BRT Apartments Corp. Q1 2023 Earnings Call
Good day and welcome to the BRT apartment Corporation's first quarter earnings Conference call. Today's conference is being recorded at this time I would like to turn the floor over to Mr. Tripp Sullivan of Investor Relations. Thank you you may begin. Thank you for joining us today on the call are Jeffrey Gould, President and Chief Executive.
Officer, George Mayer, Chief Financial Officer, and Ryan Baltimore, Chief operating officer, as well as David <unk> Senior Vice President.
I'd like to remind everyone. This conference call contains forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995 that are based on management's current expectations assumptions and beliefs.
Listeners should not place undue reliance on any forward looking statements are encouraged to review the company's SEC filings.
Clothing, its Form 10-Q for a more complete discussion of risks and other factors that could affect these forward looking statements.
Except as required by law BRT does not undertake any obligation to publicly update or revise any forward looking statements.
This call also includes a discussion of non-GAAP measures, including F. F O S. S O.
NOI combined portfolio NOI and information regarding our pro rata share of revenues expenses NOI assets and liabilities are brt's I've consolidated subsidiaries all the non-GAAP information discussed today has certain limitations.
Should be used with caution and in conjunction with the GAAP data presented in our supplemental earnings release in our reports filed with the SEC.
Please see these reports and filings for the definitions of each non-GAAP measure.
As a reminder, the company's supplemental information and earnings release have been posted on the Investor Relations section of Brt's website at Www Dot BRT apartments Dot com.
Now I'd like to turn the call over to President and CEO Geoffrey Gao. Please go ahead Chuck.
Thank you and welcome to the call I'll start with some brief comments on our overall performance and then transaction environment, then I will turn the call over to George and Ryan for some additional color around our results.
Our version of our first quarter results were consistent with what we've seen across the sector. This quarter revenues were in line with what we were anticipating at least name was positive although down from the levels achieved a year ago and expenses were in line with what we have estimated barring some unexpected cost that George will discuss later.
We're in the midst of the spring leasing season, now, which is where we typically see a lift in occupancy and rates with the continued strong population growth and demand in our markets, we have an opportunity to outperform in the winter months.
It's clear that rental growth in the sector won't be as strong as last year with 5% to 6% rental growth is a reasonable target so well need to control operating expenses as much as we can.
It has been relatively quiet on the transaction front with both sellers and buyers remain cautious.
Ironman hasn't changed much since last quarter. However, there seems to be a better understanding of where cap rates are settling.
Do you expect the sale of our Chatham Court property in Dallas during the second quarter shouldn't be completed at a sub 5% cap rate generate an IRR of 22% over a seven year hold and generate net proceeds of $19 million, which we intend to redeploy into our acquisition enrichment.
That acquisition is on track for a closing by year end.
That's a 62 and a half million dollar total purchase price, including the assumption of approximately $32 million of mortgage debt at a fixed rate of 334% and maturing in 2061, we are hard on the contract and are waiting approval. This is a great long term play for us and there are a number of similar opportunities.
We can pursue if we are able to source capital at the right terms.
We did not utilize the ATM again this quarter, given where the stock is trading but you may have noticed we filed an amended shelf registration statement last month.
Self was expiring in mid May and the interest of good corporate governance, we expect to renew our ATM program in the near future.
We are pleased with how well the portfolio continues to perform and expect that we will see the longer term benefits of owning and controlling more of our portfolio in the years to come we have the liquidity to deploy for new opportunities. If they meet our return thresholds and we have substantial flexibility with no debt maturities until 2000.
25.
George Please take it from here.
Second the first quarter results continue to reflect the positive impact on a year over year basis from the partner buyouts and improved operating margins across the portfolio.
However that was offset by the higher non controllable expenses incurred from the early cancellation costs associated with our previous insurance policies repairs from the December winter storm and the utility leak at one property.
So overall the net loss attributable to common stockholders was <unk> 21 per diluted share compared with net income of 62 cents per diluted share a year ago.
