 2012 through April 29, 2016 . . . . . . . . . . . . . . . . . . .
April 30, 2016 through April 30, 2036 . . . . . . . . . . . . . . . . . . . LIBOR + 2.95% LIBOR + 2.00%
3.50%
8.37%
3.00%
4.90%
As of September 30, 2011, $37.4 million in principal amount of these notes were outstanding.
These notes are redeemable at any time at our option.
12
Pursuant to the governing agreements, at all times prior to August 1, 2012, we will be permitted to
make distributions to our shareholders for taxable years after 2009 to the extent necessary to satisfy
REIT requirements or pay capital gains, if any, provided such distributions are paid in the form of
common shares to the maximum extent permissible under the IRS regulations in effect at the time of
such distributions, with the balance payable in cash.
Competition
With respect to our real estate lending activities, we compete, in the current economic
environment, for first mortgage loans with other entities, including other mortgage REITs, specialty
finance companies, public and private lending companies, investment funds and others. Many of our
competitors possess greater financial and other resources than we possess. Mortgage lending has been
historically competitive, but in the current economic environment it is difficult to determine our direct
and indirect competitors or the extent of the competition.
Competitive variables in our lending activities include market visibility, size of loans offered, rate,
fees, term and underwriting standards. To the extent a competitor offers a lower rate, is willing to risk
more capital in a particular transaction, and/or employs more liberal underwriting standards, our
origination volume and profit margins would be adversely impacted. We compete by offering rapid
response time in terms of approval and closing and by offering ‘‘no prepayment penalty’’ loans. In
order to supplement our marketing activities, we engage in a national advertising program.
With respect to the purchase or sale by us of real estate assets, we compete with any entity seeking
to acquire or dispose of similar properties, including other REITs, banks, pension funds, hedge funds,
real estate developers and private real estate investors. Competition is primarily dependent on price
and the ability to secure financing. Other competitive factors which a potential competitor may take
into account are location and physical condition of the property.
Our Structure
We share facilities, personnel and other resources with several affiliated entities including, among
others, Gould Investors L.P., a master limited partnership involved in the ownership and operation of a
diversified portfolio of real estate, and One Liberty Properties, Inc., a publicly-traded equity REIT.
Jeffrey A. Gould, our President and Chief Executive Officer, George Zweier, our Vice President and
Chief Financial Officer, two other officers engaged in loan origination, underwriting and servicing
activities, and four others engaged in underwriting and servicing activities devote substantially all of
their business time to us, while our other personnel (including several officers) share their services on a
part-time basis with us and other affiliated entities that share our executive offices. The allocation of
expenses for the shared facilities, personnel and other resources is computed in accordance with a
shared services agreement by and among us and the affiliated entities. The allocation is based on the
estimated time devoted by executive, administrative and clerical personnel to the affairs of each entity
that is a party to the Shared Services Agreement.
In addition, we are party to an Advisory Agreement, between us and REIT Management Corp.,
our advisor. REIT Management is wholly owned by the chairman of our Board of Trustees and he and
certain of our executive officers, including our President and Chief Executive Officer, receive
compensation from REIT Management Corp. Pursuant to this agreement, REIT Management furnishes
advisory and administrative services with respect to our business, including, without limitation,
arranging and negotiating credit facilities, participating in our loan analysis and approvals, providing
investment advice, providing assistance with building inspections and litigation strategy and support. In
addition, in connection with non-performing loans, REIT Management, among other activities, engages
in negotiations with borrowers, guarantors, and their advisors related to workouts, participates in
13
strategic decisions relating to workouts and foreclosures and may interface with receivers, managing
agents and court appointed trustees with respect to specific collateral securing our loans.
Through December 31, 2011, for the services performed by REIT Management pursuant to the
Advisory Agreement, it receives an asset management fee equal to 0.6% of our invested assets and an
incentive fee from borrowers of 0.5% of the total commitment amount, payable upon funding a loan
commitment, provided that we have received at least a loan commitment fee of 1% from the borrower
in any such transaction and any loan commitment fee in excess of 1.5% of the total commitment
amount is retained by us.
The parties entered into an amendment to the Advisory Agreement effective as of January 1, 2012,
pursuant to which (i) the stated termination date was extended until June 30, 2014, (ii) the minimum
and maximum fees payable in a fiscal year to REIT Management were set at $750,000 and $4 million,
respectively, subject to adjustment for any fiscal year of less than twelve months, and (iii) we are to pay
REIT Management the following annual fees, which are to be paid on a quarterly basis:
(cid:127) 1.0% of the average principal amount of earning loans;
(cid:127) 0.35% of the average amount of the fair market value of non-earning loans;
(cid:127) 0.45% of the average book value of all real estate properties, excluding depreciation;
(cid:127) 0. 25% of the average amount of the fair market value of marketable securities;
(cid:127) 0.15% of the average amount of cash and cash equivalents; and
(cid:127) to the extent loans or real estate are held by joint ventures or other arrangements in which we
have an interest, fees varying based on, among other things, the nature of the asset (i.e. real
estate or loans), the nature of our involvement (i.e. active or passive) and the extent of our
equity interests in such arrangement.
We believe that the Shared Services Agreement and the Advisory Agreement allow us to benefit
from access to, and from the services of, a group of senior executives with significant real estate
knowledge and experience.
We also engage affiliated entities in management activities with respect to some of the properties
acquired by us in foreclosure proceedings and some of the properties owned by joint ventures in which
we are an equity participant. These management activities include, among other things, rent billing and
collection, property repair, maintenance and improvement, contractor negotiation, construction
management and sales and leasing activities. In management’s judgment, the fees paid by us to these
affiliated entities are competitive with fees that would be charged for comparable services by unrelated
entities.
14
Item 1A. Risk Factors.
Set forth below is a discussion of certain risks affecting our business. The categorization of risks set
forth below is meant to help you better understand the risks facing our business and is not intended to limit
your consideration of the possible effects of these risks to the listed categories. Any adverse effects arising
from the realization of any of the risks discussed, including our financial condition and results of operation,
may, and likely will, adversely affect many aspects of our business.
Risks Related to our Business
The continuing economic uncertainty may result in decreased loan originations adversely affecting our
business.
In the current uncertain economic environment, the demand for our bridge loans has fluctuated.
As a result, we originated $88.8 million and $42.5 million in loans in the first and second half of fiscal
2011, respectively. Until there are sustained positive changes in the economy (including the credit and
real estate markets) and an increased demand for bridge loans, our loan originations may be at a
reduced level which would negatively affect our revenues, net income and cash flow.
Defaults on our loans may cause declines in revenues and net income.
Continuing uncertainty in the credit markets and an uncertain economic environment may result in
defaults by our borrowers in the future. Loan defaults result in a decrease in interest income and may
require the establishment of, or an increase in, loan loss reserves. The decrease in interest income
resulting from loan defaults may be for a prolonged period of time as we seek to recover, primarily
through legal proceedings, the outstanding principal balance and accrued interest due on a defaulted
loan, plus the legal costs incurred in pursuing our legal remedies. Legal proceedings, which may include
foreclosure actions and bankruptcy proceedings, are expensive and time consuming. The decrease in
interest income, and the costs involved in pursuing our legal remedies will reduce the amount of cash
available to meet our expenses. In addition, the decrease in interest income, the costs incurred by us in
a defaulted loan situation and increases in loan loss reserves will have an adverse impact on our net
income, taxable income and cash flow.
Our loan origination activities may be limited by the funds available to us.
At December 5, 2011, we had approximately $80.5 million of cash and cash equivalents available
for originations and operations. If demand for our bridge loan increases significantly, as to which no
assurance can be given, our ability to originate loans may be limited by the funds available to us.
Further, our credit facility requires us to maintain certain financial ratios, including net worth, debt
service coverage ratios, and limits our ability to incur debt. These factors may limit the amount of
mortgage loans we can originate, which will limit our revenues and operating results.
We may incur loan loss provisions and impairment charges in fiscal 2012.
We evaluate on a quarterly basis our loan and real estate portfolios for indicators of impairment.
Loan loss provisions and impairment charges reflect management’s judgment of the probability and
severity of loan losses and the decline in the value of real estate property assets. The valuation process,
which is inherently difficult, is particularly difficult during a recessionary period in which the availability
of credit is limited and commercial real estate transactions have significantly decreased.
Loan loss provisions and impairment charges may be required in the future as a result of factors
beyond our control, including, among other things, the continuation or downward acceleration of the
economic environment and changes in market conditions affecting the value of loan collateral and real
15
property assets. If our loan loss provisions or impairment charges prove inadequate to cover actual
losses, we could suffer additional losses.
If we are required to take loan loss provisions or impairment charges in the future, our results of
operations would be adversely impacted.
It is highly unlikely that we will declare any dividends in the next few years.
In December 2008, our board of trustees suspended the payment of regular quarterly dividends
and we have not declared or paid any dividends since fiscal 2010.
In order to qualify as a REIT, we are required to distribute 90% of our taxable income. At
December 31, 2010, we had a tax loss carry-forward of $70.5 million. Under current tax laws, we can
offset our future taxable income against our tax loss carry-forward for twenty years or until the tax loss
carry-forward has been fully used, whichever occurs first. As a result, we do not expect to pay a
dividend in calendar 2012 and it is unlikely that we will be required to pay a dividend for many years
thereafter in order to maintain our REIT status. The non-payment of cash dividends may negatively
impact the price of our common shares.
The increased risk of loans secured by unimproved land may harm our results of operations.
From time-to-time, we provide loans that are secured by unimproved land. Land loans are subject
to a higher risk of default because such properties are not income producing properties. In addition,
the market value of such properties is volatile. Although we only make loans on undeveloped land if
entitlements and zoning is in place for the intended use, there is always the risk that entitlements and
zoning may be changed or lapse. Consequently, in the event of a default and foreclosure, we may not
be able to sell undeveloped land for an amount equal to our investment and we may lose a significant
portion of our investment. In the event of our acquisition of undeveloped land in foreclosure
proceedings, we may elect to hold the property until the market becomes more favorable. In such case
during the holding period, which could be for a number of years, we will not receive any income from
this property and we will be required to pay the costs of carrying the property, primarily real estate
taxes and insurance, which could adversely affect our net income and shareholders’ equity.
Risks Related to the Newark Joint Venture and Real Estate Operations.
The Newark Joint Venture may have an operating loss for the foreseeable future.
Our real estate assets include the properties owned by the Newark Joint Venture, which properties
had, at September 30, 2011, an aggregate book value of $48.1 million. At September 30, 2011, the
Newark Joint Venture properties represented 81.2% and 25.1%, respectively, of our real property assets
and total assets. We anticipate that the Newark Joint Venture will operate at a loss in fiscal 2012 and
for several years thereafter. If the Newark Joint Venture operates at a loss, we and our Newark Joint
Venture partners will be required to fund the losses by making additional capital contributions, on a
pro rata basis. Although it is possible that the need to make additional contributions will be mitigated
by the sale of some of the Newark Joint Venture properties or financing secured by the Newark Joint
Venture for the operation and/or development of its properties, currently, there is no assurance that we
will be able to sell any of such properties on satisfactory terms or that we will obtain the financing
(other than the soft-cost financing of up to $8.6 million which is already committed) to fund
development and construction activities. The operations of the Newark Joint Venture could have an
adverse effect on our results of operations, financial condition and liquidity for several years.
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We have limited experience in developing and operating assemblage sites.
The principal assets of our Newark Joint Venture are two assemblage sites and two additional
properties located in downtown Newark, NJ. Since we have not previously engaged in the real estate
development business, we are subject to risks that differ from those to which we have been subject to
historically. Although the principal of the managing member of the Newark Joint Venture (who is
formerly the principal of our borrowers) is knowledgeable with respect to the local real estate market
and has experience in the development of gut rehabilitation properties, this experience may not
necessarily be relevant to a particular redevelopment project. As a result, to redevelop the assemblage
sites, the Newark Joint Venture will have to hire personnel knowledgeable in real estate development
to assist in its development, become involved with a development partner, or sell some or all of the
sites to developers or potential users. There can be no assurance that the Newark Joint Venture will be
successful in hiring experienced personnel, finding a development partner with skills needed to develop
and/or manage the redevelopment of the sites, or that we will be able to sell some or all of the
properties to developers or potential users.
The success of our Newark Joint Venture depends, to a large extent, on the principal of the Newark Joint
Venture’s manager.
The principal of the manager of the Newark Joint Venture was responsible for acquiring all the
properties owned by the Newark Joint Venture. We believe that the principal’s continued involvement
is important to the success of the Newark Joint Venture. The diminution or loss of his services due to
disability, death or for any other reasons could have a material adverse effect on the Newark Joint
Venture’s business, which would result in a material adverse effect on our business.
The Newark Joint Venture carries key man life insurance on the principal of the manager of the
Newark Joint Venture in the amount of $20 million. There can be no assurance that the proceeds from
such life insurance would be sufficient to compensate the Newark Joint Venture for the loss of his
services, and these policies do not provide any benefits if he becomes disabled or is otherwise unable to
render services to the Newark Joint Venture.
Our Newark Joint Venture is subject to risks particular to real estate development activities.
Our Newark Joint Venture is subject to the risks associated with development activities. These
risks include:
(cid:127) The inability to obtain the $150 million or more needed to fund the Teachers Village
development project.
(cid:127) The failure to obtain governmental and other approvals on a timely basis;
(cid:127) Construction, financing and other costs of developing the properties owned by the Newark Joint
Venture and in particular, Teachers Village, may not be obtained or if obtained may exceed
original estimates, possibly making such activities unprofitable;
(cid:127) Time required to complete the construction of Teachers Village or to lease up the completed
project may be greater than originally anticipated, thereby adversely affecting our cash flow and
liquidity;
(cid:127) Occupancy rates and rents of a completed project may not be sufficient to make such project
profitable; and
(cid:127) Acquire all the properties needed to develop the project to its full potential.
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We may be unable to renew leases or relet space and are exposed to the risks of defaults by tenants.
In fiscal 2011, approximately 62.1% of our rental income was generated from properties at the
Newark Joint Venture. The leases at the properties owned by the Newark Joint Venture are generally
short-term in nature. If our tenants decide not to renew their leases upon their expiration, we may not
be able to relet the space. Even if our tenants do renew or we are able to relet the space, the terms of
renewal or reletting may be less favorable than current lease terms. If we are unable to promptly renew
the leases or relet the space, or if the rental rates upon such renewal or reletting are significantly lower
than current rates, our income would be adversely affected.
Friends of Team Academy, a charter school located at the Teacher’s Village assemblage, Petco
Animal Supplies, Inc. and Calidad Furniture Corp. VII accounted for approximately 23%, 14% and
14%, respectively, of our rental income in fiscal 2011. The default, financial distress or bankruptcy of
any of these tenants could cause interruptions in the receipt of, or the loss of, a significant amount of
rental revenue and we could incur substantial costs in enforcing our rights as landlord. Our rental
income could be adversely affected if these tenants become unable to meet their obligations to us.
Unfavorable changes in market and economic conditions could adversely affect occupancy, rental rates,
operating expenses, and the overall market value of real estate assets we may acquire.
Conditions in markets in which we may acquire multi-family real estate assets may significantly
affect occupancy, rental rates and the operating performance of such assets. The risks that may
adversely affect conditions in those markets include the following:
(cid:127) industry slowdowns, plant closings and other factors that adversely affect the local economy;
(cid:127) an oversupply of, or a reduced demand for, multi-family units;
(cid:127) a decline in household formation or employment or lack of employment growth;
(cid:127) the inability or unwillingness of residents to pay rent increases;
(cid:127) rent control or rent stabilization laws, or other laws regulating housing, that could prevent us
from raising rents to offset increases in operating costs; and
(cid:127) economic conditions that could cause an increase in our operating expenses, such as increases in
property taxes, utilities, and routine maintenance.
Risks Related to our Industry
The geographic concentration of our assets may make our revenues and the value of our assets vulnerable to
adverse changes in economic conditions in the New York metropolitan area.
At September 30, 2011, 71.2% of our outstanding loans are secured by properties located in the
New York metropolitan area and 81.2% of our real estate assets are located in Newark, NJ. A lack of
geographical diversification makes our mortgage portfolio and real estate property holdings more
sensitive to local or regional economic conditions. A significant decline in the economy of the New
York metropolitan area (including Newark, NJ), could result in a greater risk of default under our
loans compared with the default rate for loans secured by properties in other geographic locations and
a greater risk of a decrease in the value of our real estate assets compared with a decrease in value of
properties located in other geographic locations. This could result in a reduction of our revenues and
provision for loan loss allowances and impairment charges, which might not be as acute if our portfolio
were more geographically diverse.
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In order for real estate properties to generate positive cash flow or to make real estate properties suitable for
sale, we may need to make significant capital improvements and incur deferred maintenance costs to these
properties.
Some of the properties we acquire, including properties acquired through foreclosure proceedings,
may face competition from newer, more updated properties. In order to remain competitive and
increase occupancy at these properties and/or make them attractive to potential purchasers, we may
have to make significant capital improvements and/or incur deferred maintenance costs with respect to
these properties. The cost of these improvements and deferred maintenance items may impair our
financial performance and our liquidity.
Financing with high loan-to-value ratios involves increased risk of loss and may adversely affect us.
Our primary source of recovery in the event of a loan default is the real estate underlying a
defaulted loan. Therefore, the value of our loan depends upon the value of the underlying real estate.
The value of the underlying property is dependent on numerous factors outside of our control,
including national, regional and local business and economic conditions, inflation, government
economic policies and the availability of credit. A loan-to-value ratio is the ratio of the amount of our
loan to the estimated market value of the property underlying a loan, as determined by our internal
valuation process. The higher the loan to value ratio, the greater the risk that the amount obtainable
from sale of a property will be insufficient to repay the loan in full upon default.
We are subject to the risks associated with loan participations, such as lack of full control rights.
Some of our investments are participating interests in loans in which we share the rights,
obligations and benefits of the loan with participating lenders pursuant to a participation agreement.
We may need the consent of these parties to exercise our rights under such loans, including rights with
respect to amendment of loan documentation, the institution of, and control over, foreclosure actions,
entering into forbearance agreements with borrowers, and sale of the underlying property upon
acquisition in foreclosure. Our participant may have interests and goals that are different from ours
and may desire an action or position which we oppose. As a result, we could become engaged in a
dispute with a participant which may affect our ability to take action with respect to defaulted loan or
disposition of the property, to our detriment.
We may have less control of our investment when we invest in joint ventures.
From time-to-time, we have entered into joint venture agreements. Our co-venturers may have
different interests or goals than we do and our co-venturers may not be able or willing to take an
action that is desired by us. A disagreement with respect to the activities of the joint venture could
result in a substantial diversion of time and effort by our management and could result in our exercise,
or the exercise by our co-venturer, of the buy/sell provision often contained in our joint venture
organizational documents. In addition, there is no limitation under our charter documents as to the
amount of funds that we may invest in joint ventures. Accordingly, we could invest a substantial amount
of our funds in joint ventures which ultimately may not be profitable as a result of disagreements with
and among our co-venturers.
Liability relating to environmental matters may impact the value of properties that we may acquire or the
properties securing our loans.
We may be subject to environmental liabilities arising from the ownership of properties we acquire.
Under various federal, state and local laws, an owner or operator of real property may become liable
for the costs of removal of certain hazardous substances released on its property. These laws often
19
impose liability without regard to whether the owner or operator knew of, or was responsible for, the
release of such hazardous substances.
The presence of hazardous substances may adversely affect an owner’s ability to sell real estate or
borrow using real estate as collateral. To the extent that an owner of a property underlying one of our
loans becomes liable for removal costs, the ability of the owner to make payments to us may be
reduced, which in turn may adversely affect the value of the relevant mortgage asset held by us.
If we acquire properties, including properties acquired through foreclosure proceedings, the
presence of hazardous substances on a property may adversely affect our ability to sell the property and
we may incur substantial remediation costs. The discovery of material environmental liabilities attached
to such properties could have a material adverse effect on our results of operations and financial
condition.
We operate in a highly competitive market.
We compete with many third parties engaged in finance and real estate investment activities,
including other REITs, specialty finance companies, public and private lending companies, investment
funds and other entities. Some of these competitors have substantially greater financial resources than
we do and generally may be able to accept more risk. As such, they have the ability to make larger
loans and to reduce the risk of loss from any one loan by having a more diversified loan portfolio.
