BRT Apartments Corp. 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Cautionary Statement Regarding Forward-Looking Statements This Quarterly Report on Form 10-Q (the "Quarterly Report"), 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 Quarterly Report 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: • general economic and business conditions, including those currently affecting our nation’s economy and real estate markets; • the availability of, and costs associated with, sources of capital and liquidity; • accessibility of debt and equity capital markets; • general and local real estate conditions, including any changes in the value of our real estate; • changes in Federal, state and local governmental laws and regulations, including laws and regulations relating to taxes and real estate and related investments; • the level and volatility of interest rates; • our acquisition strategy, which may not produce the cash flows or income expected; • the competitive environment in which we operate, including competition that could adversely affect our ability to acquire properties and/or limit our ability to lease apartments or increase or maintain rental income; • a limited number of multi-family property acquisition opportunities acceptable to us; • our multi-family properties are concentrated in the Southeastern United States and Texas, which makes us more susceptible to adverse developments in those markets; • risks associated with our strategy of acquiring value-add multi-family properties, which involves greater risks than more conservative strategies; • the condition of Fannie Mae or Freddie Mac, which could adversely impact us; • our failure to comply with laws, including those requiring access to our properties by disabled persons, which could result in substantial costs; • insufficient cash flows, which could limit our ability to make required payments on our debt obligations; • impairment in the value of real estate we own; • failure of property managers to properly manage properties; • disagreements with, or misconduct by, joint venture partners; • decreased rental rates or increasing vacancy rates; • our ability to lease units in newly acquired or newly constructed multi-family properties; • potential defaults on or non-renewal of leases by tenants; • creditworthiness of tenants; 22 Table of Contents • our ability to obtain financing for acquisitions; • development and acquisition risks, including rising or unanticipated costs and failure of such acquisitions and developments to perform in accordance with projections; • the timing of acquisitions and dispositions; • our ability to reinvest the net proceeds of dispositions into more, or as favorable, acquisition opportunities; • potential natural disasters such as hurricanes, tornadoes and floods; • board determinations as to timing and payment of dividends, if any, and our ability or willingness to pay future dividends; • financing risks, including the risks that our cash flows from operations may be insufficient to meet required debt service obligations and we may be unable to refinance our existing debt upon maturity or obtain new financing on attractive terms or at all; • lack of or insufficient amounts of insurance to cover, among other things, losses from catastrophes; • our ability to maintain our qualification as a REIT; • possible environmental liabilities, including costs, fines or penalties that may be incurred due to necessary remediation of contamination of properties presently owned or previously owned by us or a subsidiary owned by us or acquired by us; • our dependence on information systems; • risks associated with breaches of our or our joint venture partners' information technology systems; • risks associated with the stock ownership restrictions of the Code for REITs and the stock ownership limit imposed by our charter; • increases in real estate taxes at properties we acquire due to such acquisitions or other factors; • the impact of the COVID-19 pandemic; • the review, and any required response thereto, if any, arising out of the restatements set forth in, and the material weakness in internal control over financial reporting described in, our Annual Report, of our financial statements, accounting, accounting policies and internal control or financial reporting; • the other factors described in this Quarterly and our Annual Report, including those set forth, as applicable, under the captions "Risk Factors," "Business," and "Management's Discussion and Analysis of Financial Condition and Results of Operations". We caution you not to place undue reliance on forward-looking statements, which speak only as of the date of this Quarterly Report. Except to the extent otherwise 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 Quarterly Report or to reflect the occurrence of unanticipated events. 23 Table of Contents Overview We are an internally managed real estate investment trust, also known as a REIT, that is focused on the ownership, and operation of multi-family properties. These properties derive revenue from tenant rental payments. Generally, these properties are owned by unconsolidated joint ventures in which we contributed 32% to 90% of the equity. At September 30, 2020, we: (i) wholly own eight multi-family properties located in six states with an aggregate of 1,880 units and a carrying value of $155.1 million; and (ii) have ownership interests, through unconsolidated entities, in 31 multi-family properties located in nine states with 9,162 units (including 741 units at two properties in lease-up) - the carrying value of our net equity investment therein is $175.5 million. Most of our properties are located in the southeast United States and Texas. See- "Off Balance Sheet Arrangements" for information regarding the contributions of our unconsolidated subsidiaries and our reliance upon the cash flow and liquidity provided by such subsidiaries. As used herein, the term "same store properties" refers to operating properties that