The primary reason for the year over year decline, what's the 70 <unk> gain in the prior year period from the sale of a property owned by an unconsolidated subsidiary and increased interest expense from higher rates on our sub debt and usage of our credit facility.
<unk> was 28 cents per diluted share compared to 35 per diluted share a year ago, primarily due to increased interest expense on the sub debt and credit facility and higher amortization of restricted stock and our issues.
<unk> was 36 cents per diluted share compared to 39 cents per diluted share a year ago, primarily due to increased interest expense on the sub debt and credit facility.
The higher expenses I noted earlier totaled approximately $396000 or <unk> per share the increase borrowing costs year over year represented approximately $678000 or <unk> <unk> per share.
With respect to the winter storm, we anticipate receiving approximately $490000 in insurance recoveries over the next two quarters.
With a combined portfolio recurring capex was $1 $2 million for the quarter.
When you add the $558000 in replacement stuff flow through real estate operating expense on our P&L that totals approximately $1 $8 million or $217 per unit.
That's below the $300 per unit of replacements, we had been assuming in our expense growth included in the combined portfolio NOI guidance.
We've completed the rehab of 55 units during the quarter for an investment of $422000 and an estimated annualized ROI of 43%.
Nonrecurring capex, which represents revenue enhancing and major upgrades to properties totaled $1 $2 million during the quarter.
Turning to the balance sheet.
Debt to enterprise value as of March 31 was 62% compared with 59% a year ago, primarily due to the lower market capitalization avail.
Available liquidity at quarter end was $75 million, which is comprised of cash and availability under our credit facility.
And my first liquidity was $73 million.
As of March 31, our consolidated and unconsolidated and mortgage debt had a weighted average interest rate of four point of 1% and a weighted average remaining term to maturity of seven three years.
As we noted previously we fully paid down the $19 million of borrowings that were outstanding under our credit facility at year end with a 10 year interest only loan at a fixed rate of 445%.
That's substantial positive rate arbitrage, considering the current interest rate on the credit facility is at prime.
Now I will turn the call over to Ryan.
Good morning, I'd like to start with the performance of our multifamily portfolio in the quarter.
Average occupancy for the portfolio was 94, 2% for the first quarter, which is down from 96, 4% in the 2022 quarter, primarily due to the lack of movement during the pandemic among our tenants in the 2022 corner. This is typically the quarter, where we see lighter occupancy so remaining in the mid 90% range is consistent with our expectations.
Average monthly rents for the combined portfolio in the first quarter were up 10, 9% compared to the 2022 quarter for leases signed in the first quarter of 2023, we saw estimated spreads on new leases at three 3% renewal spreads of six 7% and overall spreads of five 3%.
For April we have seen estimated spreads on new leases of three 5% renewal spreads of five 6% and overall spreads of four 6%.
Our rent to income ratio for all new leases signed in the first quarter as 25%, which demonstrates that our tenants continue to have minimal stress in our properties remain affordable.
Given the performance of the portfolio to date, the timing of the disposition of Chatham Court in Dallas and the acquisition of winter field at Midlothian enrichment is consistent with our 2023 outlook. We affirmed our previously issued guidance as well as the accompanying assumptions I would refer you to our supplemental for details on that outlook and our comments on our fourth quarter earnings.
Call for some additional color around those assumptions.
Just talk about are compiled combined portfolio NOI for the quarter and some of the moving parts in that result.
A call that we introduced this metric to provide more transparency around the underlying performance of the portfolio as well as a substantial change in the composition of our unconsolidated and consolidated properties from 2021 to 2022 as we've completed partner buyouts and sold several joint ventures in this period.
Unfortunately, despite our best efforts for two quarters in a row, we've experienced some sizable increases in non controllable expenses that obscure the performance of the portfolio I hope to shed some light on this this morning.
The Master insurance program, we implemented effective in Q4 is of course, the biggest driver in the year over year expense growth I outlined the benefits of that program last quarter and is expected to pay off as the year progresses and into 2024, our full year outlook assumed a slightly greater than 50% increase for the full year at the midpoint the larger increase in.