They may also enjoy significant competitive advantages that result from, among other things, enhanced
operating efficiencies. An increase in the availability of funds to lenders, or a decrease in the amount
of borrowing activity, may increase competition for making loans and may reduce obtainable yields or
increase the credit risk inherent in the available loans.
Our revenues and the value of our portfolio may be negatively affected by casualty events occurring on
properties securing our loans.
We require our borrowers to obtain, for our benefit, comprehensive insurance covering the
property and any improvements to the property collateralizing our loan in an amount intended to be
sufficient to provide for the cost of replacement in the event of casualty. In addition, joint ventures in
which we are an equity participant carry comprehensive insurance covering the property and any
improvements to the property owned by the joint venture for the cost of replacement in the event of a
casualty. Further, we carry insurance for such purpose on properties owned by us. However, the
amount of insurance coverage maintained for any property may not be sufficient to pay the full
replacement cost following a casualty event. In addition, the rent loss coverage under a policy may not
extend for the full period of time that a tenant may be entitled to a rent abatement that is a result of,
or that may be required to complete restoration following a casualty event. In addition, there are
certain types of losses, such as those arising from earthquakes, floods, hurricanes and terrorist attacks,
that may be uninsurable or that may not be economically insurable. Changes in zoning, building codes
and ordinances, environmental considerations and other factors may make it impossible for our
borrower, a joint venture or us, as the case may be, to use insurance proceeds to replace damaged or
destroyed improvements at a property. If any of these or similar events occur, the amount of coverage
may not be sufficient to replace a damaged or destroyed property and/or to repay in full the amount
due on all loans collateralized by such property. As a result, our returns and the value of our
investment may be reduced.
Senior management and other key personnel are critical to our business and our future success may depend
on our ability to retain them.
We depend on the services of Fredric H. Gould, chairman of our board of trustees, Jeffrey A.
Gould, our president and chief executive officer, and other members of senior management to carry
20
out our business and investment strategies. Although Jeffrey A. Gould devotes substantially all of his
business time to our affairs, he devotes a limited amount of his business time to entities affiliated with
us. In addition to Jeffrey A. Gould, only three other executive officers, Mitchell Gould, our executive
vice president, Lonnie Halpern, a vice president, and George Zweier, our vice president and chief
financial officer, devote all or substantially all of their business time to us. The remainder of our
executive management personnel share their services on a part-time basis with entities affiliated with us
and located in the same executive offices pursuant to a shared services agreement. We rely on part-time
executive officers to provide certain services to us, including legal, accounting and computer services,
since we do not employ full-time executive officers to handle these services. If the shared services
agreement is terminated, we will have to obtain such services or hire employees to perform them. We
may not be able to replace these services or hire such employees in a timely manner or on terms,
including cost and level of expertise, that are as favorable as those we receive under the shared services
agreement.
In addition, in the future we may need to attract and retain qualified senior management and
other key personnel, both on a full-time and part-time basis. The loss of the services of any of our
senior management or other key personnel or our inability to recruit and retain qualified personnel in
the future, could impair our ability to carry out our business and our investment strategies.
We do not carry key man life insurance on members of our senior management.
Our transactions with affiliated entities involve conflicts of interest.
Entities affiliated with us and with certain of our executive officers provide services to us and on
our behalf. Although our policy is to obtain terms in transactions with affiliates that are at least as
favorable as those that we would receive if the transactions were entered into with unaffiliated entities,
these transactions raise the potential that we may not receive terms as favorable as those that we would
receive if the transactions were entered into with unaffiliated entities.
Compliance with REIT requirements may hinder our ability to maximize profits.
In order to qualify as a REIT for Federal income tax purposes, we must continually satisfy tests
concerning among other things, our sources of income, the amounts we distribute to our shareholders
and the ownership of securities. We may also be required to make distributions to shareholders at
disadvantageous times or when we do not have funds readily available for distribution. Accordingly,
compliance with REIT requirements may hinder our ability to operate solely on the basis of
maximizing profits.
In order to qualify as a REIT, we must also ensure that at the end of each calendar quarter at
least 75% of the value of our assets consists of cash, cash items, government securities and qualified
REIT real estate assets. The remainder of our investment in securities cannot include more than 10%
of the outstanding voting securities of any one issuer or more than 10% of the total value of the
outstanding securities of such issuer. In addition, no more than 5% of the value of our assets can
consist of the securities of any one issuer, other than a qualified REIT security. If we fail to comply
with these requirements, we must dispose of the portion of our assets in excess of such amounts within
30 days after the end of the calendar quarter in order to avoid losing our REIT status and suffering
adverse tax consequences. This requirement could cause us to dispose of assets for consideration of less
than their true value and could lead to a material adverse impact on our results of operations and
financial condition.
Item 1B. Unresolved Staff Comments.
None.
21
Executive Officers of Registrant
Set forth below is a list of our executive officers whose terms will expire at our 2012 annual Board
of Trustees’ meeting. The business history of officers who are also Trustees will be provided in our
proxy statement to be filed pursuant to Regulation 14A not later than January 28, 2012.
Name
Office
Fredric H. Gould* . . . . . . . . . . . . . . Chairman of the Board of Trustees
Jeffrey A. Gould* . . . . . . . . . . . . . . . President and Chief Executive Officer;
Trustee
Mitchell K. Gould . . . . . . . . . . . . . . Executive Vice President
Matthew J. Gould* . . . . . . . . . . . . . .
Senior Vice President; Trustee
Simeon Brinberg** . . . . . . . . . . . . . .
Senior Vice President; Senior Counsel; and
Secretary
David W. Kalish . . . . . . . . . . . . . . . .
Senior Vice President, Finance
Israel Rosenzweig . . . . . . . . . . . . . . .
Senior Vice President
Mark H. Lundy** . . . . . . . . . . . . . . .
Senior Vice President and General Counsel
George E. Zweier . . . . . . . . . . . . . . . Vice President, Chief Financial Officer
Lonnie Halpern . . . . . . . . . . . . . . . . Vice President
*
Fredric H. Gould is the father of Jeffrey A. and Matthew J. Gould.
** Simeon Brinberg is the father-in-law of Mark H. Lundy.
Mitchell K. Gould (age 39), employed by us since May 1998, has been a Vice President since
March 1999 and Executive Vice President since March 2007. From January 1998 until May 1998,
Mr. Gould was employed by Bear Stearns Companies, Inc. where he was engaged in originating and
underwriting commercial real estate loans for securitization.
Simeon Brinberg (age 77) has been our Secretary since 1983, a Senior Vice President since 1988,
and Senior Counsel since March 2006. Mr. Brinberg has been a Vice President of Georgetown
Partners, Inc., the managing general partner of Gould Investors L.P., since October 1988. Gould
Investors L.P. is primarily engaged in the ownership and operation of real estate properties held for
investment. Since June 1989, Mr. Brinberg has been a Vice President of One Liberty Properties, Inc.
(currently a Senior Vice President), a REIT engaged in the ownership of income producing real
properties leased to tenants under long term leases. Mr. Brinberg is a member of the New York Bar
and was engaged in the private practice of law for approximately 30 years prior to 1988.
David W. Kalish (age 64) has been our Senior Vice President, Finance since August 1998.
Mr. Kalish was our Vice President and Chief Financial Officer from June 1990 until August 1998. He
has been Chief Financial Officer of One Liberty Properties, Inc. and Georgetown Partners, Inc. since
June 1990. For more than five years prior to June 1990, Mr. Kalish, a certified public accountant, was a
partner of Buchbinder Tunick & Company LLP and its predecessors.
Israel Rosenzweig (age 64) has been a Senior Vice President since April 1998. Mr. Rosenzweig has
been a Vice President of Georgetown Partners, Inc. since May 1997 and from 2000 to March 2009 was
President of GP Partners, Inc., an affiliate of Gould Investors L.P. which provided advisory services in
the real estate and financial services industries to an investment advisor. He also has been a Senior
Vice President of One Liberty Properties, Inc. since May 1997.
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Mark H. Lundy (age 49) has been our General Counsel since March 2007 and a Senior Vice
President since March 2005. From 1993 to March 2005 he was a Vice President. He has been the
Secretary of One Liberty Properties, Inc. since June 1993 and he also serves as a Senior Vice President
of One Liberty Properties, Inc. Mr. Lundy has been a Vice President of Georgetown Partners, Inc.
(currently Senior Vice President) since July 1990. He is a member of the bars of New York and
Washington, D.C.
George E. Zweier (age 47) has been employed by us since June 1998 and was elected Vice
President, Chief Financial Officer in August 1998. For approximately five years prior to joining us,
Mr. Zweier, a certified public accountant, was an accounting officer with the Bank of Tokyo-Mitsubishi
Limited in its New York office.
Lonnie Halpern (age 36) has been employed by us since August 2005 and was elected a Vice
President in March 2007. Mr. Halpern is a member of the bars of New York and Massachusetts, and
was an associate at Goodwin Procter LLP, New York, N.Y. from September 2001 to March 2004 and
Hogan & Hartson LLP, New York, N.Y. from April 2004 to July 2005.
Item 2. Properties.
Our executive offices are located at 60 Cutter Mill Road, Great Neck, New York, where we
currently occupy approximately 12,000 square feet with Gould Investors L.P., REIT Management Corp.,
One Liberty Properties, Inc. and other related entities. The building in which our executive offices are
located is owned by a subsidiary of Gould Investors L.P. For fiscal 2011, we contributed $87,000 to the
annual rent of $473,000 paid by Gould Investors L.P., REIT Management Corp., One Liberty
Properties, Inc., and related entities. We also lease, under a direct lease with the Gould Investors L.P.
subsidiary, an additional 1,800 square feet directly adjacent to the 12,000 square feet at an annual
rental of $61,000.
At September 30, 2011, we owned four real estate properties, with an aggregate book value of
$59.3 million, of which two properties with a book value of $8 million were acquired in foreclosure
proceedings. The properties owned by our Newark Joint Venture, with a book value of $48.1 million as
of September 30, 2011, represent 25.1% of our total assets as of September 30, 2011. No other real
estate property owned by us represents 5% of our total assets as of September 30, 2011. See ‘‘Item 1.
Business—Our Real Estate Assets’’ and ‘‘Item 1. Business—Newark Joint Venture’’ for a schedule of
the real property assets acquired by us in foreclosure proceedings and owned at September 30, 2011
and information relating to the Newark Joint Venture.
Item 3. Legal Proceedings.
None.
Item 4.
[Removed and Reserved]
23
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities.
Our common shares of beneficial interest, or Common Shares, are listed on the New York Stock
Exchange, or the NYSE, under the symbol ‘‘BRT.’’ The following table shows for the periods indicated,
the high and low sales prices of the Common Shares as reported in the consolidated transaction
reporting system.
Quarter Ended
Fiscal 2011
Fiscal 2010
High
Low
High
Low
December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
March 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
June 30 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
September 30 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$7.40
7.46
6.67
6.48
$6.28
6.25
6.23
5.90
$5.84
6.79
7.25
6.50
$4.35
4.36
5.18
4.84
On November 30, 2011, the high and low sales prices of our Common Shares on the NYSE was
$6.28 and $6.20, respectively.
As of November 30, 2011, there were approximately 1,109 holders of record of our Common
Shares.
We did not pay any cash dividends in fiscal 2011 or 2010. Our tax loss carry forward at
December 31, 2010, was approximately $70 million; therefore, we do not anticipate paying cash
dividends in the near future.
24
Stock Performance Graph
This graph compares the performance of our shares with the Standard & Poor’s 500 Stock Index
and a peer group index consisting of publicly traded mortgage REITs. The graph assumes $100 invested
on September 30, 2006 and assumes the reinvestment of dividends.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among BRT Realty Trust, the S&P 500 Index
and the FTSE NAREIT Mortgage REITs Index
$140
$120
$100
$80
$60
$40
$20
$0
9/06
9/07
9/08
9/09
9/10
9/11
BRT Realty Trust
S&P 500
7DEC201115483899
FTSE NAREIT Mortgage REITs
*
$100 invested on 9/30/06 in stock or index, including reinvestment of dividends. Fiscal year ending
September 30.
Copyright(cid:4) 2011 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.
BRT Realty Trust . . . . . . . . . . . . . . . . . . . . . . . . . . .
S&P 500 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FTSE NAREIT Mortgage REITs . . . . . . . . . . . . . . .
100.00
100.00
100.00
67.03
116.44
61.39
41.17
90.85
42.47
32.71
84.58
53.35
36.66
93.17
58.80
35.69
94.24
60.63
9/06
9/07
9/08
9/09
9/10
9/11
Issuer Purchases of Equity Securities
In September 2011, we announced that our Board of Trustees had authorized a share buyback plan
pursuant to which we may, through September 30, 2013, expend up to $2 million to repurchase our
common shares. The following table provides information about the purchases we made in the
indicated period (no purchases were effected in July and August 2011):
Period
Total Number
of Shares
Purchased
Average
Price Paid
per Share
Total Number
of Shares
Purchased as Part
of Publicly
Announced Plans
or Programs
Approximate
Dollar Value of
Shares that
May Yet Be
Purchased Under
the Plans or
Programs
September 2011 . . . . . . . . . . . . . . . . . . . . .
7,305
$6.35
7,305
$1,953,600
25
Item 6. Selected Financial Information.
The following table, not covered by the report of the independent registered public accounting
firm, sets forth selected historical financial data for each of the fiscal years indicated. This table should
be read in conjunction with the detailed information and financial statements appearing elsewhere
herein.
2011
2010
2009
2008
2007
(Dollars in thousands, except per share
amounts)
Operating statement data:
Total revenues . . . . . . . . . . . . . . . . . . . . . . . .
Total expenses(1)(2) . . . . . . . . . . . . . . . . . . . .
Gain on sale of available-for-sale securities . . .
Loss (gain) on extinguishment of debt . . . . . . .
Income (loss) from continuing operations . . . .
Income (loss) from discontinued operations(3) .
Net income (loss) attributable to common
$ 17,881
13,834
1,319
(2,138)
3,578
1,346
$
8,135
19,844
1,586
—
(9,927)
590
$ 12,154
36,329
1,016
6,443
(19,236)
(29,124)
$ 21,990
35,554
19,940
—
7,734
(7,855)
$ 42,900
30,570
19,455
—
34,702
368
shareholders . . . . . . . . . . . . . . . . . . . . . . . .
6,374
(8,015)
(47,755)
(260)
35,070
Earnings (loss) per beneficial share:
Income (loss) from continuing operations . . . .
Income (loss) from discontinued operations . . .
Basic earnings (loss) per share . . . . . . . . . . .
Income (loss) from continuing operations . . . .
Income (loss) from discontinued operations . . .
Diluted earnings (loss) per share . . . . . . . . . . .
Distribution per common share(4) . . . . . . . . . .
$
$
$
$
$
$
$
$
.35
.10
.45
.35
.10
.45
—
(.62) $
.04
(.58) $
(.62) $
.04
(.58) $
— $
(2.50) $
(1.60)
(4.10) $
(2.50) $
(1.60)
(4.10) $
$
1.15
$
.65
(.67)
(.02) $
.65
$
(.67)
(.02) $
$
3.19
3.30
.04
3.34
3.29
.04
3.33
2.44
Balance sheet data:
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . .
Earning real estate loans(5) . . . . . . . . . . . . . .
Non-earning real estate loans(5) . . . . . . . . . . .
Purchase money mortgage loans . . . . . . . . . . .
Real estate loans held for sale . . . . . . . . . . . .
. . . . . . . . . . . . . . .
Real estate properties, net
Cash and cash equivalents . . . . . . . . . . . . . . .
Available-for-sale securities at market . . . . . . .
Real estate properties held for sale . . . . . . . . .
Junior subordinated notes . . . . . . . . . . . . . . . .
Mortgages payable . . . . . . . . . . . . . . . . . . . . .
Total BRT Realty Trust shareholders’ equity . . .
$191,012
67,266
—
—
8,446
59,277
44,025
2,766
—
37,400
14,417
129,063
$186,266
17,263
35,143
5,340
—
55,843
58,497
10,270
—
40,815
12,557
124,554
$193,333
44,677
2,836
16,804
16,915
55,544
25,708
8,963
14,204
40,234
9,460
121,227
$270,020
95,228
18,407
—
—
14,154
35,765
10,482
62,858
56,702
2,315
186,772
$328,109
185,899
63,627
—
—
3,336
17,103
34,936
9,355
56,702
2,395
235,175
(1) Includes $3,165, $17,110, $15,260 and $9,300 of provision for loan losses for fiscal 2010, 2009, 2008
and 2007, respectively.
(2) Includes $2,625, $1,272 and $1,050 of impairment charges in fiscal 2010, 2009 and 2008,
respectively.
(3) Includes $745, $29,774 and $8,165 of impairment charges for fiscal 2010, 2009 and 2008,
respectively.
(4) The distributions in fiscal 2008, 2007 and 2006 were paid wholly in cash. In September 2009, a
distribution of $1.15 per share was declared and in October 2009 was paid in a combination of an
26
aggregate of $13,308 in cash, representing 10% of this distribution, and the balance in our
common shares. The cash amount was allocated pro rata among all shareholders who elected to
receive cash. Since any shareholder electing to receive cash could not receive the entire dividend in
cash, the remainder of the dividend was paid to shareholders electing to receive cash in our
common shares. Shareholders who did not elect cash received the entire dividend in our common
shares.
(5) Earning and non-earning loans, which exclude loans held for sale, are presented without deduction
of the related allowance for possible losses and deferred fee income.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview
We are a real estate investment trust, also known as a REIT. Our primary business is to originate
and hold for investment senior mortgage loans secured by commercial and multi-family real estate
property in the United States. We also originate loans to persons purchasing their own or third party
mortgage debt, at a discount to the principal amount thereof. Our primary source of revenue has
generally been interest income, which is the interest our borrowers pay on our loans, and to a lesser
extent, loan fee income generated on the origination and extension of loans, rental revenue from real
properties and investment income.
The following highlights our results of operations for fiscal 2011 and our financial condition at
fiscal year-end:
(cid:127) we originated $131.3 million of mortgage loans in fiscal 2011 ($28.3 million, $60.5 million,
$23.6 million and $18.9 million in the first, second, third and fourth fiscal quarters, respectively)
compared to $17.9 million in fiscal 2010 and $12.7 million in fiscal 2009;
(cid:127) we have cash and cash equivalents and available-for-sale securities of approximately
$46.8 million and $84.3 million, at September 30, 2011 and December 5, 2011, respectively;
(cid:127) our performing loan portfolio increased 290% from $17.3 million at September 30, 2010 to
$67.3 million at September 30, 2011;
(cid:127) our non-performing loan portfolio decreased from $35.1 million at September 30, 2010 to zero
at September 30, 2011;
(cid:127) interest and fee income in fiscal 2011 increased $6.5 million or 166% from fiscal 2010;
(cid:127) in fiscal 2011, we entered into a revolving credit facility to provide additional liquidity and
lending capacity; and
(cid:127) we restructured our junior subordinated notes in March 2011 by repaying at par $5.0 million of
the principal amount outstanding and obtaining an interest rate reduction; and as a result we
estimate a reduction in our interest costs associated with these notes by approximately $588,000
and $1.72 million in fiscal 2012 and 2013, respectively.
We cannot predict with any certainty the potential impact the current economic uncertainty will
have on our future financial performance. Until there is consistent and considerable improvement in
the overall economy, we could experience (i) limited origination activity, (ii) borrower defaults,
(iii) loan loss provisions and impairment charges, (iv) foreclosure actions (with an increase in expenses
incurred in pursuing such actions), (v) the acquisition of additional properties in foreclosure
proceedings, (vi) significant expenses for stabilizing, repairing and operating properties acquired in
foreclosure proceedings, and (vii) reduced access to capital and increased cost of financing, all of which
could result in a decline in our revenues and generate operating losses.
27
Year Ended September 30, 2011 Compared to Year Ended September 30, 2010
Revenues
The following table compares our revenues for the periods indicated:
Fiscal
2011
2010
Increase
(Decrease) % Change
(Dollars in thousands):
Interest on real estate loans . . . . . . . . . . . .
Interest on purchase money mortgage loans
Loan fee income . . . . . . . . . . . . . . . . . . . .
Rental revenue from real estate properties .
Recovery of previously provided allowance .
Other, primarily investment income . . . . . .