were owned for the entirety of the periods being presented. For the three and nine months ended September 30, 2020 and 2019, there were seven same store properties. Challenges and Uncertainties Presented by COVID-19 We are facing challenges resulting from the outbreak of the COVID-19 pandemic. While the nation-wide economic hardships resulting from the responses to the pandemic did not have a material impact on our results of operations for the three and nine months ended September 30, 2020, the pandemic, among other things, may adversely affect the ability of our residents to pay rent (due to furloughs, layoffs and/or the expiration of, or reduction in, unemployment benefits) and as a result, our ability to pay dividends and/or the debt service on our mortgages. Several of our properties ( e.g. , Silvana Oaks Apartments-N. Charleston, SC and Crestmont at Thornblade-Greenville, SC.), offer housing near manufacturing and other facilities ( e.g. , Boeing and BMW, respectively) and several properties ( e.g., Parkway Grande-San Marcos, TX and Chatham Court and Reflections-Dallas, TX), offer housing to students at nearby colleges or universities. Reductions in employment at these or other manufacturing or employment centers located close to our properties may make it more difficult for those residents employed at such facilities to pay rent. Changes to the programs offered at educational institutions ( i.e. , offering on-line classes as opposed to in-person classes) located near our properties has resulted in reduced demand for such properties. The pandemic (i) may require us to incur additional real estate operating expenses to maintain our properties and promote the health and safety of our residents, (ii) may result in reduced revenues due to rent accommodations offered to current or prospective tenants, (iii) has limited our ability to raise rents, market our properties, delayed efforts to implement value add programs and acquire or dispose of properties. Any one or more of the foregoing may adversely impact our results of operations and liquidity and capital resource position. The governmental response to the pandemic has resulted in additional legislation regulating our relationships with our residents, including limitations on our ability to exercise various remedies with respect to residents that do not pay rent or other charges and may result in other legislation changing the relationship between landlords and tenants, including legislation limiting the rents we can charge or collect. The ultimate extent of the impact of the pandemic on our business, financial condition, liquidity, results of operations and prospects will depend on future developments, which are highly uncertain and cannot be predicted with confidence. Sale of $4 million real estate loan Our consolidated balance sheet at June 30, 2020, included a $4.0 million loan representing the remaining unpaid principal balance of a legacy asset from the period in which we were engaged in the real estate lending business. This loan, which we historically referred to as the Newark Joint Venture loan, matured June 30, 2020. During the quarter ended September 30, 2020, this loan was sold to an unrelated third party for its unpaid principal balance plus interest and fees of $325,000. 24 Table of Contents Results of Operations – Three months ended September 30, 2020 compared to three months ended September 30, 2019. Revenues The following table compares our revenues for the periods indicated: Three Months Ended September 30, (Dollars in thousands): 2020 2019 Increase (Decrease) % Change Rental revenue $ 7,020 $ 6,261 $ 759 12.1 Other income 293 161 132 82.0 Total revenues $ 7,313 $ 6,422 $ 891 13.9 Rental revenue The increase is primarily due to: • $655,000 due to the inclusion of revenues from a multi-family property at which we bought out the interests of our joint venture partner in October 2019 (the "Partner Buyout") and which is now wholly owned by us, and • $243,000 from same store properties primarily due to an increase in average rental rates. Offsetting this increase is the inclusion, in the corresponding period of the prior year, of $138,000 from two properties that were sold in July 2019 (the "Sold Properties"). Other income The increase is primarily due to default interest that was collected on the Newark loan receivable. This loan was sold on September 30, 2020. Expenses The following table compares our expenses for the periods indicated: Three Months Ended September 30, (Dollars in thousands) 2020 2019 Increase (Decrease) % Change Real estate operating expenses $ 3,289 $ 2,741 $ 548 20.0 Interest expense 1,731 1,870 (139) (7.4) General and administrative 2,730 2,430 300 12.3 Impairment charge 3,642 — 3,642 N/A Depreciation 1,777 1,373 404 29.4 Total expenses $ 13,169 $ 8,414 $ 4,755 56.5 Real estate operating expenses. The increase is due primarily to: • $381,000 due to the inclusion of operating expenses from the Partner Buyout; and • $267,000 from several same store properties, due primarily to increased repairs and maintenance, real estate taxes replacement costs and increase real estate insurance rates and increases in utility costs. Offsetting these increases is the inclusion, in the corresponding period of the prior year, of $111,000 from the Sold Properties. 