Q1 was due to the cost of early cancellation for our previous policies and we do not anticipate this to continue throughout the year.
Combined portfolio NOI was up 1% in the first quarter compared with the first quarter of 2022.
The primary components, where revenue grew seven 1% primarily due to increased rental rates across the portfolio total expenses increased 15, 2%, primarily due to higher insurance repairs and maintenance and utilities.
Another way to look at the expenses controllable expenses were up 11, 8%, while non controllable expenses were up 21, 5%.
The $396000 of expenses related to the items mentioned earlier impacted combined portfolio NOI by two 6% on a year over year basis.
Absent. These expenses, we would have reported a three 6% combined portfolio NOI this quarter.
If we were looking at a 25% year over year increase in insurance expense similar to many of our peers, we would've reported a combined portfolio NOI increase of six 3% in Q1.
That completes our prepared remarks, operator would you. Please open the call to questions.
We will now begin the question and answer is nothing.
To ask a question you May press Star then one on your Touchstone phone if youre using a speakerphone. Please pick up your handset before pressing the keys and to withdraw. Your question. Please press Star then two and our first question of the day will come from Iraq Mehta with EFI and please go ahead.
Yeah. Thanks, good morning.
I'm wondering.
I know why you're.
Good morning, who needs you talked about.
Mutational sequence of Hawaii.
Well, then 23 is that sequential improvement driven by the expenses good fit going lower.
We ran it as you know.
I grew up however, we know we ran into a little bit about obviously some issues with expenses. This quarter I think that it will stabilize the insurance being one of them and that we have a better handle on it for sure I think the insurance costs and what we did taking over bringing together most of the portfolio was something that I think long term is a big benefit for us in which obviously not to submit.
Over the last quarter, but yeah, we think things will stabilize for sure yeah.
Just to add onto that Gaurav. This is ryan the repairs and maintenance and the utilities with the storm damages as well as this utility leak you know as we mentioned this is not something we anticipate continuing throughout the year. So I think on the.
Expense side is where we'll really see the benefit.
Okay.
I wanted to ask you on one.
Okay.
Antonio I noticed the occupancy for that property is 85, 7% which is lower.
And you all are well.
Portfolio occupancy can you provide some color on.
What's going on at that property wise at Centinela.
Yes, we've had some short term problems there nothing that we think we can rectify them.
Basically we have had some increased.
<unk> see there are it really stems back from the buyout of the original partner or some of our concerns are about putting in tenants that didn't necessarily meet credit and issues like that were part of the problem from the seller and it always happens at times.
We get into a short term problem of occupancy after we take over property.
As I said, we're rectifying our delinquencies are and those tenants that were in there that we're not paying are getting pushed out and we're getting we're getting viable tenants in place, but it was a concern for us and I'm glad you pointed it out.
Obviously, the occupancy was a big concern and it's something that long term, we think will handle no problem, that's already improving quite a bit.
And I think you'll see steady occupancy growth in that particular property.
Okay.
Okay.
Lastly on the transaction market.
The remarks.
<unk> talked about selling a property in <unk> at sub 5% cap rate.
Is that Kathryn indicated what were the.
The cap rates are in order for the market.
I'm, sorry, I didn't hear your question.
In your prepared remarks, you talked about selling a property in second quarter at sub 5% cap rate.
Is that like sub 5% cap rate, what you're seeing in all of the markets for multifamily properties.
So youre asking generally what's happened with cap rates in the in the in the general market specific to this property, yes. It was sub five where it is so five and we're planning on that closing.
Very soon.
Generally with the market I think we've seen a stabilization in cap rates and a better feel for where things are I would say it probably runs about 50 basis points higher than maybe 50 to 100 basis points higher than the the lowest in the market where cap rates were as low as say 4%.
So I think we're seeing deals typically run and where we're focused on cap rate seeing that they are in that probably four 5% to 5% range that goes from our own sales as well as from talking to partners and other people in the industry and seeing where they're selling their properties that as well. So we've had some calls of late with other <unk>.