$ 8,234
266
1,828
3,456
3,595
502
$2,412
1,212
253
3,422
365
471
$5,822
(946)
1,575
34
3,230
31
Total revenues . . . . . . . . . . . . . . . . . . . .
$17,881
$8,135
$9,746
241%
(78)%
623%
1%
885%
7
120%
Interest on real estate loans. The increase is primarily due to a $48.3 million increase in the
average balance of earning loans outstanding attributable to additional loan originations, which we
believe is the result of improved economic conditions. The weighted average interest rate on
performing loans was 12.17% in both fiscal 2011 and 2010. Continuing economic uncertainty in fiscal
2012 may result in reduced loan originations and reduced interest on real estate loans and loan fee
income.
Interest on purchase money mortgages. The decrease is attributable to a reduction in the average
balance of these outstanding mortgages as loans with an aggregate principal balance of $5.34 million
were paid off since the fourth quarter of fiscal 2010. We had originated purchase money mortgages in
fiscal 2009 to facilitate the sale of properties we acquired in foreclosure.
Loan fee income. The increase is due to the amortization of loan fees received on the increase in
loans originated during fiscal 2011.
Recovery of previously provided allowance. The increase reflects the reversal of a previously
provided loan loss allowance of $2.5 million allocated to a non-performing loan that was sold in the
quarter ended March 31, 2011 and the recovery of $1 million on a loan charged off in a prior year.
Expenses
The following table compares our expenses for the periods indicated:
(Dollars in thousands)
Interest on borrowed funds . . . . . . . . . . . .
Advisor’s fee, related party . . . . . . . . . . . .
Provision for loan loss . . . . . . . . . . . . . . .
Impairment charges . . . . . . . . . . . . . . . . .
Foreclosure related professional fees . . . . .
General and administrative . . . . . . . . . . . .
Operating expenses related to real estate
properties . . . . . . . . . . . . . . . . . . . . . . .
Amortization and depreciation . . . . . . . . .
Fiscal
2011
2010
Increase
(Decrease) % Change
$ 2,112
916
—
—
579
6,149
$ 2,584
785
3,165
2,625
673
6,063
$ (472)
131
(3,165)
(2,625)
(94)
86
(18.3)%
16.7%
NM*
NM*
(13.9)%
1.4%
3,340
738
3,216
733
124
5
3.9%
1%
Total expenses . . . . . . . . . . . . . . . . . . .
$13,834
$19,844
$(6,010)
(30.3)%
* Not meaningful.
28
Interest on borrowed funds. Approximately $508,000 of the decrease is attributable to the
restructuring of the junior subordinated notes in March 2011 (of which $433,000 is due to the reduction
of the interest rate and $75,000 is due to the decrease in the principal amount outstanding) and
approximately $449,000 is due to the capitalization of interest with respect to a Newark, NJ assemblage
site currently under development. The decrease was partially offset by a $448,000 increase in mortgage
interest due to the aggregate net increase of $1.86 million in mortgage debt outstanding. This debt
increased due to the borrowing with respect to the $8.6 million financing facility for the Newark Joint
Venture. The $4 million outstanding at September 30, 2011 under this facility bears interest at the rate
of 17% per year.
Advisor’s fee, related party. The fee is calculated based on invested assets and increased because of
the increase in our portfolio of loans and real estate assets due to increased originations in fiscal 2011.
Provision for loan losses.
In fiscal 2010, we recorded $3,165,000 of loan loss provisions. There
were no such provisions in fiscal 2011.
Impairment Charges.
such charges in fiscal 2011.
In fiscal 2010, we recorded $2,625,000 of impairment charges. There were no
Foreclosure related professional fees. Fees decreased primarily due to the resolution in fiscal 2011
of substantially all of the bankruptcy, foreclosure and related proceedings in which we were involved.
General and administrative expense. This increase is attributable primarily to an increase of
$440,000 in payroll related costs reflecting higher salaries, commissions, pension and medical expenses,
partially offset by an aggregate approximately $412,000 decline in professional fees, travel related,
public company and various miscellaneous expenses.
Operating expenses related to real estate owned. This increase is attributable primarily to increases
in maintenance, insurance and professional fees on our Newark property partially offset by a $134,000
decline in real estate tax expense on a land parcel we own in Daytona, FL.
Other revenue and expense items
The following table compares other revenue and expense items for the years indicated:
(Dollars in thousands)
Equity in earnings of unconsolidated ventures . . . . . . . . . . . . .
Gain on sale of available-for-sale securities . . . . . . . . . . . . . . .
Loss on extinguishment of debt . . . . . . . . . . . . . . . . . . . . . . .
Fiscal
2011
2010
Increase
(Decrease) % Change
$
350
1,319
(2,138)
$ 196
1,586
$
154
(267)
— (2,138)
78.4%
(16.8)%
NM
Equity in earnings of unconsolidated ventures. The increase is attributable to $99,000 of income
generated with respect to the activities of the Torchlight joint venture and $54,000 attributable to
increased rental income at one of our other ventures properties.
Gain on sale of available-for-sale securities. During fiscal 2011, we sold available-for-sale securities
with a cost basis of $6.3 million for $7.6 million, recognizing a gain of $1.3 million. During fiscal 2010,
we sold available-for-sale securities with a cost basis of $1.8 million for $3.4 million recognizing a gain
of $1.6 million.
Loss on extinguishment of debt.
In March 2011, we restructured our outstanding junior
subordinated notes. Pursuant to the restructuring, we repaid $5.0 million of the notes at par and
reduced the interest rate on the remaining outstanding notes through the April 2036 maturity date. For
accounting purposes this restructuring was treated as an extinguishment of debt, and accordingly, we
recognized a loss of $2.1 million which represented the unaccreted principal balance of the notes and
the related unamortized costs.
29
Discontinued operations
In fiscal 2011, we had income from discontinued operations of $1.3 million due to the sale of two
cooperative apartment units in New York and the payoff of a loan which was classified as real estate
for accounting purposes. In fiscal 2010, discontinued operations represented the loss from operations of
$602,000 primarily from two multi-family garden apartment properties and a hotel property, an
impairment charge of $745,000 which related to a multi-family garden apartment property and gains of
$1,937,000 from the sale of two multi-family properties, a hotel property and coop and condominium
units.
Year Ended September 30, 2010 Compared to Year Ended September 30, 2009
Revenues
The following table compares our revenues for the periods indicated:
(Dollars in thousands):
Interest on real estate loans . . . . . . . . . . . . . . . . . . . . . . . . .
Interest on purchase money mortgage loans . . . . . . . . . . . . . .
Loan fee income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rental revenue from real estate properties . . . . . . . . . . . . . . .
Recovery of previously provided allowance . . . . . . . . . . . . . . .
Other, primarily investment income . . . . . . . . . . . . . . . . . . . .
Fiscal
2010
2009
Increase
(Decrease) % Change
$2,412
1,212
253
3,422
365
471
$ 8,577
246
887
1,718
—
726
$(6,165)
966
(634)
1,704
365
(255)
(71.9)%
392.7%
(71.5)%
99.2%
NM
(35.1)%
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$8,135
$12,154
$(4,019)
(33.1)%
Interest on real estate loans. The decrease is primarily due to the $57.6 million decrease from
fiscal 2009 in the average balance of earning loans outstanding. The decrease in such balance is
attributable to the increase in non-performing loans (which increased because two loans in the
aggregate principal amount of $34.6 million became non-performing in the first quarter of fiscal 2010)
and payoffs and sales of $39.3 million of outstanding loans. Partially offsetting this decrease was an
increase of approximately $449,000 of interest income attributable to the increase from 11.48% to
12.17% in the interest rate earned on the performing loans and interest income of $486,000, of which
$359,000 is attributable to payments received in connection with the settlement of a lawsuit relating to
a series of loans to one borrower and $90,000 is attributable to the receipt of interest on
non-performing loans.
Interest on purchase money mortgages. The increase is attributable to the inclusion for a full fiscal
year of interest on such mortgages. We began to originate such loans in the third quarter of fiscal 2009
to facilitate the sale of our owned real estate.
Rental revenue from real estate properties. The increase is due to the inclusion for a full fiscal year
of rental revenues earned from the properties owned by our Newark Joint Venture, including $465,000
derived from a lease entered into in the first quarter of fiscal 2010. We entered into the Newark Joint
Venture in the fourth quarter of fiscal 2009 and accordingly, rental revenues for fiscal 2009 only
includes revenues from such venture for the fourth quarter.
Recovery of previously provided allowance.
In fiscal 2010, we recognized a $365,000 recovery in
previously provided loan loss allowances from two loans that were previously impaired and were paid
off for amounts greater than their net carrying value. There was no comparable revenue in fiscal 2009.
Other, primarily investment income. The net decrease is attributable to the decrease in dividend
income due to the sale of dividend paying securities and to a lesser extent to lower rates earned on
short-term investments.
30
Expenses
The following table compares expenses for the periods indicated:
(Dollars in thousands)
Interest on borrowed funds . . . . . . . . . . . . . . . . . . . . . . . . .
Advisor’s fee, related party . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreclosure related professional fees . . . . . . . . . . . . . . . . . .
Debt restructuring charges . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses related to real estate properties . . . . . . .
Amortization and depreciation . . . . . . . . . . . . . . . . . . . . . . .
Fiscal
2010
2009
Increase
(Decrease) % Change
$ 2,584
785
3,165
2,625
673
—
6,063
3,216
733
$ 4,719
1,173
17,110
1,272
908
685
7,045
2,133
1,284
$ (2,135)
(387)
(13,945)
1,353
(235)
(685)
(982)
1,079
(551)
(45.3)%
(33.0)%
(81.5)%
106.4%
(25.9)%
NM
(13.9)%
50.1%
(43.0)%
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$19,844
$36,329
$(16,485)
(45.4)%
Interest on borrowed funds. The components of the decrease are as follows: (a) $1.09 million is
due to the restructuring effected in fiscal 2009 of our junior subordinated notes; (b) $787,000 is
attributable to the $15.5 million decrease in the average outstanding balance of our junior subordinated
notes which decrease in turn is attributable to our partial repayment of these notes at the end of the
fourth quarter of fiscal 2009; (c) $146,000 is due to the reduction of amounts borrowed due to our
termination of the credit facility in the third quarter of fiscal 2009; (d) $311,000 is attributable to the
reduction in amortization of deferred borrowing costs resulting primarily from our termination of the
credit facility; (e) $527,000 is attributable to increased balances of mortgages outstanding on our
Newark properties; and (f) $328,000 is due to the capitalization of interest expense allocated to the
development of one of the Newark, NJ Assemblages.
Advisor’s fee, related party. The fee is calculated based on invested assets and decreased because
of the decrease in our portfolio of loans and real estate assets. These assets decreased because of our
foreclosure of defaulted mortgage loans and the subsequent sale of the underlying real estate.
Provision for loan losses.
In fiscal 2010 we took loan loss provisions against two loans with an
aggregate outstanding balance of $26.7 million. In fiscal 2009, the loan loss provision was taken against
22 loans with an aggregate principal balance $65.8 million.
Impairment charges. The impairments in fiscal 2010 were taken against two properties, of which
$2.5 million relates to a parcel of unimproved land located in South Daytona Beach, Florida and the
$125,000 balance was taken against six individual condominium units located in Apopka, Florida. In
fiscal 2009, we took an impairment charge against one property in our real estate portfolio located in
Manhattan, New York.
Foreclosure related professional fees. Fees decreased due to the decrease in foreclosure actions and
workout activity as many of the foreclosure actions pending in fiscal 2009 were concluded in fiscal 2009
or early fiscal 2010.
Debt restructuring charges. This represents legal expenses and third party costs incurred in fiscal
2009 in connection with the restructuring of our trust preferred securities. There was no comparable
expense in fiscal 2010.
General and administrative expense. The decrease is attributable primarily to net decreases of
$595,000 in professional fees and $367,000 in salary, benefits and expenses allocated pursuant to our
shared services agreement. Professional fees decreased primarily because fiscal 2009 included expenses
incurred in connection with the workout and the resulting joint venture agreement that was entered
into in the fourth quarter of fiscal 2009 with respect to the Newark Joint Venture. There was no
31
comparable expense in fiscal 2010. Professional fees also decreased because fiscal 2009 includes
additional audit and internal control fees incurred in connection with workout and foreclosure activity.
Salary, benefits and allocated expenses decreased on a net basis primarily due to reduced bonuses and
the reduction in our level of workout and foreclosure activity. There were also decreases in taxes and
travel and entertainment expenses which were partially offset by increases in advertising/promotional
fees and exchange listing and other public company expenses.
Operating expenses related to real estate properties. The increase is attributable to the inclusion, for
a full fiscal year, of the operating expenses related to our Newark Joint Venture properties. In fiscal
2009, such expenses were only incurred in the fourth fiscal quarter.
Amortization and depreciation. The decrease is attributable to reclassification of real estate to real
estate held for sale as depreciation is not recorded on properties held for sale.
Other revenue and expense items
Equity in earnings (loss) of unconsolidated ventures.
In fiscal 2010, we had a gain of $196,000
compared to a loss of $2.8 million in fiscal 2009. The change is attributable primarily to the inclusion in
fiscal 2009 of a $2.8 million loss reflecting our proportionate share of the loss sustained by our joint
venture with the CIT Capital USA, Inc. and the write off of the balance of the unamortized fee we
paid to an investment banker for obtaining capital from CIT Capital USA. The principal reason for the
loss recorded by the joint venture was a loan loss provision taken to reflect a decrease in the value of
the real estate underlying a non-performing loan.
Gain on early extinguishment of debt.
In fiscal 2009, we retired $15.9 million face value of junior
subordinated notes for $7.95 million. We incurred legal and other fees of $365,000 related to the
transaction. The carrying value at the time of the redemption was $14.8 million, which included
$329,000 of deferred fees. We recorded a gain of $6.44 million on the transaction. There was no
comparable gain in fiscal 2010.
Discontinued operations
The following table compares the components of our discontinued operations for the periods
indicated:
(Dollars in thousands)
Loss from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of real estate assets . . . . . . . . . . . . . . . . . . . . .
Fiscal
2010
2009
Increase
(Decrease) % Change
$ (602) $ (1,549)
(29,774)
2,199
(745)
1,937
$
947
29,029
(262)
61.1%
97.5%
(11.9)%
Income (loss) from discontinued operations . . . . . . . . . . . . .
$ 590
$(29,124)
$29,714
102.0%
Loss from operations. The decrease is attributable to the sale in late fiscal 2009 and early fiscal
2010 of real estate assets that we acquired through foreclosures in fiscal 2009 that were classified in
fiscal 2009 as held for sale.
Impairment charges. These charges decreased as we sold most of the properties acquired by
foreclosure in fiscal 2009 and the beginning of fiscal 2010. In fiscal 2010, the impairment charges were
taken against two properties and in fiscal 2009 were taken against thirteen properties.
Gain on sale of real estate assets. We recorded gains on the sale of five properties in fiscal 2010
and on the sale of six properties in fiscal 2009.
Liquidity and Capital Resources
Liquidity is a measurement of our ability to meet cash requirements, including to fund loan
originations, pay operating expenses, repay borrowings, and other general business needs. We require
32
capital to fund loan originations, acquire properties and pay operating expenses. Our current sources of
capital and liquidity primarily consist of our cash, marketable securities, revolving credit facility and
effective November 2012, our participation arrangement with 512 Lending. Our total available liquidity
at September 30, 2011 and December 5, 2011, without giving effect to this participation arrangement,
was approximately $60.3 million and $84.3 million, respectively.
We believe we have sufficient capital to meet our operating expenses in fiscal 2012, and to fund
any capital contributions required by the Newark Joint Venture. We also have funds available to engage
in our primary lending business and to make property acquisitions.
The Newark Joint Venture may borrow up to $8.6 million (of which $4.0 million had been
borrowed at September 30, 2011) to fund specified development activities with respect to the Teachers
Village project. While it is currently seeking up to $150 million in financing from public and private
sources to fund the further development and construction of this project, no assurance can be given
that the Newark Joint Venture will obtain the necessary financing on acceptable terms or if such
financing is obtained, that such project will be profitable for us.
Participation Arrangement
In November 2011, we entered into an arrangement with 512 Lending, LLC pursuant to which
each of us, with specified exceptions, must present to the other the opportunity (but not the obligation)
to participate in loans such party originates. The arrangement expires in December 2014, subject to
earlier termination by either party on not less than 60 days’ notice for any reason. It is generally
anticipated that 512 Lending will fund between 50% to 80% of the principal amount of loans we
originate and in which they elect to participate and that we will fund up to 20% of the principal
amount of loans they originate and in which we elect to participate.
Credit Facility
A subsidiary of ours is able to borrow funds to originate loans and for its general corporate
purposes through a senior secured revolving credit facility with Capital One, National Association. The
maximum amount that may be borrowed is the lesser of $25 million and the borrowing base. The
borrowing base is generally equal to 40% to 65% (depending on, among other things, the type of
property secured by the eligible mortgage receivables pledged to the lender and the operating income
of the related property) of such receivables. Interest accrues on the outstanding balance at the greater
of (i) 4% plus LIBOR and (ii) 5.50%. The facility matures June 21, 2014 and, subject to the
satisfaction of specified conditions, the outstanding balance may be converted at our option into an
18 month term loan. We have guaranteed the payment and performance of our subsidiary’s obligations
under the facility. At September 30, 2011 and November 30, 2011, no amount was outstanding
thereunder.
The loan documents, among other things, require:
(cid:127) (i) us to maintain on a quarterly basis and on a consolidated basis, net worth of not less than
$100 million and liquidity of not less than $7.5 million, and (ii) prohibits us from incurring debt,
with specified exceptions, in excess of five percent of our net worth; and
(cid:127) (i) our subsidiary to maintain a debt service coverage ratio and a collateral coverage ratio of not
less than 1.5 to 1.0, and (ii) prohibits the subsidiary, with specified exceptions, from incurring
debt.
Off Balance Sheet Arrangements
We are not a party to any off balance sheet arrangements.
33
Disclosure of Contractual Obligations
The following table sets forth as of September 30, 2011 our known contractual obligations:
(Dollars in thousands)
Long-Term Debt Obligations . . . . . . . . . . . . . . . . . . .
Capital Lease Obligations . . . . . . . . . . . . . . . . . . . . .
Operating Lease Obligation(1) . . . . . . . . . . . . . . . . .
Purchase Obligations(2) . . . . . . . . . . . . . . . . . . . . . .
Other Long-Term Liabilities Reflected on the Trust’s
Payment due by Period
Less than
1 Year
1 - 3
Years
3 - 5
Years
More than
5 Years
$7,385
—
113
1,410
$ 403
—
222
3,007
$1,354
—
222
1,694
$42,675
—
477
—
Total
$51,817
—
1,034
6,111
Balance Sheet Under GAAP . . . . . . . . . . . . . . . . .
—
—
—
—
—
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$8,908
$3,632
$3,270
$43,152
$58,962
(1) Includes $53,000 per annum estimated to be payable pursuant to a five year lease to be entered
into with our affiliate.
(2) Reflects the minimum payment of $750,000 payable commencing January 1, 2012 for every twelve
month period pursuant to our Advisory Agreement, as amended, with REIT Management. This
agreement terminates June 30, 2014. Also includes an estimated $847,000 payable annually
pursuant to the Shared Services Agreement. This estimate reflects the amount paid in fiscal 2011
pursuant to the Shared Services Agreement. No amount has been reflected as payable pursuant to
such agreement after five years as such amount is not determinable. See ‘‘Business—Our
Structure.’’
Significant Accounting Estimates and Critical Accounting Policies
Our significant accounting policies are more fully described in Note 1 to our consolidated financial
statements. The preparation of financial statements and related disclosure in conformity with
accounting principles generally accepted in the United States requires management to make certain
judgments and estimates that affect the amounts reported in the consolidated financial statements and
accompanying notes. Certain of our accounting policies are particularly important to understand our
financial position and results of operations and require the application of significant judgments and
estimates by our management; as a result they are subject to a degree of uncertainty. These significant
accounting policies include the following:
Allowance for Possible Losses and Impairment Charges
We conduct a quarterly review of (i) each loan in our mortgage portfolio, including the real estate
securing each loan, (ii) each of our real estate assets, and (iii) each real estate asset owned by our joint
ventures. This review is conducted in order to determine if there is uncertainty that the borrower has
sufficient funds to repay the loan or if indicators of impairment are present on the real estate.
In reviewing the value of the collateral underlying a loan and the real estate assets owned, whether
by us or our joint ventures, if there is an indicator of impairment, we seek to arrive at the fair value of
each piece of collateral and each real estate asset by using one or more valuation techniques, such as
comparable sales, discounted cash flow analysis or replacement cost analysis. Determination of the fair
value of the collateral securing a loan requires significant judgment, estimates and discretion by
management. Our real estate assets (other than real estate held for sale) and our joint ventures’ real
estate assets are evaluated for indicators of impairment using an undiscounted cash flow analysis. If the
analysis suggests that the undiscounted cash flows to be generated by the property will be insufficient to
recover the investment made by us or any joint venture, as the case may be, an impairment provision
will be calculated based upon the excess of the carrying amount of the property over its fair value using
a discounted cash flow model. Real estate assets are valued at the lower of the recorded cost or
34
estimated fair value. We do not obtain any third party appraisals regarding the value of the property
securing loans made by us or our joint ventures, or the real estate assets owned by us or our joint
ventures. Instead, we rely on our own ‘‘in-house’’ valuations. Any valuation allowances taken with
respect to our loan portfolio or real estate assets reduces our net income, assets and shareholders’
equity to the extent of the amount of the valuation allowance, but it will not affect our cash flow until
such time as the property is sold. For fiscal 2010, $3.17 million of loan loss provisions were recorded
against our mortgage portfolio and $3.37 million of impairment charges were taken with respect to our
real estate assets (including real estate properties held for sale). In fiscal 2011, no such provisions or
changes were taken.
Revenue Recognition
We recognize interest income and rental income on an accrual basis, unless we make a judgment
that impairment of a loan or of real estate owned renders doubtful collection of interest or rent in
accordance with the applicable loan documents or lease. In making a judgment as to the collectability
of interest or rent, we consider, among other factors, the status of the loan or property, the borrower’s
or tenant’s financial condition, payment history and anticipated events in the future. Income recognition
is suspended for loans when, in the opinion of management, a full recovery of income and principal
becomes doubtful. Income recognition is resumed when the loan becomes contractually current and
continued performance is demonstrated. Accordingly, management must make a significant judgment as
to whether to treat a loan or real estate owned as impaired. If we make a decision to treat a
‘‘problem’’ loan or real estate asset as not impaired and therefore continue to recognize the interest
and rent as income on an accrual basis, we could overstate income by recognizing income that will not
be collected and the uncollectible amount will ultimately have to be written off. The period in which
the uncollectible amount is written off could adversely affect taxable income for a specific year.
Cash Distribution Policy
We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended,
since our organization. To qualify as a REIT, we must meet a number of organizational and operational
requirements, including a requirement that we distribute currently (within the time frames prescribed
by the Code and the applicable regulations) to our shareholders at least 90% of our adjusted ordinary
taxable income. It is the current intention of our management to maintain our REIT status. As a REIT,
we generally will not be subject to corporate Federal income tax on taxable income we distribute
currently in accordance with the Code and applicable regulations to shareholders. If we fail to qualify
as a REIT in any taxable year, we will be subject to Federal income taxes at regular corporate rates
and may not be able to qualify as a REIT for four subsequent tax years. Even if we qualify for Federal
taxation as a REIT, we may be subject to certain state and local taxes on our income and to Federal
income and excise taxes on undistributed taxable income, i.e., taxable income not distributed in the
amounts and in the time frames prescribed by the Code and applicable regulations thereunder.
In December 2008, our board of trustees suspended the payment of regular quarterly dividends.
No dividends were paid in fiscal 2011 or 2010. At December 31, 2010, we had a net operating loss
carry-forward of $70.5 million and we anticipate utilizing approximately $8.2 million in calendar 2011.
Since we can offset our future taxable income against our tax loss carry-forward until the earlier of
2028 or the tax loss carry-forward has been fully used, we do not expect to pay a dividend in calendar
2012 and it is unlikely that we will be required to pay a dividend for several years thereafter to
maintain our REIT status. Although our board of trustees reviews the payment of dividends
periodically, there is no expectation that a dividend will be paid in the 2012 calendar year and for
several years thereafter.
35
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.
Our primary component of market risk is interest rate sensitivity. Our interest income 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. At September 30, 2011, approximately 82% of the
principal amount of our outstanding mortgage loans were comprised of variable rate loans tied to the
prime rate and with a stated minimum rate. 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 as of September 30, 2011 and believe that a
one percent increase in interest rates would cause an increase in income before taxes of $513,000 and a
one percent decline in interest rates would not cause a decrease in income before taxes because all of
our variable rate loans have a stated minimum rate. As of September 30, 2011, 71% of our loan
portfolio was secured by properties located in the New York metropolitan area, and we are therefore
subject to risks associated with the New York economy.
Item 8. Financial Statements and Supplementary Data.
The information required by this item appears in a separate section of this Report following
Part IV.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not applicable.
Item 9A. Controls and Procedures.
A review and evaluation was performed by 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 of the end of the period covered by this Annual Report on Form 10-K. Based on
that review and evaluation, the CEO and CFO have concluded that our current disclosure controls and
procedures, as designed and implemented, were effective. There have been no significant changes in
our internal controls or in other factors that could significantly affect our internal controls subsequent
to the date of their evaluation. There were no material weaknesses identified in the course of such
review and evaluation and, therefore, we took no corrective measures.
Management Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f)
promulgated under the Securities Exchange Act of 1934, as amended, as a process designed by, or
under the supervision of, a company’s principal executive and principal financial officers and effected
by a company’s board, management and other personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with GAAP and includes those policies and procedures that:
(cid:127) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the
transactions and dispositions of the assets of a company;
(cid:127) provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with GAAP, and that receipts and expenditures of a
36
company are being made only in accordance with authorizations of management and directors of
a company; and
(cid:127) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of a company’s assets that could have a material effect on the
financial transactions.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the
risks that controls may become inadequate because of changes in conditions or that the degree of
compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of
September 30, 2011. In making this assessment, our management used criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated
Framework.
Based on its assessment, our management believes that, as of September 30, 2011, our internal
control over financial reporting was effective based on those criteria.
Our independent auditors, BDO USA, LLP, have issued an audit report on the effectiveness of
internal control over financial reporting. This report appears on page F-1 of this Annual Report on
Form 10-K.
Item 9B. Other Information.
On December 8, 2011, the Board of Trustees adopted, subject to shareholder approval, the Trust’s
2012 Incentive Plan. This plan provides for the grant of up to 600,000 common shares pursuant to
stock options, restricted stock, restricted stock units and performance share awards. Directors, officers,
employees and consultants are entitled to participate in the Plan. Awards to be granted under the plan
are subject to the terms and conditions imposed by the plan and by the plan administrators. Subject to
earlier termination at the discretion of the plan administrators, the plan terminates ten years after its
adoption by shareholders.
On December 8, 2011, the Board of Trustees approved an amendment to the Advisory Agreement
between us and REIT Management, which amendment is effective as of January 1, 2011. See
‘‘Business-Our Structure’’ for further information regarding this amendment.
37
Item 10. Directors, Executive Officers and Corporate Governance.
PART III
Apart from certain information concerning our executive officers which is set forth in Part I of this
report, the other information required by Item 10 is incorporated herein by reference to the applicable
information to be in the proxy statement to be filed for our 2012 Annual Meeting of Shareholders.
Item 11. Executive Compensation.
The information concerning our executive compensation required by Item 11 will be included in
the proxy statement to be filed relating to our 2012 Annual Meeting of Shareholders and is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
Except as set forth below, the information required by Item 12 will be included in the proxy
statement to be filed relating to our 2012 Annual Meeting of Shareholders and is incorporated herein
by reference.
Equity Compensation Plan Information
The table below provides information as of September 30, 2011 with respect to our Common
Shares that may be issued upon exercise of outstanding options, warrants and rights:
Number of securities
to be issued upon exercise
of outstanding options,
warrants and rights
Weighted-average exercise
price of outstanding options,
warrants and rights
Number of securities
remaining available-for
future issuance under
equity compensation plans—
excluding securities
reflected in column (a)
Equity compensation plans
approved by security
holders . . . . . . . . . . . . . .
Equity compensation plans
not approved by security
holders . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . .
Total
11,000(1)
100,000
111,000(2)
$8.25
$9.00
—
229,560
—
229,560
(1) Excludes 491,705 shares of restricted stock issued to officers, directors, employees and consultants.
These restricted shares generally vest five years from the effective date of the award, subject to
acceleration as provided in the agreement and incentive plan governing same. These shares vest as
follows: 40,925 shares in 2012; 62,780 shares in 2013; 125,350 shares in 2014; 124,550 shares
in 2015 and 138,100 shares in 2016.
(2) Represents warrants to acquire up to 100,000 common shares at an exercise price of $9.00 per
share, subject to adjustment as provided for therein. These warrants were issued to an affiliate of
Torchlight Investors in connection with our joint venture and expire in May 2012.
Item 13. Certain Relationships and Related Transactions.
The information concerning relationships and certain transactions required by Item 13 will be
included in the proxy statement to be filed relating to our 2012 Annual Meeting of Shareholders and is
incorporated herein by reference.
38
Item 14. Principal Accounting Fees and Services.
The information concerning our principal accounting fees required by Item 14 will be included in
the proxy statement to be filed relating to our 2012 Annual Meeting of Shareholders and is
incorporated herein by reference.
Item 15. Exhibits, Financial Statement Schedules.
PART IV
(a)
1. All Financial Statements.
The response is submitted in a separate section of this report following Part IV.
2.
Financial Statement Schedules.
The response is submitted in a separate section of this report following Part IV.
3. Exhibits:
In reviewing the agreements included as exhibits to this Annual Report on Form10-K, please
remember they are included to provide you with information regarding their terms and are
not intended to provide any other factual or disclosure information about us or the other
parties to the agreements. The agreements contain representations and warranties by each of
the parties to the applicable agreement. These representations and warranties have been made
solely for the benefit of the other parties to the applicable agreement and:
(cid:127) should not in all instances be treated as categorical statements of fact, but rather as a
way of allocating the risk to one of the parties if those statements prove to be
inaccurate;
(cid:127) have been qualified by disclosures that were made to the other party in connection with
the negotiation of the applicable agreement, which disclosures are not necessarily
reflected in the agreement;
(cid:127) may apply standards of materiality in a way that is different from what may be viewed
as material to you or other investors; and
(cid:127) were made only as of the date of the applicable agreement or such other date or dates
as may be specified in the agreement and are subject to more recent developments.
Accordingly, these representations and warranties may not describe the actual state of
affairs as of the date they were made or at any other time.
Exhibit
No.
3.1
3.2
3.3
4.1
Title of Exhibits
Third Amended and Restated Declaration of Trust (incorporated by reference to
Exhibit 3.1 to our Form 10-K for the year ended September 30, 2005).
By-laws (incorporated by reference to Exhibit 3.2 to our Form 10-K for the year ended
September 30, 2005).
Amendment to By-laws, dated December 10, 2007 (incorporated by reference to
Exhibit 3.1 to our Form 8-K filed December 11, 2007).
Junior Subordinated Supplemental Indenture, dated as of March 15, 2011, between us and
the Bank of New York Mellon (incorporated by reference to Exhibit 4.1 to our Form 8-K
filed March 18, 2011).
39
Exhibit
No.
4.2
10.1*
10.2*
10.3
10.4*
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
Title of Exhibits
Warrant to purchase 100,000 shares of beneficial interest of BRT Realty Trust
(incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K filed
June 7, 2011).
Amended and Restated Advisory Agreement, effective as of January 1, 2007, between us
and REIT Management Corp. (incorporated by reference to Exhibit 10.1 to our Form 8-K
filed November 27, 2006).
Shared Services Agreement, dated as of January 1, 2002, by and among Gould
Investors L.P., us, One Liberty Properties, Inc., Majestic Property Management Corp.,
Majestic Property Affiliates, Inc. and REIT Management Corp. (incorporated by reference
to Exhibit 10.2 to our Form 10-K filed December 11, 2008).
Amended and Restated Limited Liability Company Operating Agreement by and among
TRB Newark Assemblage LLC, TRB Newark TRS, LLC, RBH Capital, LLC and RBH
Partners LLC (incorporated by reference to Exhibit 10.1 to our Form 8-K filed June 9,
2009).
Form of Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.5 to
our Form 10-K for the year ended September 30, 2010).
Loan and Security Agreement, dated as of June 22, 2011, among BRT RLOC LLC, as
borrower, BRT Realty Trust, as guarantor, BRT Realty Trust, as servicer, Capital One,
National Association, as agent, Capital One, National Association, as custodian, and the
lenders from time-to-time party thereto (incorporated by reference to Exhibit 10.1 to our
Form 8-K filed on June 23, 2011).
Guaranty dated as of June 22, 2011, by us in favor of Capital One, National Association
(incorporated by reference to Exhibit 10.2 to our Form 8-K filed on June 23, 2011).
Account Control Agreement dated as of June 22, 2011 among Capital One, National
Association, BRT RLOC LLC, and Capital One, National Association, as Agent
(incorporated by reference to Exhibit 10.3 to our Form 8-K filed on June 23, 2011).
Revolving Loan Note dated as of June 22, 2011 (incorporated by reference to Exhibit 10.4
to our Form 8-K filed on June 23, 2011).
Servicing and Asset Management Agreement between us and BRT RLOC, LLC.
(incorporated by reference to Exhibit 10.5 to our Form 8-K filed on June 23, 2011).
Custodial Agreement, dated as of June 22, 2011, among Capital One, National
Association, as custodian, BRT RLOC LLC, us, as servicer and Capital One, National
Association, as agent (incorporated by reference to Exhibit 10.6 to our Form 8-K filed on
June 23, 2011).
Limited Liability Company Agreement of BRTL LLC dated as of June 2, 2011 by and
among BRTL LLC, Debt Opportunity Fund III, LLC and BRT Torch Member LLC
(incorporated by reference to exhibit 10.1 to our Form 8-K filed on June 7, 2011).
Servicing and Asset Management Agreement made as of June 2, 2011 between BRT
Realty Trust and BRTL LLC (incorporated by reference to exhibit 10.2 to our Form 8-K
filed on June 7, 2011).
Pledge and Security Agreement dated as of June 2, 2011 made by BRT Torch
Member LLC in favor of Debt Opportunity Fund III, LLC (incorporated by reference to
exhibit 10.3 to our Form 8-K filed on June 7, 2011).
40
Exhibit
No.
10.14*
10.15*
14.1
21.1
23.1
23.2
31.1
31.2
31.3
32.1
32.2
32.3
2009 Incentive Plan
Title of Exhibits
Amendment No. 1 dated as of December 8, 2011 to Amended and Restated Advisory
Agreement between us and REIT Management.
Revised Code of Business Conduct and Ethics of BRT Realty Trust, adopted June 12,
2006 (incorporated by reference to Exhibit 14.1 to the Form 8-K of BRT Realty Trust filed
June 14, 2006).
Subsidiaries
Consent of BDO USA LLP
Consent of Ernst & Young, LLP
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 (the ‘‘Act’’)
Certification of Senior Vice President—Finance pursuant to Section 302 of the Act.
Certification of Chief Financial Officer pursuant to Section 302 of the Act
Certification of Chief Executive Officer pursuant to Section 906 of the Act
Certification of Senior Vice President—Finance pursuant to Section 906 of the Act
Certification of Chief Financial Officer pursuant to Section 906 of the Act
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Definition Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
*
Indicates management contract or compensatory plan or arrangement.
(b) Exhibits.
See Item 15(a)(3) above. The file number for all the exhibits incorporated by reference is:
001-07172.
(c) Financial Statements.
See Item 15(a)(2) above.
41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Date: December 8, 2011
By:
/s/ JEFFREY A. GOULD
Jeffrey A. Gould
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the Registrant and in the capacity and on the dates
indicated.
Signature
Title
Date
/s/ FREDRIC H. GOULD
Fredric H. Gould
/s/ JEFFREY A. GOULD
Jeffrey A. Gould
/s/ KENNETH BERNSTEIN
Kenneth Bernstein
/s/ ALAN GINSBURG
Alan Ginsburg
/s/ MATTHEW J. GOULD
Matthew J. Gould
/s/ LOUIS C. GRASSI
Louis C. Grassi
/s/ GARY HURAND
Gary Hurand
/s/ JEFFREY RUBIN
Jeffrey Rubin
/s/ JONATHAN SIMON
Jonathan Simon
/s/ ELIE WEISS
Elie Weiss
Chairman of the Board
December 8, 2011
Chief Executive Officer, President and
Trustee (Principal Executive Officer)
December 8, 2011
Trustee
Trustee
Trustee
Trustee
Trustee
Trustee
Trustee
Trustee
December 8, 2011
December 8, 2011
December 8, 2011
December 8, 2011
December 8, 2011
December 8, 2011
December 8, 2011
December 8, 2011
/s/ GEORGE E. ZWEIER
George E. Zweier
Chief Financial Officer, Vice President
(Principal Financial and Accounting
Officer)
December 8, 2011
42
Item 8, Item 15(a)(1) and (2)
Index to Consolidated Financial Statements and Consolidated Financial Statement Schedules
Reports of Independent Registered Public Accounting Firms . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets as of September 30, 2011 and 2010 . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations for the years ended September 30, 2011, 2010 and
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Equity for the years ended September 30, 2011, 2010 and 2009 . .
Consolidated Statements of Cash Flows for the years ended September 30, 2011, 2010 and
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Financial Statement Schedules for the year ended September 30, 2011:
III—Real Estate Properties and Accumulated Depreciation . . . . . . . . . . . . . . . . . . . . . . . .
IV—Mortgage Loans on Real Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page No.
F-1
F-4
F-5
F-6
F-7
F-9
F-33
F-35
All other schedules are omitted because they are not applicable or the required information is
shown in the consolidated financial statements or the notes thereto.
43
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
BRT Realty Trust and Subsidiaries
We have audited BRT Realty Trust and Subsidiaries’ (the ‘‘Trust’’) internal control over financial
reporting as of September 30, 2011, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the
COSO criteria). The Trust’s management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over financial reporting
included in the accompanying Item 9A. Controls and Procedures—Management Report on Internal
Control Over Financial Reporting. Our responsibility is to express an opinion on the Trust’s internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was maintained
in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on the assessed risk. Our audit also
included performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only
in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, BRT Realty Trust and Subsidiaries maintained, in all material respects, effective
internal control over financial reporting as of September 30, 2011, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheet of BRT Realty Trust and Subsidiaries
as of September 30, 2011, and the related consolidated statement of operations, shareholders’ equity,
and cash flows for the year then ended and our report dated December 12, 2011 expressed an
unqualified opinion thereon.
New York, New York
December 12, 2011
/s/ BDO USA LLP
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
BRT Realty Trust and Subsidiaries
We have audited the accompanying consolidated balance sheet of BRT Realty Trust and
Subsidiaries (the ‘‘Trust’’) as of September 30, 2011 and the related consolidated statement of
operations, shareholders’ equity, and cash flows for the year then ended. In connection with our audit
of the financial statements, we have also audited the financial statement schedules listed in the Index at
Item 15(a). These financial statements and schedules are the responsibility of the Trust’s management.
Our responsibility is to express an opinion on these financial statements and schedules based on our
audit.
We conducted our audit in accordance with auditing standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial statements and schedules.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of BRT Realty Trust and Subsidiaries at September 30, 2011
and the results of their operations and their cash flows for the year then ended, in conformity with U.S.
generally accepted accounting principles.
Also, in our opinion, the financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), BRT Realty Trust and Subsidiaries’ internal control over financial
reporting as of September 30, 2011, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated December 12, 2011 expressed an unqualified opinion thereon.