Investor Partners and they also were seeing similar cap rates in that four 5% to 5%.
Yeah.
Yeah.
The next question will come from Michael Gorman with <unk>. Please go ahead.
Yeah. Thanks, Good morning, guys, Ryan you talked a little bit about.
Some of them move outs or some of the lack of move outs during COVID-19 and that may be having some impact on the comps can you just talk about the retention rate that you saw in the quarter or where you think that's going to settle out and maybe just walk through kind of where the resident what kind of other options. The residents are moving out to in this environment is at home purchases are they leaving the market.
What what's driving that.
Sure Good morning, Michael Yeah, we're.
We're not seeing a tremendous amount of move outs due to home buying I think interest rates are at play a significant factor in that.
The retention rates, you know still kind of hovers in that.
50%, 55% range generally across the portfolio.
That being said I think obviously during the pandemic there was a lot less movement, we were definitely higher than that probably closer to 60 plus percent on the retention side.
We're also seeing as rent growth has slowed down people are definitely renewing more and we're seeing more push on that front as well, but one thing to notice is with our value add program, which you know as you saw we did about 55 units. We do look at that quite often you see if we can be more aggressive there we look at returns and see where Theres opera.
<unk>, so that that can have short term effects on retention and occupancy as well, but generally speaking we're not seeing a tremendous amount of home buying you know, it's a lot of job relocation or alternative options to where people are moving to.
Yeah on that we hope to do more on the renovation of units, we're focusing on renewal rents in markets and seeing where it pays to vacate and do a full renovation because the returns as you see them there haven't been great we'd like to see and we'd like to do more units moving forward, it's something that we're definitely focused on.
Yeah for sure and maybe a follow up on that I think you mentioned that kind of 880 units over the next 24 months potentially.
How does that work in terms of your line of sight are these is this.
Just from your perspective units that you'd like to get back because you think the returns are there do you have line of sight into turn into kind of what those tenants are going to do over the next 24 months.
Kind of walk me through how that pipeline is constructed.
No I mean basically it's just when a proof of concept is there on a particular property where you see that the demand is there.
Let's say, let's assume rents increased by $200 because you've done a full renovation and if you've done a third or half of the property and you've seen the occupancy be minimal and those run of vacancy minimal in those renovated units. It's a good sign that the market allows them and can sustain rent.
Rents in the higher and higher a breakpoint. So if the renewal rents there are three or 4% is something that we would probably consider and will work towards doing the renovation.
And we're seeing more of a proof of concept frankly, I don't know if you have anything want to add to that no. I think just just on the number of units that's I think.
Our goal is to be able to do all of the units I think as as we've mentioned you know there are properties, where retention is higher and people continue to renew even if we were more aggressive on those renewal rates. So we do them. When we can I think the eight eight years units available it's not necessarily.
There's no guarantee we're going to get all those units back it really depends on the property, but as Jeff mentioned a lot of those units are already existing properties that have proved out the value added concept. So so we do believe there's opportunity there we just don't.
We don't know when we'll get those units back right.
The other thing is a lot of the portfolio that you saw we bought back from partners. There was always a conversation with the partners as to what we want to do it was a joint conversation I think now that we own more of it 100% ourselves, we probably a little bit more aggressive than to do the renovations and to get the bumps are than.
And then maybe some of our partners would have been so we have more of an appetite.
Owning 100% we have full control.
Got it got it that's helpful and then maybe Jeff just quickly on the transaction market.
Obviously, you understand kind of across the board, there's a bid ask spread between buyers and sellers and expectations I Wonder if that goes further down if youre seeing any disconnect between.
Our expectations for the fundamental performance in the transaction property transaction market, where maybe buyers have different expectations for expense and NOI growth when theyre looking to acquire versus what the sellers are forecasting is is it just on the price or is it even on the underlying income that that there's kind of a disconnect.
Well I think there is a new norm on rental growth and I think everyone is starting to see that you can't anticipate the growth that we have we and others have had over the last year and a half or two years.