/s/ BDO USA LLP
New York, New York
December 12, 2011
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
BRT Realty Trust and Subsidiaries
We have audited the accompanying consolidated balance sheet of BRT Realty Trust and
Subsidiaries (the ‘‘Trust’’) as of September 30, 2010 and the related consolidated statements of
operations, equity, and cash flows for the years ended September 30, 2010 and 2009. These financial
statements are the responsibility of the Trust’s management. Our responsibility is to express an opinion
on these financial statements and schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects,
the consolidated financial position of BRT Realty Trust and Subsidiaries at September 30, 2010, and the
consolidated results of their operations and their cash flows for the years ended September 30, 2010
and 2009, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
New York, New York
December 13, 2010
F-3
BRT REALTY TRUST AND SUBSIDIARIES
Consolidated Balance Sheets
(Amounts in thousands, except per share data)
September 30,
2011
2010
ASSETS
Real estate loans
Earning interest
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-earning interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 67,266
—
$ 17,263
35,143
Deferred fee income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for possible losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase money mortgage loans
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate loan held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate properties net of accumulated depreciation of $2,511 and $1,806 . . . . . . .
Investment in unconsolidated ventures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Available-for-sale securities at market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
67,266
(576)
—
66,690
—
8,446
59,277
4,247
44,025
2,766
5,561
52,406
(245)
(3,165)
48,996
5,340
—
55,843
775
58,497
10,270
6,545
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$191,012
$186,266
LIABILITIES AND EQUITY
Liabilities:
Junior subordinated notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgages payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deposits payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commitments and contingencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity:
BRT Realty Trust shareholders’ equity:
Preferred shares, $1 par value:
$ 37,400
14,417
948
2,518
55,283
—
$ 40,815
12,557
1,332
1,723
56,427
—
Authorized 10,000 shares, none issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
Shares of beneficial interest, $3 par value:
Authorized number of shares, unlimited, 14,994 and 15,148 issued . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income—net unrealized gain on
available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of 1,422 and 1,460 treasury shares of beneficial interest . . . . . . . . . . . . . . . . .
Total BRT Realty Trust shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-controlling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
44,981
171,889
45,445
172,268
278
(77,015)
(11,070)
129,063
6,666
1,594
(83,389)
(11,364)
124,554
5,285
Total Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
135,729
129,839
Total Liabilities and Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$191,012
$186,266
See accompanying notes to consolidated financial statements.
F-4
BRT REALTY TRUST AND SUBSIDIARIES
Consolidated Statements of Operations
(Dollars in thousands, except share data)
Year Ended September 30,
2011
2010
2009
Revenues:
Interest on real estate loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest on purchase money mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . .
Loan fee income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rental revenue from real estate properties . . . . . . . . . . . . . . . . . . . . . . . . . .
Recovery of previously provided allowances . . . . . . . . . . . . . . . . . . . . . . . . .
Other, primarily investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
8,234
266
1,828
3,456
3,595
502
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17,881
Expenses:
Interest on borrowed funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advisor’s fees, related party . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan losses
Impairment charges
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreclosure related professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt restructuring charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative—including $847, $822 and $1,002 to related party . . . .
Operating expenses relating to real estate properties . . . . . . . . . . . . . . . . . . . .
Amortization and depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total revenues less total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in earnings (loss) of unconsolidated ventures
. . . . . . . . . . . . . . . . . . . . .
Gain on sale of joint venture interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Loss) gain on extinguishment of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discontinued operations:
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss from operations
Impairment charges
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of real estate assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discontinued operations
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plus: net loss attributable to non-controlling interests . . . . . . . . . . . . . . . . . . . . .
Net income (loss) attributable to common shareholders . . . . . . . . . . . . . . . . . .
Basic and diluted per share amounts attributable to common shareholders:
Income (loss) from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic and diluted earnings (loss) per share . . . . . . . . . . . . . . . . . . . . . . . . . .
Amounts attributable to BRT Realty Trust:
Income (loss) from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discontinued operations
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
$
2,112
916
—
—
579
—
6,149
3,340
738
13,834
4,047
350
—
1,319
(2,138)
3,578
—
—
1,346
1,346
4,924
1,450
6,374
.35
.10
.45
5,028
1,346
6,374
$
2,412
1,212
253
3,422
365
471
8,135
2,584
785
3,165
2,625
673
—
6,063
3,216
733
19,844
(11,709)
196
—
1,586
—
(9,927)
(602)
(745)
1,937
590
(9,337)
1,322
8,577
246
887
1,718
—
726
12,154
4,719
1,173
17,110
1,272
908
685
7,045
2,133
1,284
36,329
(24,175)
(2,791)
271
1,016
6,443
(19,236)
(1,549)
(29,774)
2,199
(29,124)
(48,360)
605
$
$
$
$
$
(8,015)
$
(47,755)
(.62)
.04
(.58)
(8,605)
590
(8,015)
$
$
$
$
(2.50)
(1.60)
(4.10)
(18,631)
(29,124)
(47,755)
Weighted average number of common shares outstanding:
Basic and diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14,041,569
13,871,668
11,643,972
See accompanying notes to consolidated financial statements.
F-5
BRT REALTY TRUST AND SUBSIDIARIES
Consolidated Statements of Equity
Years Ended September 30, 2011, 2010 and 2009
(Dollars in thousands, except share data)
Shares of Additional
Beneficial
Interest
Paid-In
Capital
Accumulated
Other
Non
Comprehensive (Accumulated Treasury Controlling
Income
Deficit)
Shares
Interests
Total
$166,402
$ 7,126
$(14,311)
$(10,578) $
121
$186,893
share)
Balances, September 30, 2008 . . . . . . . $38,133
Distributions—common share ($1.15 per
. . . . . . . . . . . . . . . . . . . . .
Restricted stock vesting . . . . . . . . . . .
Compensation expense—restricted stock
Contributions from non-controlling
—
—
—
interests . . . . . . . . . . . . . . . . . . . .
Distributions to non-controlling interests
Shares repurchased (256,110 shares) . . .
Net loss . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss—net
unrealized loss on available-for-sale
securities (net of reclassification
adjustment for gains of $1,014
included in net loss) . . . . . . . . . . . .
Comprehensive loss . . . . . . . . . . . . . .
Balances, September 30, 2009 . . . . . . .
Shares issued—stock dividend (2,437,352
shares) . . . . . . . . . . . . . . . . . . . . .
Restricted stock vesting . . . . . . . . . . .
Compensation expense—restricted stock
Contributions from non-controlling
interests . . . . . . . . . . . . . . . . . . . .
Distributions to non-controlling interests
Shares repurchased (52,403 shares) . . . .
Net loss . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss—net
unrealized loss on available-for-sale
securities (net of reclassification
adjustment for gains of $1,557
included in net loss) . . . . . . . . . . . .
Comprehensive loss . . . . . . . . . . . . . .
Balances, September 30, 2010 . . . . . . .
Restricted stock vesting . . . . . . . . . . .
Compensation expense—restricted stock
Issuance of warrants in connection with
joint venture agreement . . . . . . . . . .
Contributions from non-controlling
interests . . . . . . . . . . . . . . . . . . . .
Distributions to non-controlling interests
Purchase of minority interest . . . . . . . .
Shares repurchased (154,692 shares) . . .
Net income (loss) . . . . . . . . . . . . . . .
Other comprehensive loss—net
unrealized loss on available-for-sale
securities (net of reclassification
adjustment for gains of $462 included
in net loss) . . . . . . . . . . . . . . . . . .
Comprehensive income . . . . . . . . . . . .
—
(205)
876
—
—
—
—
—
—
—
—
—
—
—
—
38,133
167,073
7,312
—
—
4,604
(242)
833
—
—
—
—
—
—
—
—
—
—
—
—
45,445
—
—
172,268
(294)
845
—
—
—
—
(464)
—
259
—
—
(429)
(760)
—
—
—
—
—
—
—
—
(13,308)
—
—
—
—
—
(47,755)
—
205
—
—
—
(943)
—
— (13,308)
—
—
876
—
5,534
(60)
—
(605)
5,534
(60)
(943)
(48,360)
(4,415)
—
2,711
—
—
—
—
—
(4,415)
— (52,775)
(75,374)
(11,316)
4,990
126,217
—
—
—
—
—
—
—
(1,117)
—
1,594
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(8,015)
—
242
—
—
—
—
—
—
(290)
1,846
(229)
—
— (1,322)
11,916
—
833
1,846
(229)
(290)
(9,337)
—
—
—
—
—
(1,117)
— (10,454)
(83,389)
—
—
(11,364)
294
—
5,285
—
—
129,839
—
845
—
—
—
—
—
6,374
—
—
259
3,181
—
(66)
—
(284)
—
—
—
— (1,450)
3,181
(66)
(713)
(1,224)
4,924
—
—
—
—
(1,316)
—
—
—
—
—
—
—
(1,316)
3,608
Balances, September 30, 2011 . . . . . . . $44,981
$171,889
$
278
$(77,015)
$(11,070) $ 6,666
$135,729
See accompanying notes to consolidated financial statements.
F-6
BRT REALTY TRUST AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in Thousands)
Year Ended September 30,
2011
2010
2009
Cash flows from operating activities:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income (loss) to net cash provided by (used
$
4,924
$ (9,337) $(48,360)
in) operating activities:
Provision for loan loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recovery of previously provided allowances . . . . . . . . . . . . . . . . . . . . . .
Impairment charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization and depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of deferred fee income . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accretion of junior subordinated notes principal . . . . . . . . . . . . . . . . . . .
Amortization of securities discount . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of restricted stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of real estate assets from discontinued operations . . . . . . . . .
Gain on sale of available-for-sale securities
. . . . . . . . . . . . . . . . . . . . . .
Loss (gain) on extinguishment of debt . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in (earnings) loss of unconsolidated joint ventures . . . . . . . . . . . . .
Gain on sale of joint venture interest
. . . . . . . . . . . . . . . . . . . . . . . . . .
Distribution of earnings of unconsolidated joint ventures . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in straight line rent
Increases and decreases from changes in other assets and liabilities:
(Increase) decrease in interest and dividends receivable . . . . . . . . . . . . . .
Decrease (increase) in prepaid expenses
. . . . . . . . . . . . . . . . . . . . . . . .
Increase (decrease) in accounts payable and accrued liabilities . . . . . . . . .
Increase in deferred costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Increase) decrease in security deposits and other receivable . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
(3,595)
—
963
(1,777)
277
(28)
845
(1,346)
(1,319)
2,138
(350)
—
210
(54)
(410)
451
375
(142)
153
127
3,165
(365)
3,370
927
(219)
581
(69)
833
(1,937)
(1,586)
—
(196)
—
193
(330)
398
115
(960)
—
(270)
(27)
17,110
—
31,046
1,686
(897)
322
(28)
876
(2,199)
(1,016)
(6,443)
2,791
(271)
185
(16)
754
(1,876)
(1,431)
—
60
280
Net cash provided by (used in) operating activities
. . . . . . . . . . . . . . . . . . . .
1,442
(5,714)
(7,427)
Cash flows from investing activities:
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Collections from real estate loans
Additions to real estate loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from the sale of loans and loan participations . . . . . . . . . . . . . . . .
Loan loss recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net costs capitalized to real estate owned . . . . . . . . . . . . . . . . . . . . . . . . .
Collection of loan fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions to real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of available-for-sale securities . . . . . . . . . . . . . . . . . . . .
Purchase of available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from maturity of held-to-maturity security . . . . . . . . . . . . . . . . . .
Distributions of capital of unconsolidated joint ventures . . . . . . . . . . . . . . .
Contributions to unconsolidated joint ventures . . . . . . . . . . . . . . . . . . . . . .
Proceeds from the sale of joint venture interests
. . . . . . . . . . . . . . . . . . . .
Purchase of interest from non-controlling partner . . . . . . . . . . . . . . . . . . . .
66,072
(131,255)
46,147
1,039
(3,605)
2,465
(2,421)
4,035
7,590
(55)
—
1,010
(4,045)
—
(713)
20,207
22,475
(12,704)
(17,384)
—
16,815
2,417
227
(4,721)
(4,120)
557
419
— (15,718)
25,152
2,668
(4,520)
—
4,111
(781)
1,350
—
15,930
3,425
(4,194)
1,000
1,701
—
—
—
Net cash (used in) provided by investing activities . . . . . . . . . . . . . . . . . . . . .
(13,736)
36,294
18,018
F-7
BRT REALTY TRUST AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
(Dollars in Thousands)
Cash flows from financing activities:
Proceeds from borrowed funds
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of borrowed funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of junior subordinated notes . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from mortgages payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage principal payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in deferred borrowing costs
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash distribution—common shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expenses associated with stock issuance . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital contributions from non-controlling interests . . . . . . . . . . . . . . . . . .
Capital distributions to non-controlling interests . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . .
Repurchase of shares of beneficial interest
Net cash (used in) provided by financing activities . . . . . . . . . . . . . . . . . . . . .
Year Ended September 30,
2011
2010
2009
—
—
(5,000)
2,130
(270)
(926)
—
—
3,181
(68)
(1,225)
(2,178)
—
—
—
3,202
(105)
(821)
(1,334)
(60)
1,846
(229)
(290)
6,000
(9,000)
(8,316)
5,131
(86)
(987)
(15,564)
—
3,117
—
(943)
2,209
(20,648)
Net (decrease) increase in cash and cash equivalents
. . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . . . . .
(14,472)
58,497
32,789
25,708
(10,057)
35,765
Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . . . .
$ 44,025
$ 58,497
$ 25,708
Supplemental disclosures of cash flow information:
Cash paid during the year for interest expense, including capitalized interest
of $775 and $328 in 2011 and 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash paid during the year for income and excise taxes . . . . . . . . . . . . . . . .
$
$
1,791
$ 2,120
$ 5,841
8
$
17
$
145
Non cash investing and financing activities:
Common stock dividend—portion paid in the Trust’s common shares . . . . . .
— $ 11,916
—
Reclassification of loans to real estate and real estate held for sale upon
foreclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Junior subordinated notes redeemed to cancel statutory trust common
securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of warrants in connection with joint venture agreement
. . . . . . . . .
$
Seller financing provided for sale of real estate . . . . . . . . . . . . . . . . . . . . .
—
—
—
259
—
— $ 43,329
— $ 13,308
— $ 1,702
— $ 17,777
Reclassification of real estate properties to/from real estate held for sale . . . .
— $ 8,552
$ 6,801
Assumption of mortgages of consolidated joint venture . . . . . . . . . . . . . . . .
—
— $ 2,100
Reclassification of real estate loans to real estate loans held for sale . . . . . . .
$
8,446
— $ 16,915
See accompanying notes to consolidated financial statements.
F-8
BRT REALTY TRUST AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2011
NOTE 1—ORGANIZATION, BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Background
BRT Realty Trust is a business trust organized in Massachusetts. Our primary business is to
originate and hold for investment senior mortgage loans secured by commercial and multi-family real
estate property in the United States. This includes originating loans to persons purchasing their own or
third party mortgage debt, at a discount to the principal amount thereof. Generally, in such
transactions, we purchase the mortgage and our counterparty is obligated to repurchase such mortgage
within a specified period. The loans we originate generally have relatively high yields and are
short-term or bridge loans with a duration ranging from six months to one year. It is our policy to lend
at a floating rate of interest based on a spread over the prime rate, with a stated minimum rate, though
we originate fixed rate loans as circumstances dictate. We receive an origination fee for the loans we
originate. We conduct our operations to qualify as a real estate investment trust, or REIT, for Federal
income tax purposes.
From time-to-time we originate junior commercial and multi-family mortgage loans, participate as
an equity investor in, and mortgage lender to, joint ventures which acquire income producing real
estate property, and purchase securities of other REITs.
Principles of Consolidation; Basis of Preparation
Certain items on the consolidated financial statements for the preceding periods have been
reclassified in the accompanying consolidated financial statements to conform to the current year’s
presentation.
The consolidated financial statements include the accounts and operations of BRT Realty Trust, its
wholly owned subsidiaries, and its majority-owned or controlled real estate entities and its interests in
variable interest entities in which it is the primary beneficiary. Material intercompany items and
transactions have been eliminated. BRT Realty Trust and its subsidiaries are hereinafter referred to as
‘‘BRT’’ or the ‘‘Trust.’’
With respect to its unconsolidated joint ventures, as (i) the Trust is primarily the managing
member but does not exercise substantial operating control over these entities or the Trust is not the
managing member and (ii) such entities are not variable-interest entities, the Trust has determined that
such joint ventures should be accounted for under the equity method of accounting for financial
statement purposes.
RBH-TRB Newark Holdings LLC was determined to be a Variable Interest Entity (‘‘VIE’’)
because the total equity investment at risk is not sufficient to permit it to finance its activities without
additional subordinated financial support by its equity holders. The Trust was determined to be the
primary beneficiary as it has a controlling financial interest in the VIE as it has the obligation to
absorb a majority of the VIE’s expected losses. For these reasons, the Trust has consolidated the
operations and assets of this VIE in the Trust’s consolidated financial statements.
F-9
BRT REALTY TRUST AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
September 30, 2011
NOTE 1—ORGANIZATION, BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Income Tax Status
The Trust qualifies as a real estate investment trust under Sections 856-860 of the Internal
Revenue Code of 1986, as amended. The Trustees may, at their option, elect to operate the Trust as a
business trust not qualifying as a real estate investment trust.
Income Recognition
Income and expenses are recorded on the accrual basis of accounting for financial reporting
purposes. The Trust does not accrue interest on impaired loans where, in the judgment of management,
collection of interest according to the contractual terms of the loan documents is considered doubtful.
Among the factors the Trust considers in making an evaluation of the amount of interest that is
collectable, are the financial condition of the borrower, the status of the underlying collateral and
anticipated future events. The Trust accrues interest on performing impaired loans and records cash
receipts as a reduction of interest receivable. For impaired non-accrual loans, interest is recognized on
a cash basis. The Trust will resume the accrual of interest if it determines the collection of interest
according to the contractual terms of the loan is probable.
Loan commitment, origination and extension fee income on loans held in our portfolio is deferred
and recorded as loan fee income over the life of the commitment and loan. Commitment fees are
generally non-refundable. When a commitment expires or the Trust no longer has any other obligation
to perform, the remaining fee is recognized into income.
Rental revenue from real estate properties includes the base rent that each tenant is required to
pay in accordance with the terms of their respective leases reported on a straight line basis over the
initial term of the lease.
The basis on which cost was determined in computing the realized gain or loss on
available-for-sale securities is specific cost.
Allowance for Possible Losses
A loan evaluated for impairment is deemed to be impaired when based on current information
and events, it is probable, in the judgment of management, that the Trust will not be able to collect all
amounts due according to the contractual terms of the loan documents. When making this evaluation
various factors are considered, as appropriate, including, market evaluations of the underlying
collateral, estimated operating cash flow from the property during the projected holding period, and
estimated sales value computed by applying an estimated capitalization rate to the projected stabilized
net operating income of the specific property, less selling costs, discounted at market discount rates. If
upon completion of the evaluation, the value of the collateral securing the loan is less than the
recorded investment in the loan, an allowance is created with a corresponding charge to expense. The
fair values related to the collateral securing impaired loans based on discounted cash flow models are
considered to be level 3 valuations within the fair value hierarchy. When the Trust acquires title to the
property, the loan loss allowance is adjusted by charging off all amounts related to the loan and
recording the property at its adjusted carrying value.
F-10
BRT REALTY TRUST AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
September 30, 2011
NOTE 1—ORGANIZATION, BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Real Estate Properties, Real Estate Properties Held For Sale and Loan Held For Sale
Real estate properties are shown net of accumulated depreciation and includes real property
acquired by foreclosure and similar proceedings.
When real estate is acquired by foreclosure proceedings, it is recorded at the lower of the
recorded investment of the loan or estimated fair value of the property at the time of foreclosure or
delivery of a deed in lieu of foreclosure. The recorded investment is the face amount of the loan that
has been decreased by any deferred fees, loan loss allowances and any valuation adjustments. Real
estate assets, including assets acquired by foreclosure proceedings, that are operated for the production
of income are depreciated over their estimated useful lives. Costs incurred in connection with the
foreclosure of the properties collateralizing the real estate loans are expensed as incurred.
Real estate and real estate loans are classified as held for sale when management has determined
that it has met the appropriate criteria in Accounting Standards Codification (ASC) 360. Real estate
properties which are held for sale are not depreciated and their operations are shown in discontinued
operations. Real estate assets and loans that are expected to be disposed of are valued at the lower of
their carrying amount or their fair value less costs to sell on an individual asset basis.
The Trust accounts for the sale of real estate when title passes to the buyer, sufficient equity
payments have been received, there is no continuing involvement by the Trust and there is reasonable
assurance that the remaining receivable, if any, will be collected.
Real Estate Asset Impairments
The Trust reviews each real estate asset owned, including investments in real estate ventures to
determine if there are indicators of impairment. If such indicators are present, the Trust determines
whether the carrying amount of the asset can be recovered. Recognition of impairment is required if
the undiscounted cash flows estimated to be generated by the assets are less than the assets’ carrying
amount. Measurement of impairment is based upon the estimated fair value of the asset. In evaluating
a property for impairment, various factors are considered, including estimated current and expected
operating cash flow from the property during the projected holding period, costs necessary to extend
the life or improve the asset, expected capitalization rates, projected stabilized net operating income,
selling costs, and the ability to hold and dispose of such real estate owned in the ordinary course of
business. Valuation adjustments may be necessary in the event that effective interest rates, rent-up
periods, future economic conditions, and other relevant factors vary significantly from those assumed in
valuing the property. If future evaluations result in a diminution in the value of the property, the
reduction will be recognized as an impairment charge. The fair values related to the impaired real
estate are considered to be a level 3 valuation within the fair value hierarchy.
Fixed Asset Capitalization
A variety of costs may be incurred in the development of our properties. After a determination is
made to capitalize a cost, it is allocated to the specific project that is benefited. The costs of land and
building under development include specifically identifiable costs. The capitalized costs include
pre-construction costs essential to the development of the property, development costs, construction
F-11
BRT REALTY TRUST AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
September 30, 2011
NOTE 1—ORGANIZATION, BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES
(Continued)
costs, interest costs, real estate taxes, and other costs incurred during the period of development. We
consider a construction project as substantially completed when it is available for occupancy, but no
later than one year from cessation of major construction activity. We cease capitalization when the
project is available for occupancy.
Equity Based Compensation
The Trust’s compensation expense for restricted stock awards is amortized over the vesting period
of such awards, based upon the estimated fair value of such restricted stock at the grant date. For
accounting purposes, the restricted shares are not included in the outstanding shares shown on the
consolidated balance sheets until they vest, however, they are included in the calculation of both basic
and diluted earnings per share as they participate in the earnings of the Trust.
Per Share Data
Basic earnings (loss) per share was determined by dividing net income (loss) applicable to common
shareholders for each year by the weighted average number of shares of beneficial interest outstanding
during each year. Diluted earnings per share reflects the potential dilution that could occur if securities
or other contracts to issue shares of beneficial interest were exercised or converted into shares of
beneficial interest or resulted in the issuance of shares of beneficial interest that share in the earnings
of the Trust. Diluted earnings per share was determined by dividing net income applicable to common
shareholders for each year by the total of the weighted average number of shares of beneficial interest
outstanding plus the dilutive effect of the Trust’s unvested restricted stock and outstanding options and
warrants using the treasury stock method.
Cash Equivalents
Cash equivalents consist of highly liquid investments, primarily direct United States treasury
obligations with maturities of three months or less when purchased.
Use of Estimates
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 and accompanying notes. Actual results could differ from
those estimates.
Segment Reporting
Management has determined that it operates in two reportable segments: a loan and investment
segment and a real estate segment. The loan and investment segment includes all activities related to
the origination and servicing of our loan portfolio and other investments and the real estate segment
includes all activities related to the development, operation and disposition of the Trusts real estate
assets. These two lines of business require different support infrastructures.
F-12
BRT REALTY TRUST AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
September 30, 2011
NOTE 1—ORGANIZATION, BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES
(Continued)
New Accounting Pronouncements
In June 2009, the FASB issued updated guidance, which amends guidance for determining whether
an entity is a variable interest entity, or VIE, and requires the performance of a qualitative rather than
a quantitative analysis to determine the primary beneficiary of a VIE. Under this guidance, an entity
would be required to consolidate a VIE if it has (i) the power to direct the activities that most
significantly impact the entity’s economic performance and (ii) the obligation to absorb losses of the
VIE or the right to receive benefits from the VIE that could be significant to the VIE. This guidance
was effective for the first annual reporting period that began after November 15, 2009. The Trust
adopted this guidance on October 1, 2010 and the adoption did not have a material impact on the
consolidated financial statements.
In July 2010, the FASB issued updated guidance on disclosures about the credit quality of
financing receivables and the allowance for credit losses which will require a greater level of
information disclosed about the credit quality of loans and allowance for loan losses, as well as
additional information related to credit quality indicators, past due information, and information
related to loans modified in a troubled debt restructuring. This guidance became effective for public
entities for interim and annual reporting periods ending on or after December 15, 2010. The Trust
adopted this guidance on January 1, 2011 and the adoption did not have a material impact on the
consolidated financial statements.
In April 2011, the FASB issued Accounting Standard Unit (ASU) No. 2011-02 which is included in
Accounting Standards Codification (ASC) 320, Receivables. This update requires a creditor to evaluate
whether a restructuring constitutes a troubled debt restructuring by concluding that the restructuring
constitutes a concession and that the debtor is experiencing financial difficulties. This guidance was
effective for the Trust interim reporting beginning July 1, 2011. This guidance did not have a material
impact on its financial condition, results of operations or disclosures.
In May 2011, the FASB issued ASU No. 2011-04, which is included in ASC 820, Fair Value
Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure
Requirements in U.S GAAP and IFRS. This update defines fair value, clarifies a framework to
measure fair value, and requires specific disclosures of fair value measurements. The guidance will be
effective for the Trust’s interim and annual reporting periods beginning October 1, 2011, and applied
prospectively. The Trust does not expect adoption of this guidance to have a material impact on its
financial condition, results of operations, or disclosures.
In June 2011, the FASB issued ASU No. 2011-05, which is included in ASC 220, Presentation of
Comprehensive Income. This update improves the comparability, consistency, and transparency of
financial reporting and increases the prominence of items reported in other comprehensive income.
The guidance requires all non-owner changes in shareholders’ equity be presented either in a single
continuous statement of comprehensive income or in two separate but consecutive statements. The
guidance will be effective for the Trust’s interim and annual reporting periods beginning January 1,
2012, and applied retrospectively. The Trust does not expect adoption of this guidance to have a
material impact on its financial condition, results of operations, or disclosures.
F-13
BRT REALTY TRUST AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
September 30, 2011
NOTE 2—REAL ESTATE LOANS AND PURCHASE MONEY MORTGAGES
At September 30, 2011, information as to real estate loans (excluding a real estate loan held for
sale), all of which are earning, is summarized as follows (dollars in thousands):
Real Estate
Loans, Net
Percent
Multi-family residential
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retail
$26,300
24,975
11,874
4,117
39.2
37.1
17.6
6.1
67,266
100%
Deferred fee income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(576)
Real estate loans, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$66,690
A summary of the changes in non-earning loans before allowance for possible losses of $3,165,000
and $1,618,000 for the years ended September 30, 2010 and 2009 respectively, is as follows (dollars in
thousands):
2011
2010
2009
Beginning principal balance . . . . . . . . . . . . . . . . . . .
Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Protective advances . . . . . . . . . . . . . . . . . . . . . . . . .
$ 35,143
$ 2,836
— 34,563
—
—
$ 18,407
68,184
93
Total additions . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payoffs and paydowns . . . . . . . . . . . . . . . . . . . . . . .
Sale of loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassified to performing . . . . . . . . . . . . . . . . . . . .
Reclassified to real estate loan held for sale . . . . . . .
Transferred to owned real estate . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . .
Direct charge off
68,277
— 34,563
(883)
(2,256)
—
—
—
(1,250)
— (22,967)
— (56,448)
(2,300)
—
(26,655)
—
(8,488)
—
—
Total reductions . . . . . . . . . . . . . . . . . . . . . . . . . . .
(35,143)
(2,256)
(83,848)
Ending principal balance . . . . . . . . . . . . . . . . . . . . .
$
— $35,143
$ 2,836
There was no allowance for possible losses at September 30, 2011.
At September 30, 2011, 2010 and 2009, no earning loans were deemed impaired and accordingly
no loan loss allowances have been established against our earning portfolio. During the years ended
September 30, 2011, 2010 and 2009, respectively, an average of $7,758,000, $23,526,000 and $34,932,000,
respectively, of real estate loans were deemed impaired, and no interest income was recognized in any
period relating to these loans.
The Trust recognized cash basis interest of $621,000, $571,000 and $481,000 on non-earning loans
in the years ended September 30, 2011, 2010 and 2009, respectively.
F-14
BRT REALTY TRUST AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
September 30, 2011
NOTE 2—REAL ESTATE LOANS AND PURCHASE MONEY MORTGAGES (Continued)
At September 30, 2010 information as to real estate loans and purchase money mortgages, all of
which are first mortgage loans, is summarized as follows (dollars in thousands):
Earning
Interest
Non-Earning
Interest
Total
Allowance
For Possible
Losses
Real Estate
Loans, Net
Real estate loans:
Condominium units (existing multi-family) .
Vacant loft building with retail . . . . . . . . . .
Multi-family residential . . . . . . . . . . . . . . .
Retail . . . . . . . . . . . . . . . . . . . . . . . . . . . .
— $ 8,488
26,075
—
580
$14,097
—
3,166
Deferred fee income . . . . . . . . . . . . . . . . .
17,263
(159)
Real estate loans, net . . . . . . . . . . . . . . .
17,104
Purchase money mortgage loans:
35,143
(86)
35,057
$ 8,488
26,075
14,677
3,166
52,406
(245)
52,161
—
$(2,985)
(180)
—
(3,165)
(3,165)
$ 8,488
23,090
14,497
3,166
49,241
(245)
48,996
Multi-family residential . . . . . . . . . . . . . . .
5,340
—
5,340
—
5,340
Real estate and purchase money
mortgage loans, net . . . . . . . . . . . . . .
$22,444
$35,057
$57,501
$(3,165)
$54,336
Loans originated by the Trust generally provide for interest rates indexed to the prime rate with a
stated minimum. However in 2011, we also originated loans where the interest rate is fixed for the
initial term, and converts to a floating rate loan if the extension option if any, is exercised. In 2010 the
Trust also provided fixed rate financing to facilitate the sale of real estate that it owned.
At September 30, 2011, two separate, unaffiliated borrowers had loans outstanding in excess of 5%
of total assets. Information regarding these loans is set forth in the table below (dollars in thousands):
Office building(a)
. . . . . . . . . . . . . . . . . .
Industrial . . . . . . . . . . . . . . . . . . . . . . . . .
$22,800
$11,874
1
1
30.1% 11.9% NY Performing
6.2% MD Performing
15.7%
Gross Loan
Balance
# of
Loans Gross Loans
% of
% of
Assets
State
Status
(a) This loan was paid in full on November 10, 2011.
The Trust’s portfolio consists of senior mortgage loans, secured by residential or commercial
property, 71% of which are located in New York, 16% in Maryland, 7% in New Jersey and 6% in
two other states.
F-15
BRT REALTY TRUST AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
September 30, 2011
NOTE 2—REAL ESTATE LOANS AND PURCHASE MONEY MORTGAGES (Continued)
Annual maturities of real estate loans (excluding real estate loan held for sale) during the next five
years and thereafter are summarized as follows (dollars in thousands):
Year Ending September 30,
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amount
$55,393
11,873
—
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$67,266
If a loan is not repaid at maturity, the Trust may either extend the loan or may commence
foreclosure proceedings. The Trust analyzes each loan separately to determine the appropriate course
of action. In analyzing each situation, management examines various aspects of the loan receivable,
including the value of the collateral, the financial strength of the borrower, past payment history and
plans of the owner of the property. Of the $52,701,000 of real estate loans receivable that were
scheduled to mature in fiscal 2011, $3,066,000 were extended, $41,147,000 were paid off or sold, and
$8,488,000 was the subject of a bankruptcy proceeding.
At September 30, 2011, the three largest real estate loans had principal balances outstanding of
approximately $22,800,000, $11,874,000 and $9,516,000. These three loans accounted for 17.5%, 5.5%
and 4.3% of the total interest and fees earned on our loan portfolio in the year ended September 30,
2011.
NOTE 3—REAL ESTATE LOAN HELD FOR SALE
At September 30, 2011, the Trust had one loan outstanding, which is classified as held for sale.
The loan, which represented a pari passu interest in a loan with a principal balance of approximately
$17 million, had a carrying value of approximately $8.5 million, and represented 11.2% of total real
estate loans and 4.4% of total assets at September 30, 2011. In October 2011, pursuant to a Federal
Bankruptcy Court approved joint plan of reorganization, the Trust and its loan participant sold the
rights to the loan for net proceeds of approximately $23.5 million. The Trust provided $15 million of
financing for the purchase. This loan paid off on December 5, 2011.
NOTE 4—ALLOWANCE FOR POSSIBLE LOAN LOSSES
The following is an analysis of the allowance for possible loan losses (dollars in thousands):
Year Ended September 30,
2011
2010
2009
Balance at beginning of year . . . . . . . . . . . . . . . . . . .
Provision for loan loss . . . . . . . . . . . . . . . . . . . . . . . .
Recovery of previously provided allowance . . . . . . . . .
Charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 3,165
—
(3,595)
(609)
1,039
$ 1,618
3,165
(365)
(1,480)
227
$ 6,710
17,110
—
(24,619)
2,417
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . .
$ — $ 3,165
$ 1,618
F-16
BRT REALTY TRUST AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
September 30, 2011
NOTE 4—ALLOWANCE FOR POSSIBLE LOAN LOSSES (Continued)
The allowance for possible losses applies to two loans aggregating $26,655,000 at September 30,
2010, and one loan of $2,256,000 at September 30, 2009.
NOTE 5—REAL ESTATE PROPERTIES
A summary of the change in real estate properties for the year ended September 30, 2011 is as
follows (dollars in thousands):
September 30,
2010
Balance
Costs
Capitalized
Depreciation,
Amortization
and Paydowns
September 30,
2011
Balance
Shopping centers/retail . . . . . . . . . . . . . . . . . . . .
Multi-family . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2,957(a)
2,969
41,945(b)
7,972(c)
Total real estate properties . . . . . . . . . . . . . . . . .
$55,843
—
—
$6,793
—
$6,793
$ (104)
(2,654)
(601)
—
$(3,359)
$ 2,853
315
48,137
7,972
$59,277
(a) The Trust holds, with a minority partner, a leasehold interest in a portion of a retail shopping
center located in Yonkers, New York. The leasehold interest is for approximately 28,500 square
feet and, including all option periods, expires in 2045. The non-controlling interest was 15%, or
$(120,000) at September 30, 2011 and 30% or $152,000 at September 30, 2010.
These
amounts are included as a component of non-controlling interests on the consolidated balance
sheets.
(b) Represents the real estate assets of RBH-TRB Newark Holdings LLC, a consolidated VIE which
owns 26 operating and development properties in Newark, New Jersey. These properties contain a
mix of office, retail space and surface parking, totaling approximately 637,000 square feet. These
assets are subject to blanket mortgages in the aggregate principal balance of $27,000,000 held by
the Trust, which are eliminated in consolidation. Several of the assets are also encumbered by
other mortgages which are discussed in Note 9—Debt Obligations—Mortgages Payable. The risks
associated with our involvement in this VIE have not changed in the year ended September 30,
2011.
For the years ended September 30, 2011 and 2010, this VIE had revenues of $2,034,000 and
$2,026,000, respectively, and operating expenses of $2,486,000 and $2,635,000, respectively,
excluding interest and depreciation expense. The Trust made capital contributions of $3,194,000
and $1,858,000 to this venture in the years ended September 30, 2011 and 2010, respectively,
representing its proportionate share of capital required to fund the operations of the venture for
its next fiscal year. The contributions made in 2011 also include $928,000 to purchase additional
land parcels. The minority partner also made its proportionate share of the capital contribution
which totaled $3,181,000 and $1,851,000 in the years ended September 30, 2011 and 2010,
respectively.
(c) Land is composed of an 8.9 acre development parcel located in Daytona Beach, Florida, previously
acquired in foreclosure.
F-17
BRT REALTY TRUST AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
September 30, 2011
NOTE 5—REAL ESTATE PROPERTIES (Continued)
Future minimum rentals to be received by the Trust pursuant to non-cancellable operating leases
with terms in excess of one year, from properties on which the Trust holds title at September 30, 2011,
are as follows (dollars in thousands):
Year Ending September 30,
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amount
$ 2,481
2,221
2,172
2,185
2,066
10,944
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$22,069
NOTE 6—IMPAIRMENT CHARGES
The Trust reviews each real estate asset owned, including investments in unconsolidated joint
ventures, for which indicators of impairment are present to determine whether the carrying amount of
the asset can be recovered. If indicators of impairment are present, measurement is then based upon
the fair value of the asset. Real estate assets held for sale are valued at the lower of cost or fair value,
less costs to sell on an individual asset basis.
As a result of the credit crisis and the deterioration in the value of real estate in locations where
the Trust owned properties, the Trust took impairment charges of $3,370,000 and $31,046,000 for the
fiscal years ended September 30, 2010 and 2009, respectively, as follows (dollars in thousands):
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate properties
Real estate properties held for sale . . . . . . . . . . . . . . . . . . . . . . .
$2,625
745
$ 1,272
29,774
Total impairment charges . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,370
$31,046
September 30,
2010
2009
There were no impairment charges taken in Fiscal 2011.
NOTE 7—INVESTMENT IN UNCONSOLIDATED VENTURES
On June 2, 2011, a wholly owned subsidiary of the Trust entered into a joint venture with an
affiliate of Torchlight Investors (‘‘Torchlight’’). The joint venture has the right, but not the obligation, to
acquire all whole loans originated by the Trust. The BRT member is the managing member of the joint
venture. The joint venture may be capitalized with up to $100 million of which 20% will be funded by
the BRT member and 80% will be funded by Torchlight as and when loans are acquired. Subsequent to
year end, the parties to the venture terminated the Trust’s obligation to sell loans to this venture.
In the fiscal year ended September 30, 2011, the Trust’s share of the venture’s earnings was
$99,000. The Trust’s equity investment in this joint venture totaled $3,431,000 at September 30, 2011.
F-18
BRT REALTY TRUST AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
September 30, 2011
NOTE 7—INVESTMENT IN UNCONSOLIDATED VENTURES (Continued)
The Trust is also a partner in two unconsolidated joint ventures, each of which owns and operates
one property. The Trust was also a partner in an unconsolidated joint venture that engaged in short
term lending. That venture ceased operations in November 2009. These ventures generated $251,000,
$196,000 and ($2,791,000) in equity earnings (loss) for the years ended September 30, 2011, 2010
and 2009, respectively. The Trust’s equity investment in these unconsolidated joint ventures totaled
$816,000 and $775,000 at September 30, 2011 and 2010, respectively.
NOTE 8—AVAILABLE-FOR-SALE SECURITIES
At September 30, 2011, the Trust had available for sale securities which consisted solely of equity
securities. Details regarding these available-for-sale securities are presented below (dollars in
thousands):
Equity Securities . . . . . . . . . . . . . . . . . . . .
$2,488
$406
$(128)
$2,766
Cost
basis
Unrealized
gains
Unrealized Market
value
losses
Unrealized gains and losses are reflected as accumulated other comprehensive income-net
unrealized gain on available-for-sale securities in the accompanying consolidated balance sheets.
The Trust’s available-for-sale equity securities were determined to be Level 1 financial assets within
the valuation hierarchy established by current accounting guidance, and the valuation is based on
current market quotes received from financial sources that trade such securities. All of the
available-for-sale securities in an unrealized loss position are equity securities and amounts are not
considered to be other than temporarily impaired because the Company expects the value of these
securities to recover and plans on holding them until at least such recovery.
During the year ended September 30, 2011, the Trust sold equity securities for $4,173,000 with a
cost basis of $3,346,000, determined using specific identification. Accordingly, the Trust recognized a
gain of $827,000 from these sales. The Trust also sold available-for-sale debt securities for $3,417,000
which had a basis of $2,925,000 determined using specific identification. Accordingly the Trust
recognized a gain of $492,000 from these sales.
At September 30, 2010, the Trust had available for sale securities which consisted of debt and
equity securities. Details regarding these available-for-sale securities are presented below (dollars in
thousands):
Debt Securities . . . . . . . . . . . . . . . . . . . . .
Equity Securities . . . . . . . . . . . . . . . . . . . .