Sellers don't have any expectation for example, and how understanding what's going on with insurance as an example insurance clusters are skyrocketing and sellers I think want to bury their head and not see the real impact of insurance. It took a while for them to understand a readjustment in taxes real estate taxes. For example, when a buyer had to comment on.
Taxes were going up and they didn't want to focus on the increase that are that a buyer would then have well the same thing's happening with insurance I think it's a model that they have to learn and understand and realize that the increases have been substantial so it's partly on the expense side, it's partly on the rental side as well.
I would say.
The rental side I think people read about and hear about in sellers see that is not the same growth as it was I don't think there's a real focus on the expense side as much as they need to see and in time.
I think they'll understand it better and then there'll be more of a.
And understanding between buyer and seller of what real true NOI is.
Great and then just last one for me just quickly I knew the loan until Guyana.
Closed on that in February when when was that rate locked in and is that kind of representative of where where you think we could do additional secured debt in todays market.
Yeah. So so that rate was locked earlier this year and it was done at we kind of got a good timing we were monitoring rates pretty much daily when we were ready to lock and we're able to take advantage of a good a good dip in the market.
I think today, you're seeing still probably closer to that 5% plus on the debt side.
So I don't think I think the 445% that we got is a very strong piece of paper now and we do believe it's very good long term and as George mentioned, the the arbitrage versus the credit facility rate of Prime is pretty significant there. So yes, I think today, we're still getting quoted and seeing things probably in the five plus percent range on the.
Fannie Freddie debt.
The good news is we have now in our line is there's nothing outstanding we're very focused on keeping the line balance at or near zero for the most part and especially we can and with the rate that we're paying on the line is obviously, we don't think it's very good borrowing right now so.
We're very cognizant of that and careful of the usage of the line.
Great. Thanks for the time guys.
Sure.
The last question will come from Craig Kucera with B Riley FBR. Please go ahead.
Hey, good morning, guys.
Jeff I appreciate the color on the San Antonio property, but your suburban Dallas, a JV asset has also seen some occupancy softness over the past several quarters is that property also having some bad debt issues or something else going on.
What we saw there is frankly, just a little bit of a supply issues I mean, I am pleased to say that.
The portfolio overall has seen no we have not seen a great deal of new supply in our markets, which is obviously terrific exception is some to some extent as Dallas Huntsville, Alabama, maybe Nashville, Tennessee.
But these markets continue to expand and with new development.
Increased job growth and all so I think some of the Dallas specific portfolio it had to do with.
New supply in these markets, which is being absorbed I think the I think its a number one or a couple of states and cities where population growth is so rapid and.
I think with that because the new supply is getting eaten up but that had some impact on Dallas.
Okay great.
And just circling back to some some bigger picture comments, you mentioned that cap rates were settling down and.
Kind of give your thoughts on where they are gone, but I'm curious are you seeing a pick up in training in transaction volume or are things still relatively slow.
Things are still relatively slow I would say it picked up slightly from.
Maybe February of this year, but slightly only.
As far as overall I mean, the deal flow is not whats.
In the normal pattern of what we've seen over the years.
Again, I think it goes back to the earlier question from Michael of.
Salaries understanding of what markets are and what pricing they can get people waiting to see what's going to happen with the economy.
And seeing what's going on with all the reports et cetera. So we'd like to think that volume will pick up I think once you first get an understanding of cap rates and there is some stabilization that helps but until interest rates.
We're going to stay at a certain level and where everyone's comfortable and theres not that uncertainty I think it'll remain somewhat quiet going forward.
Alright. Thanks.
Sure.
This concludes our question and answer session I would like to turn the conference back over to Mr. Jeff <unk> for any closing remarks. Please go ahead.
Just wanted to say thank you all for joining US. We appreciate your continued support and interest in BR team.
Have a nice day, if you have any follow up questions feel free to call, Brian or myself at any time.
They have to speak with you. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
Yeah.
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Yeah.
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