Cost
basis
Unrealized
gains
Unrealized
losses
Market
value
$2,897
5,779
$8,676
$ 611
1,056
$1,667
—
$73
$73
$ 3,508
6,762
$10,270
The Trust’s available-for-sale debt securities were determined to be Level 2 financial assets within
the valuation hierarchy established by current accounting guidance, and the valuation is based on
market quotes from inactive markets received from financial sources that trade such securities.
F-19
BRT REALTY TRUST AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
September 30, 2011
NOTE 8—AVAILABLE-FOR-SALE SECURITIES (Continued)
During the year ended September 30, 2010, the Trust sold available-for-sale equity securities for
$2,425,000. The cost basis of these securities was $975,000, determined using specific identification.
Accordingly, the Trust recognized a gain of $1,450,000 from these sales. The Trust also sold an
available-for-sale debt security for $1,000,000. The cost basis of this security was $864,000 and was
determined using specific identification. Accordingly, the Trust recognized a gain of $136,000 on this
sale.
NOTE 9—DEBT OBLIGATIONS
Debt obligations consist of the following (dollars in thousands):
Line of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Junior subordinated notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgages payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total debt obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
$37,400
14,417
$51,817
—
$40,815
12,557
$53,372
September 30,
2011
2010
Line of credit
On June 22, 2011, the Trust, through a wholly owned subsidiary, entered into a senior secured
revolving credit facility with Capital One, N.A. The maximum amount that may be borrowed under the
facility is the lesser of $25 million and the borrowing base. The borrowing base is generally equal to
40% to 65% (depending on, among other things, the type of property secured by the eligible mortgage
receivables pledged to the lender and the operating income of the related property) of such receivables.
Interest accrues on the outstanding balance at the greater of (i) 4% plus LIBOR and (ii) 5.50%. The
facility matures June 21, 2014 and, subject to the satisfaction of specified conditions, the outstanding
balance may be converted at the Trust’s option into an 18 month term loan. The Trust has guaranteed
the payment and performance of its subsidiary’s obligations under the facility.
The loan documents, among other things, require (A) the Trust (i) to maintain on a quarterly basis
and on a consolidated basis, net worth of not less than $100 million and liquidity of not less than
$7.5 million, and (ii) prohibits the Trust from incurring debt, with specified exceptions, in excess of five
percent of its net worth and (B) the subsidiary (i) to maintain a debt service coverage ratio and a
collateral coverage ratio of not less than 1.5 to 1.0, and (iii) prohibits the subsidiary, with specified
exceptions, from incurring debt.
We paid, and in each of June 2012 and 2013 will pay, an $82,500 fee in connection with this
facility.
At September 30, 2011 there was no outstanding balance on the facility.
Junior Subordinated Notes
On March 15, 2011, the Trust restructured its existing junior subordinated notes resulting in the
repayment of $5,000,000 of the outstanding notes at par and the reduction of the interest rates on the
remaining outstanding notes as set forth in the table below:
Interest period
Prior Interest Rate
New Interest Rate
March 15, 2011 through July 31, 2012 . . . . . .
3.00%
4.90%
August 1, 2012 through April 29, 2016 . . . . . .
April 30, 2016 through April 30, 2036 . . . . . . LIBOR + 2.95% LIBOR + 2.00%
3.50%
8.37%
F-20
BRT REALTY TRUST AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
September 30, 2011
NOTE 9—DEBT OBLIGATIONS (Continued)
The Trust accounted for the restructuring of this debt as an extinguishment of debt. For the year
ended September 30, 2011, the Trust recognized a loss on the extinguishment of the debt of $2,138,000,
which represented the unamortized principal of $1,308,000 and unamortized costs of $830,000. The
Trust also incurred third party costs of $512,000 which were deferred and will be amortized over the
remaining life of the notes.
Interest expense relating to the junior subordinated notes for the years ended September 30, 2011,
2010 and 2009 was $1,564,000, $2,065,000 and $3,941,000, respectively. Amortization of the deferred
costs which is a component of interest expense on borrowed funds was $261,000, $33,000 and $110,000
for the years ended September 30, 2011, 2010 and 2009, respectively.
Mortgages Payable
The Trust has five first mortgages and one second mortgage outstanding with an aggregate
principal balance at September 30, 2011 of $14,417,000. One of these mortgages, with an outstanding
balance of $2,041,000, is secured by a long term leasehold position on a shopping center owned by a
consolidated joint venture. The remaining five mortgages, with aggregate outstanding balances of
$12,376,000, are secured by individual parcels of two land assemblages in Newark, NJ owned by
another consolidated joint venture.
Interest expense relating to the mortgages payable including amortized mortgage costs for the
years ended September 30, 2011, 2010 and 2009 was $1,259,000, $811,000 and $284,000, respectively.
During the years ended September 30, 2011 and 2010, the Trust capitalized interest expense of
$775,000 and $326,000, respectively. This interest is being capitalized in connection with the
development of a portion of the Trust’s Newark Joint Venture’s properties.
Details pertaining to the outstanding mortgages payable at September 30, 2011 are as follows
(dollars in thousands):
Location
Balance
Amortizing
Rate
Maturity Date
Yonkers, NY . . . . . . . . . . . . . . . . . . . . . . . . . . .
Market Street, Newark, NJ . . . . . . . . . . . . . . . . .
Market Street, Newark, NJ . . . . . . . . . . . . . . . . .
Broad Street, Newark, NJ . . . . . . . . . . . . . . . . . .
Broad Street, Newark, NJ . . . . . . . . . . . . . . . . . .
Teachers Village, Newark, NJ(a) . . . . . . . . . . . . .
$ 2,041
1,200
900
5,828
486
3,962
$14,417
Yes
No
No
Yes
Yes
No
6.25% December 31, 2011
7.00% April 20, 2012
7.00% January 18, 2015
6.00% August 1, 2030
6.00% August 1, 2030
17.00% March 14, 2012
(a) This mortgage is subordinate to a first mortgage in the amount of $7,500,000 held directly by the
Trust that is eliminated in consolidation. The Trust has guaranteed $993,000 of the mortgage
obligation at September 30, 2011, based on the current outstanding balance. The guarantee
amount will increase to $2,154,000 if the full amount of the $8,600,000 loan is drawn and
outstanding.
F-21
BRT REALTY TRUST AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
September 30, 2011
NOTE 9—DEBT OBLIGATIONS (Continued)
Scheduled principal repayments on these mortgages are as follows (dollars in thousands):
Years Ending September 30,
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amount
$ 7,386
195
208
1,120
233
5,275
$14,417
NOTE 10—COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) for the years ended was as follows (dollars in thousands):
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss-unrealized loss on
September 30,
2011
2010
2009
$ 4,924
$ (9,337) $(48,360)
available-for-sale securities . . . . . . . . . . . . . . . . . .
(1,316)
(1,117)
(4,415)
Comprehensive income (loss) . . . . . . . . . . . . . . . . . .
Plus: net loss attributable to non-controlling interests
3,608
1,450
(10,454)
1,322
(52,775)
605
Comprehensive income (loss) attributable to common
shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 5,058
$ (9,132) $(52,170)
NOTE 11—INCOME TAXES
The Trust has elected to be taxed as a real estate investment trust (‘‘REIT’’), as defined under the
Internal Revenue Code of 1986, as amended. As a REIT, the Trust will generally not be subject to
Federal income taxes at the corporate level if it distributes 100% of its REIT taxable income, as
defined, to its shareholders. To maintain its REIT status, the Trust must distribute at least 90% of its
taxable income; however if it does not distribute 100% of its taxable income, it will be taxed on
undistributed income. There are a number of organizational and operational requirements the Trust
must meet to remain a REIT. If the Trust fails to qualify as a REIT in any taxable year, its taxable
income will be subject to Federal income tax at regular corporate tax rates and it may not be able to
qualify as a REIT for four subsequent tax years. Even if it is qualified as a REIT, the Trust is subject to
certain state and local income taxes and to Federal income and excise taxes on the undistributed
taxable income. For income tax purposes the Trust reports on a calendar year.
During the years ended September 30, 2011, 2010 and 2009, the Trust recorded $20,000, $6,000
and $53,000, respectively, of state franchise tax, net of refunds, relating to the 2011, 2010 and 2009 tax
years.
Earnings and profits, which determine the taxability of dividends to shareholders, differs from net
income reported for financial statement purposes due to various items including timing differences
related to loan loss provision, impairment charges, depreciation methods and carrying values.
F-22
BRT REALTY TRUST AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
September 30, 2011
NOTE 11—INCOME TAXES (Continued)
The financial statement income is expected to be approximately $2,300,000 higher than the income
for tax purposes for calendar 2011, primarily due to the reversal of loan loss provision taken for book
purposes in the current calendar year that is not reportable for tax purposes in the current tax year.
At December 31, 2010, the Trust had a tax loss carry forward of $70,510,000. These net operating
losses can be used in future years to reduce taxable income when it is generated. These tax loss carry
forwards begin to expire in 2028.
NOTE 12—SHAREHOLDERS’ EQUITY
Distributions
During the year ended September 30, 2011, the Trust did not declare or pay any dividends.
Stock Options
At September 30, 2011 there were 11,000 options outstanding that were issued pursuant to the
BRT 1996 Stock Option Plan, all of which are currently exercisable. These options have an exercise
price of $8.25 and expire December 2011. No further grants can be made under this Plan.
Changes in the number of shares under all option arrangements are summarized as follows:
Outstanding at beginning of period . . . . . . . . . . . . . . . .
Expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at end of period . . . . . . . . . . . . . . . . . . . .
Exercisable at end of period . . . . . . . . . . . . . . . . . . . . .
Option prices per share outstanding (a) . . . . . . . . . . . .
Weighted average remaining contractual life (years) . . . .
Weighted average exercise price . . . . . . . . . . . . . . . . . .
$
Year Ended September 30,
2011
2010
2009
22,500
(11,500)
11,000
11,000
8.25
.2
8.75
22,500
—
22,500
22,500
—
22,500
22,500
$6.12 - $8.25
.6
7.16
22,500
$7.75 - $10.45
1.6
9.07
(a) The exercise price of these options have been adjusted for the fiscal year ended September 30,
2011 and 2010 to give effect to the stock dividend that took place in October 2009.
Restricted Shares
An aggregate of 850,000 shares have been authorized for issuance under the Trust’s equity
incentive plans, of which 229,560 shares remain available for future grants at September 30, 2011. The
restricted shares issued vest five years from the date of grant and under specified circumstances,
including a change in control, may vest earlier. Since inception of the plans, 126,410 shares have vested
and 491,705 shares have been granted and have not yet vested.
During the fiscal years ended September 30, 2011, 2010 and 2009, the Trust issued 138,150, 125,150
and 126,450 restricted shares, respectively, under the Trusts equity incentive plans. For accounting
purposes, the restricted shares are not included in the outstanding shares shown on the consolidated
balance sheets until they vest. The estimated fair value of restricted stock at the date of grant is being
amortized ratably into expense over the applicable vesting period. For the years ended September 30,
F-23
BRT REALTY TRUST AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
September 30, 2011
NOTE 12—SHAREHOLDERS’ EQUITY (Continued)
2011, 2010 and 2009, the Trust recognized $845,000, $833,000 and $876,000 of compensation expense,
respectively. At September 30, 2011, $1,801,000 has been deferred as unearned compensation and will
be charged to expense over the remaining vesting periods. The weighted average vesting period is
2.85 years.
Changes in number of shares outstanding under the 2009 and 2003 BRT Incentive Plans are shown
below:
Years Ended September 30,
2011
2010
2009
Outstanding at beginning of the year . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cancelled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
391,580
138,150
(175)
(37,850)
299,280
125,150
(2,050)
(30,800)
197,540
126,450
(750)
(23,960)
Outstanding at the end of the year . . . . . . . . . . . . . . . . . . . . . . . . . . . .
491,705
391,580
299,280
Warrant
On June 2, 2011, in connection with entering into a joint venture with an affiliate of Torchlight
Investors (‘‘Torchlight’’), the Trust issued a warrant to purchase 100,000 shares of beneficial interest of
the Trust. The warrant is exercisable until May 30, 2012. The exercise price of the warrant is $9.00 per
share and includes anti-dilution adjustments in the event of stock splits, stock dividends and issuances
of securities. The warrant’s fair value of $259,000 as of the issue date was determined by a third party
appraiser using a Monte Carlo simulation model and was recorded as a component of the Trust’s
investment in the joint venture.
Earnings (Loss) Per Share
The following table sets forth the computation of basic and diluted earnings (loss) per share
(dollars in thousands):
2011
2010
2009
Numerator for basic and diluted earnings (loss) per share
attributable to common shareholders:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Denominator:
Denominator for basic earnings (loss) per share—weighted
$
6,374
$
(8,015) $
(47,755)
average shares(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14,041,569
13,871,668
11,643,972
Effect of dilutive securities:
Employee stock options . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock dividend payable . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Denominator for diluted earnings (loss) per share—adjusted
—
—
298
—
—
2,437,352
weighted average shares and assumed conversions(1) . . . . .
14,041,569
13,871,668
11,643,972
Basic earnings (loss) per share . . . . . . . . . . . . . . . . . . . . . . .
Diluted earnings (loss) per share . . . . . . . . . . . . . . . . . . . . .
$
$
.45
.45
$
$
(.58) $
(.58) $
(4.10)
(4.10)
(1) Outstanding shares for 2010 and 2009 are the same for basic and diluted as the effect of dilutive
shares in the computation of earnings per share would have been antidilutive.
F-24
BRT REALTY TRUST AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
September 30, 2011
NOTE 12—SHAREHOLDERS’ EQUITY (Continued)
Share Buyback and Treasury Shares
In September 2011, the Board of Trustees approved a share repurchase program pursuant to which
the Trust may spend up to $2,000,000 to repurchase its shares of beneficial interest. Shares repurchased
under this program will be retired. As of September 30, 2011, the Trust had repurchased 7,305 shares
at an average cost of $6.35 per share. During the fiscal years ended September 30, 2010 and 2009 the
Trust repurchased 52,403 and 256,110 shares, respectively, at an average cost of $5.55 and $3.68 per
share, respectively.
During the years ended September 30, 2011, 2010 and 2009, 37,850, 30,800 and 23,960 treasury
shares, respectively, were issued in connection with the vesting of restricted stock under the Trust’s
incentive plans. As of September 30, 2011, the Trust owns 1,422,000 treasury shares of beneficial
interest at an aggregate cost of $11,070,000.
Tender Offer
On October 27, 2010, 147,388 shares of beneficial interest were tendered pursuant to a previously
announced tender offer. The total purchase price of these shares was $6.30 per share, aggregating
$929,000.
NOTE 13—ADVISOR’S COMPENSATION AND RELATED PARTY TRANSACTIONS
Certain of the Trust’s officers and trustees are also officers and directors of REIT
Management Corp. (‘‘REIT Management’’) to which the Trust pays advisory fees for administrative
services and investment advice. Fredric H. Gould, chairman of the board, is the sole shareholder of
REIT Management. The amended and restated agreement, expired on December 31, 2010 and was
extended to December 31, 2011. Advisory fees are currently charged to operations at a rate of 0.6% on
invested assets which consist primarily of real estate loans, real estate assets and investment securities.
Advisory fees amounted to $916,000, $785,000 and $1,173,000 for the years ended September 30, 2011,
2010 and 2009, respectively. The parties entered into an amendment to the Advisory Agreement
effective January 1, 2012, pursuant to which (i) the stated termination date was extended until June 30,
2014, (ii) the minimum and maximum fees payable in a twelve month period to REIT Management
were set at $750,000 and $4 million, respectively, subject to adjustment for any period of less than
twelve months and (iii) the Trust is to pay REIT Management the following annual fees which are to
be paid on a quarterly basis.
(cid:127) 1.0% of the average principal amount of earning loans;
(cid:127) .35% of the average amount of the fair market value of non-earning loans;
(cid:127) .45% of the average book value of all real estate properties, excluding depreciation;
(cid:127) .25% of the average amount of the fair market value of marketable securities;
(cid:127) .15% of the average amount of cash and cash equivalents; and
(cid:127) To the extent loans or real estate are held by joint ventures or other arrangements in which the
Trust has an interest, fees vary based on, among other things, the nature of the asset (i.e. real
estate or loans), the nature of our involvement (i.e. active or passive) and the extent of our
equity interests in such arrangements.
F-25
BRT REALTY TRUST AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
September 30, 2011
NOTE 13—ADVISOR’S COMPENSATION AND RELATED PARTY TRANSACTIONS (Continued)
The Trust’s borrowers also pay fees directly to REIT Management based on loan originations,
which generally are one-time fees payable upon funding of a loan, in the amount of 1⁄2 of 1% of the
total loan. These fees were $750,000, $89,000 and $44,000 for the years ended September 30, 2011,
2010 and 2009, respectively. Effective January 1, 2012, borrowers will no longer pay any loan
origination fees to REIT Management.
Management of certain properties for the Trust is provided by Majestic Property
Management Corp., a corporation in which the chairman of the board is the sole shareholder, under
renewable year-to-year agreements. Certain of the Trust’s officers and Trustees are also officers and
directors of Majestic Property Management Corp. Majestic Property Management Corp. provides real
property management, real estate brokerage and construction supervision services to the Trust and its
joint venture properties. For the years ended September 30, 2011, 2010 and 2009, fees for these
services aggregated $83,000, $66,000 and $175,000, respectively.
The chairman of the board is also chairman of the board of One Liberty Properties, Inc., a related
party, and certain of the Trust’s officers and Trustees are also officers and directors of One Liberty
Properties, Inc. In addition, the Chairman of the Board is an executive officer and sole shareholder of
Georgetown Partners, Inc., the managing general partner of Gould Investors L.P. and the sole member
of Gould General LLC, a general partner of Gould Investors L.P., a related party. Certain of the
Trust’s officers and Trustees are also officers and directors of Georgetown Partners, Inc. The allocation
of expenses for the shared facilities, personnel and other resources is computed in accordance with a
shared services agreement by and among the Trust and the affiliated entities. During the years ended
September 30, 2011, 2010 and 2009, allocated general and administrative expenses reimbursed by the
Trust to Gould Investors L.P. pursuant to the shared services agreement, aggregated $847,000, $822,000
and $1,002,000, respectively. At September 30, 2011, $100,000 remains unpaid and is included in
accounts payable and accrued liabilities on the consolidated balance sheet.
F-26
BRT REALTY TRUST AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
September 30, 2011
NOTE 14—SEGMENT REPORTING
Management has determined that the Trust operates in two reportable segments, a loan and
investment segment which includes the origination and servicing of our loan portfolio and our
investments and a real estate segment which includes the operation and disposition of our real estate
assets.
The following table summarizes the Trust’s segment reporting for the year ended September 30,
2011 (dollars in thousands):
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 14,425
$ 3,456
$ 17,881
Loan and
Investment
Real Estate
Total
3,340
7,644
738
13,834
4,047
350
1,319
(2,138)
3,578
1,346
1,346
4,924
1,082
1,030
2,112
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses related to real estate
properties . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization and depreciation . . . . . . . . . . . . . . .
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total revenues less total expenses . . . . . . . . . . . . .
Equity in earnings of unconsolidated ventures . . . .
Gain on sale of available-for-sale securities . . . . . .
Loss on extinguishment of debt . . . . . . . . . . . . . .
—
5,273
—
6,355
8,070
99
1,319
(1,420)
3,340
2,371
738
7,479
(4,023)
251
—
(718)
Income (loss) from continuing operations . . . . . . .
8,068
(4,490)
Discontinued operations:
Gain on sale of real estate assets . . . . . . . . . . . . .
Income from discontinued operations . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . .
Plus: net loss attributable to non- controlling
—
—
8,068
1,346
1,346
(3,144)
interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
1,450
1,450
Net income (loss) attributable to common
shareholders . . . . . . . . . . . . . . . . . . . . . . . . . .
$
8,068
$ (1,694)
$
6,374
Segment assets at September 30, 2011 . . . . . . . . .
$126,916
$64,096
$191,012
F-27
BRT REALTY TRUST AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
September 30, 2011
NOTE 14—SEGMENT REPORTING (Continued)
The following table summarizes the Trust’s segment reporting for the year ended September 30,
2010 (dollars in thousands):
Loan and
Investment
Real Estate
Total
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
4,713
$ 3,422
$
8,135
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses related to real estate
properties . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan loss . . . . . . . . . . . . . . . . . . . . .
Impairment charges . . . . . . . . . . . . . . . . . . . . . . .
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization and depreciation . . . . . . . . . . . . . . .
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,181
1,403
2,584
—
3,165
—
5,233
—
9,579
3,216
—
2,625
2,288
733
3,216
3,165
2,625
7,521
733
10,265
19,844
Total revenues less total expenses . . . . . . . . . . . . .
(4,866)
(6,843)
(11,709)
Equity in earnings of unconsolidated ventures . . . .
Gain on sale of available-for-sale securities . . . . . .
28
1,586
168
—
196
1,586
Loss from continuing operations
. . . . . . . . . . . . .
(3,252)
(6,675)
(9,927)
Discontinued operations:
Loss from operations . . . . . . . . . . . . . . . . . . . . . .
Impairment charges . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of real estate assets . . . . . . . . . . . . .
Income from discontinued operations . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plus: net loss attributable to non- controlling
—
—
—
—
(602)
(745)
1,937
590
(602)
(745)
1,937
590
(3,252)
(6,085)
(9,337)
interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
1,322
1,322
Net loss attributable to common shareholders . . . .
$ (3,252)
$ (4,763)
$ (8,015)
Segment assets at September 30, 2010 . . . . . . . . .
$124,928
$61,338
$186,266
F-28
BRT REALTY TRUST AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
September 30, 2011
NOTE 14—SEGMENT REPORTING (Continued)
The following table summarizes the Trust’s segment reporting for the year ended September 30,
2009 (dollars in thousands):
Loan and
Investment
Real Estate
Total
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 10,436
$ 1,718
$ 12,154
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses related to real estate
properties . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan loss . . . . . . . . . . . . . . . . . . . . .
Impairment charges . . . . . . . . . . . . . . . . . . . . . . .
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization and depreciation . . . . . . . . . . . . . . .
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,887
1,832
4,719
—
17,110
—
6,943
—
26,940
2,133
—
1,272
2,868
1,284
9,389
2,133
17,110
1,272
9,811
1,284
36,329
Loss before other revenue and expense items . . . .
(16,504)
(7,671)
(24,175)
Equity in loss of unconsolidated ventures . . . . . . .
Gain on sale of joint venture interest . . . . . . . . . .
Gain on sale of available-for-sale securities . . . . . .
Gain on early extinguishment of debt . . . . . . . . . .
(2,261)
—
1,016
4,194
(530)
271
—
2,249
(2,791)
271
1,016
6,443
Loss from continuing operations
. . . . . . . . . . . . .
(13,555)
(5,681)
(19,236)
Discontinued operations:
Income (loss) from operations . . . . . . . . . . . . . . .
Impairment charges . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of real estate assets . . . . . . . . . . . . .
824
(2,373)
— (29,774)
2,199
—
(1,549)
(29,774)
2,199
Income (loss) from discontinued operations . . . . .
824
(29,948)
(29,124)
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plus: net loss attributable to non- controlling
(12,731)
(35,629)
(48,360)
interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
605
605
Net loss attributable to common shareholders . . . .
$ (12,731)
$(35,024)
$ (47,755)
Segment assets at September 30, 2009 . . . . . . . . .
$122,785
$ 70,548
$193,333
F-29
BRT REALTY TRUST AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
September 30, 2011
NOTE 15—FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial Instruments Not Measured at Fair Value
The following methods and assumptions were used to estimate the fair value of each class of
financial instruments that are not reported at fair value on the consolidated balance sheets:
Cash and cash equivalents, accounts receivable (included in other assets), accounts payable and
accrued liabilities: The carrying amounts reported in the balance sheet for these instruments
approximate their fair value due to the short term nature of these accounts.
Real estate loans: The earning mortgage loans of the Trust, which have variable rate provisions
which are based upon a margin over prime rate, have an estimated fair value which is equal to their
carrying value, assuming market rates of interest between 12% and 12.5%. The earning mortgage loans
of the Trust, which have fixed rate provisions, have an estimated fair value $48,000 greater than their
carrying value assuming a market rate of interest of 11% which reflects institutional lender yield
requirement.
Real estate loan held for sale: The real estate loan held for sale has an estimated fair value of
$3,100,000 greater than its carrying value at September 30, 2011. This is based on a contract to sell the
rights to this loan.
Junior subordinated notes: At September 30, 2011, the estimated fair value of the Trust’s junior
subordinated notes is less than their carrying value by approximately $357,000, based on a market rate
of 3.85%.
Mortgages payable: At September 30, 2011, the estimated fair value of the Trust’s mortgages
payable is greater than their carrying value by approximately $693,000 assuming market interest rates
between 4.71% and 17%. Market interest rates were determined using current financing transactions
provided by third party institutions.
Considerable judgment is necessary to interpret market data and develop estimated fair value. The
use of different market assumptions and/or estimation methodologies may have a material effect on the
estimated fair value assumptions.
Financial Instruments Measured at Fair Value
The Trust’s fair value measurements are based on the assumptions that market participants would
use in pricing the asset or liability. As a basis for considering market participant assumptions in fair
value measurements, there is a fair value hierarchy that distinguishes between markets participant
assumptions based on market data obtained from sources independent of the reporting entity and the
reporting entity’s own assumptions about market participant assumptions. Level 1 assets/liabilities are
valued based on quoted prices for identical instruments in active markets, Level 2 assets/liabilities are
valued based on quoted prices in active markets for similar instruments, on quoted prices in less active
or inactive markets, or on other ‘‘observable’’ market inputs and Level 3 assets/liabilities are valued
based significantly on ‘‘unobservable’’ market inputs. The Trust does not currently own any financial
F-30
BRT REALTY TRUST AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
September 30, 2011
NOTE 15—FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
instruments that are classified as Level 3. The following table lists the Trust’s available for securities
and their fair value by level (dollars in thousands):
Financial assets:
Available-for-sale securities:
Corporate equity securities . . . . . . . . . . . . . . . . . .
NOTE 16—COMMITMENT
Carrying and
Fair Value
Maturity
Date
Fair Value
Using Fair
Level 1
Measurements
Value
Hierarchy
Level 2
$2,766
— $2,776
—
The Trust maintains a non-contributory defined contribution pension plan covering eligible
employees and officers. Contributions by the Trust are made through a money purchase plan, based
upon a percent of qualified employees’ total salary as defined therein. Pension expense approximated
$315,000, $287,000 and $303,000 during the years ended September 30, 2011, 2010 and 2009,
respectively. At September 30, 2011, $28,000 remains unpaid and is included in accounts payable and
accrued liabilities on the consolidated balance sheet.
NOTE 17—QUARTERLY FINANCIAL DATA (Unaudited)
Revenues . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of available-for-sale securities .
Loss on extinguishment of debt
. . . . . . . . .
(Loss) income from continuing operations . .
Discontinued operations . . . . . . . . . . . . .
Net (loss) income . . . . . . . . . . . . . . . . . . .
Plus: net loss attributable to non-
2011
1st Quarter
Oct.-Dec
2nd Quarter
Jan.-March
3rd Quarter
April-June
4th Quarter
July-Sept.
Total
For Year
$ 2,452
421
—
(681)
—
(681)
$ 5,697
593
(2,138)
625
697
1,322
$ 5,344
176
—
2,072
645
2,717
$ 4,388
129
—
1,562
4
1,566
$17,881
1,319
(2,138)
3,578
1,346
4,924
controlling interests . . . . . . . . . . . . . . . .
173
525
455
297
1,450
Net (loss) income attributable to common
shareholders . . . . . . . . . . . . . . . . . . . . . .
(508)
1,847
3,172
1,863
6,374
(Loss) income per beneficial share
Continuing operations . . . . . . . . . . . . .
Discontinued operations . . . . . . . . . . .
Basic earnings (loss) per share . . . . . . .
$
$
(.04)
—
(.04)
$
$
.08
.05
.13
$
$
.18
.05
.23
$
$
.13
—
.13
$
$
.35
.10
.45
F-31
BRT REALTY TRUST AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
September 30, 2011
NOTE 17—QUARTERLY FINANCIAL DATA (Unaudited) (Continued)
Revenues . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan loss . . . . . . . . . . . . . . . .
Impairment charges . . . . . . . . . . . . . . . . . .
Gain on sale of available-for-sale securities .
Loss from continuing operations . . . . . . . . .
Discontinued operations(a) . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss
Plus: net loss attributable to non-controlling
interests . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss attributable to common
2010
1st Quarter
Oct.-Dec
2nd Quarter
Jan.-March
3rd Quarter
April-June
4th Quarter
July-Sept.
Total
For Year
$ 1,881
3,165
—
1,586
(2,990)
102
(2,888)
$ 2,027
—
—
—
(1,613)
(114)
(1,727)
$ 2,345
—
2,625
—
(3,989)
589
(3,400)
$ 1,882
—
—
—
(1,335)
13
(1,322)
$ 8,135
3,165
2,625
1,586
(9,927)
590
(9,337)
367
370
429
156
1,322
shareholders . . . . . . . . . . . . . . . . . . . . . .
(2,521)
(1,357)
(2,971)
(1,166)
(8,015)
(Loss) income per beneficial share
Continuing operations . . . . . . . . . . . . .
Discontinued operations . . . . . . . . . . .
Basic earnings (loss) per share . . . . . . .
$
$
(.20)
.01
(.19)
$
$
(.09)
(.01)
(.10)
$
$
(.25)
.04
(.21)
$
$
(.08)
—
(.08)
$
$
(.62)
.04
(.58)
(a) Includes impairment charges of $745,000 in the 1st quarter of 2010.
NOTE 18—SUBSEQUENT EVENTS
Subsequent events have been evaluated and any significant events, relative to our consolidated
financial statements as of September 30, 2011 that warrant additional disclosure have been included in
the notes to the consolidated financial statements.
F-32
SCHEDULE III—REAL ESTATE PROPERTIES AND ACCUMULATED DEPRECIATION
BRT REALTY TRUST AND SUBSIDIARIES
SEPTEMBER 30, 2011
(Dollars in thousands)
F
-
3
3
Description
Encumbrances
Land
Buildings and
Improvements Land
Improvements
Carrying
Costs
Land
Buildings and
Improvements
Total
Initial Cost to
Company
Costs Capitalized
Subsequent to
Acquisition
Gross Amount At Which
Carried at
September 30, 2011
Accumulated
Amortization Construction Acquired
Date of
Date
Depreciation
Life For
Latest Income
Statement
Commercial
Yonkers, NY.
. . . . . . .
South Daytona, FL. . . . .
Newark, NJ . . . . . . . . .
Residential
Manhattan, NY . . . . . .
Misc.(1) . . . . . . . . . . .
$ 2,041
—
12,376
—
$10,437
17,088
$ 4,000
—
19,033
—
—
$2,315
$
53
—
8,897
—
—
— $ 7,972
19,403
$2,115
$ 4,053
—
30,045
$ 4,053
7,972
49,448
$1,200
—
1,311
—
—
—
—
—
—
35
—
—
—
—
—
35
280
35
280
—
—
Total . . . . . . . . . . . . .
$14,417
$27,525
$23,033
$2,315
$8,985
$2,115
$27,375
$34,413
$61,788
$2,511
(a)
(b)
Aug-2000
Feb-2008
June-2008
39 years
N/A
39 years
— 27.5 years
—
(c)
(1) Represents loans which are reported as real estate because they do not qualify for sale treatment under current accounting guidance.
BRT REALTY TRUST AND SUBSIDIARIES
SCHEDULE III—REAL ESTATE PROPERTIES
AND ACCUMULATED DEPRECIATION (Continued)
SEPTEMBER 30, 2011
(Dollars in thousands)
Notes to the schedule:
(a) Total real estate properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Accumulated depreciation and amortization . . . . . . . . . . . . .
$61,788
2,511
Net real estate properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$59,277
(b) Amortization of the Trust’s leasehold interests is over the shorter of
estimated useful life or the term of the respective land lease.
Information not readily obtainable.
(c)
A reconciliation of real estate properties is as follows:
Balance at beginning of year . . . . . . . . . . . . . . . . . . .
$55,843
$69,748
$77,012
Year Ended September 30,
2011
2010
2009
Additions:
Acquisitions through foreclosure . . . . . . . . . . . . . . . . .
Other acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital improvements . . . . . . . . . . . . . . . . . . . . . . . .
Capitalized development expenses and carrying costs . .
Deductions:
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation/amortization/paydowns . . . . . . . . . . . . . .
Impairment charges . . . . . . . . . . . . . . . . . . . . . . . . . .
—
2,315
141
4,371
6,827
2,561
832
—
3,393
— 60,304
—
—
4,722
1,741
—
2,379
4,120
65,026
13,775
880
3,370
18,025
40,035
1,209
31,046
72,290
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . .
$59,277
$55,843
$69,748
The aggregate cost of investments in real estate assets for Federal income tax purposes is
approximately $2,625 higher than book value.
F-34
BRT REALTY TRUST AND SUBSIDIARIES
SCHEDULE IV—MORTGAGE LOANS ON REAL ESTATE
(INCLUDING MORTGAGE LOAN HELD FOR SALE)
SEPTEMBER 30, 2011
(Dollars in thousands)
# of
Loans
Interest
Rate
Final
Maturity
Date
Periodic Payment Terms
Face
Amount
of
Carrying
Value
Of
Prior
Liens Mortgages Mortgages(a)
Interest monthly, principal at maturity
1 Prime+8.75% Nov.2011
Interest monthly, principal at maturity
1 Prime+8.75% Oct. 2012
Interest monthly, principal at maturity
1 Prime+8.75% July 2012
Demand
1 Prime+7%
Interest monthly, principal at maturity
Dec. 2011 Interest monthly, principal at maturity
10.5%
1
Mar. 2012 Interest monthly, principal at maturity
1
12%
Sept. 2012 Interest monthly, principal at maturity
1 Prime+8.75
Interest monthly, principal at maturity
Various
1 Various
Interest monthly, principal at maturity
Various
4 Various
— $22,800
11,874
9,516
8,488
6,887
2,800
2,800
395
8,194
—
—
—
—
—
—
$22,800
11,672
9,233
8,446
6,858
2,780
2,800
395
8,155
F
-
3
5
Description
First Mortgage Loans
Office Building, NY, NY . . . . . . . . . . . .
Industrial, Baltimore, MD . . . . . . . . . . .
Multi-family, Westchester, NY . . . . . . . .
Multi-family/Condo Brooklyn, New York .
Multi-family, New York, NY . . . . . . . . .
Multi-family, Cape Canaveral, FL . . . . . .
Multi-family, Plainfield, NJ . . . . . . . . . .
$0 - 1,500 . . . . . . . . . . . . . . . . . . . .
$1,500 - 2,500 . . . . . . . . . . . . . . . . .
Mezzanine Loan
$1,500 - 2,500 . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . .
1
13
12%
May 2012 Interest monthly, principal at maturity $13,832
2,000
1,997
$13,832
$75,754
$75,136
Principal Amount
of Loans subject
to delinquent
principal or
interest
—
$8,488
—
—
—
—
—
—
$8,488
BRT REALTY TRUST AND SUBSIDIARIES
SCHEDULE IV—MORTGAGE LOANS ON REAL ESTATE
(INCLUDING REAL ESTATE LOAN HELD FOR SALE) (Continued)
SEPTEMBER 30, 2011
(Dollars in thousands)
Notes to the schedule:
(a) The following summary reconciles mortgage loans at their carrying values:
Year Ended September 30,
2011
2010
2009
$ 54,336
$79,570
$128,843
Balance at beginning of year . . . . . . . . . . . . . . . . . .
Additions:
Advances under real estate loans . . . . . . . . . . . . . . .
Amortization of deferred fee income . . . . . . . . . . . .
Recovery of previously provided allowances . . . . . . .
Deductions:
Collections of principal . . . . . . . . . . . . . . . . . . . . . .
Sale of loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan loss . . . . . . . . . . . . . . . . . . . . . .
Collection of loan fees . . . . . . . . . . . . . . . . . . . . . .
Loan loss recoveries . . . . . . . . . . . . . . . . . . . . . . . .
Transfer to real estate upon foreclosure, net of
131,255
1,777
3,595
136,627
66,072
46,251
—
2,465
1,039
17,384
219
365
17,968
22,475
16,916
3,165
419
227
charge offs and unamortized fees . . . . . . . . . . . . .
—
—
115,827
43,202
30,481
897
—
31,378
20,207
—
17,110
557
2,417
40,360
80,651
Balance at end of year . . . . . . . . . . . . . . . . . . . . . .
$ 75,136
$54,336
$ 79,570
(cid:127) Carrying value of mortgage loans is net of allowances for loan losses in the amount of $0, $3,165
and $1,618 in 2011, 2010 and 2009, respectively.
(cid:127) Carrying value of mortgage loans is net of deferred fee income in the amount of $618, $245 and
$44 in 2011, 2010 and 2009, respectively.
(cid:127) The aggregate cost of investments in mortgage loans is the same for financial reporting purposes
and Federal income tax purposes.
F-36
CORPORATE DIRECTORY
Fredric H. Gould
Chairman of the Board of Trustees;
Chairman of the Board of Georgetown
Partners, Inc., the Managing General
Partner of Gould Investors L.P., a
real estate partnership; President of
REIT Management Corp., Advisor to
theTrust; Chairman of the Board of
Directors of One Liberty Properties Inc.;
Director of East Group Properties, Inc.
Jeffrey A. Gould
Trustee; President and Chief Executive
Officer; Senior Vice President of
Georgetown Partners, Inc.; Senior
Vice President and Director of One
Liberty Properties, Inc.
Matthew J. Gould
Trustee; Senior Vice President;
President of Georgetown Partners, Inc.;
Senior Vice President of the Advisor;
Senior Vice President and Director of
One Liberty Properties, Inc.
Gary J. Hurand
Trustee; President of Dawn Donut
Systems Inc.; President of Management
Diversified Inc.; Director of Citizens
Republic Bancorp.
Alan Ginsburg
Trustee; Chief Executive Officer,
CED Companies
Elie Weiss
Trustee; Private Investor
Registrar, Transfer Agent,
Distribution Disbursing Agent
American Stock Transfer and
Trust Company
59 Maiden Lane
New York, New York 10038
Israel Rosenzweig
Senior Vice President; Senior Vice
President of Georgetown Partners, Inc.;
Senior Vice President of One Liberty
Properties, Inc.
Auditors
2011
BDO USA, LLP
401 Broadhollow Road
Melville, NY 11747
David W. Kalish
Senior Vice President-Finance; Senior
Vice President and Chief Financial
Officer of Georgetown Partners, Inc.
Senior Vice President and Chief Financial
Officer of One Liberty Properties, Inc.
Simeon Brinberg
Senior Vice President and Secretary;
Senior Vice President of Georgetown
Partners, Inc; Senior Vice President
of One Liberty Properties, Inc.
Mark H. Lundy
Senior Vice President; Senior Vice
President and Secretary of One
Liberty Properties, Inc; Senior Vice
President of Georgetown Partners, Inc.
2009-2010
Ernst & Young LLP
5 Times Square
New York, New York 10036
Form 10-K Available
A copy of the annual report (Form 10-K)
filed with the Securities and Exchange
Commission may be obtained without
charge by writing to the Secretary,
BRT Realty Trust, 60 Cutter Mill Road,
Suite 303, Great Neck,New York 11021.
Common Stock
The company’s common stock is listed
on the New York Stock Exchange under
the ticker symbol BRT.
Web Site Address
www.BRTRealty.com
Louis Grassi
Trustee; Managing Partner, Grassi & Co.,
CPA’s; Director, Flushing Financial Corp.
George E. Zweier
Vice President and Chief Financial Officer
Jeffrey Rubin
Trustee; Chief Executive Officer and
President of JR Group.
Kenneth F. Bernstein
Trustee; President and Chief Executive
Officer of Acadia Realty Trust
Jonathan H. Simon
Trustee; President and Chief Executive
Officer of Simon Development Group
Mitchell K. Gould
Executive Vice President
Lonnie Halpern
Vice President
Alysa Block
Treasurer; Treasurer of One Liberty
Properties, Inc.
BRT REALTY TRUST
60 Cutter Mill Road, Suite 303
Great Neck, NY 11021
(516) 466-3100
www.BRTREALTY.com
A n n u a l R e p o r t
BRT Realty Trust
A National Leader in Short-term Real Estate Lendin g
2011