25 Table of Contents Interest expense. The decrease is due to a: (i) $200,000 decrease in such expense on our floating rate subordinated debt due to a decline in interest rates and (ii) lesser extent, a decrease in such expense on our credit facility as there was no amount outstanding under the facility in the current quarter. Offsetting the decrease is an increase of $197,000 due to the inclusion of interest expense from the Partner Buyout. General and administrative. The increase is due primarily to a $226,000 increase in compensation costs, including an $89,000 increase for the non-cash amortization of restricted stock. Depreciation The increase is primarily due to a non-cash adjustment to record additional depreciation resulting from an increase in asset values on three properties where we previously bought out our partners interests. Impairment charge In the current quarter, we entered into a contract to sell our 8.7 acre vacant land parcel in South Daytona Beach, Florida for $4.7 million, which is approximately $3.3 million less than its carrying value at September 30, 2020. The sale of this property, which is scheduled to be completed in mid - 2021, is subject to certain conditions, including the purchaser being satisfied with the results of its due diligence review and the ability to obtain enhanced zoning. As a result of this proposed sale, we took an impairment charge of $3.6 million representing the excess of book value over the sum of the parcel's fair value. We can provide no assurance that this transaction will be completed. We anticipate using the $4.4 million of net proceeds from the sale for general working capital purposes, including the payment of our dividend. Equity in (loss) of unconsolidated joint ventures. The table below reflects the condensed income statements of our Unconsolidated Properties. In accordance, among other things, with US generally accepted accounting principles, each of the line items in the chart below (other than equity in (loss) of unconsolidated joint ventures) is presented as if these properties are wholly owned by us though, as noted earlier, our equity interests in these properties range from 32% to 90% (see note 9 of our consolidated financial statements) (dollars in thousands): Three Months Ended September 30, 2020 2019 Increase (Decrease) % change Rental revenues from unconsolidated joint ventures $ 32,341 $ 31,273 $ 1,068 3.4 % Real estate operating expense from unconsolidated joint ventures 16,092 15,212 880 5.8 % Interest expense from unconsolidated joint ventures 8,663 9,202 (539) (5.9) % Depreciation from unconsolidated joint ventures 10,411 9,901 510 5.2 % Total expenses from unconsolidated joint ventures 35,166 34,315 851 2.5 % Total revenues less total expenses from unconsolidated joint ventures (2,825) (3,042) 217 (7.1) % Loss on extinguishment of debt — (379) 379 (100.0) % Other equity earnings and gain on insurance proceeds 427 — 427 N/A Net income (loss) (2,398) (3,421) 1023 (29.9) % Equity in (loss) of unconsolidated joint ventures $ (1,529) $ (2,390) Set forth below is an explanation of the most significant changes in the components of the income of our unconsolidated joint ventures. Same store properties at unconsolidated joint ventures represent 25 properties that have been owned for the entirety of both periods being compared and exclude properties in lease up. 26 Table of Contents Rental revenue from unconsolidated joint ventures The increase is due primarily to: • $1.1 million from two properties currently in lease up, • $802,000 in revenues from a property acquired during the twelve months ended September 30, 2020, • $602,000 from unconsolidated same store properties - $455,000 of the increase is due to an increase in average rental rates at many properties and $212,000 of the increase is due to the increase in other variable payments ( e.g., utility reimbursements, late fees, etc.), and • $257,000 from the inclusion, for the entire three months ended September 30, 2020, of a property that was only owned for a portion of the corresponding period in the prior year. Offsetting the increase is the inclusion, in the corresponding period of the prior year, of $984,000 from a property that was sold in December 2019 and $714,000 from the property that was the subject of the Partner Buyout. Real estate operating expenses from unconsolidated joint ventures The increase is due to: • $1.1 million from same store properties, primarily due to increases of (i) $862,000 in real estate tax expense, of which approximately $445,000 is due to the inclusion, in the corresponding period of the prior year, of refunds and tax reductions received in the corresponding period of the prior year on a property from multi - year tax challenges and the balance is due generally to increases in tax rates, and (ii) $236,000 of increased insurance expense as we have been experiencing increase rates upon renewals, • $340,000 in expenses incurred from a property acquired during the 12 months ended September 30, 2020, • $313,000 from two properties currently in lease up, and • $122,000 from the inclusion, for the entire three months ended September 30, 2020, of one property that was only owned for a portion of the corresponding period in the prior year. Offsetting the increase is the inclusion, in the corresponding period of the prior year, of $614,000 from a property that was sold in December 2019 and $383,000 from the property that was the subject of the Partner Buyout. Interest expense from unconsolidated joint ventures The decrease is due primarily to the inclusion in the corresponding period of the prior year of: • $200,000 from the property that was the subject of the Partner Buyout, • $193,000 from same store properties as a result of a mortgage refinancing in the corresponding period of the prior year, and • $175,000 from a property that was sold in December 2019. The decrease was offset by the inclusion of $305,000 of interest expense at a property acquired during the 12 months ended September 30, 2020. Depreciation from unconsolidated joint ventures The increase is due primarily to: • $498,000 in expenses from a property acquired during the twelve months ended September 30, 2020, and • $350,000 from two properties which are currently in lease up and, in the corresponding period in the prior year, were not being fully depreciated because they were in development. Offsetting the increase is the inclusion, in the corresponding period of the prior year, of $204,000 from the property purchased in the Partner Buyout and $172,000 from a property that was sold in December 2019. Loss on extinguishment of debt. During the three months ended September 30, 2019, we incurred a swap termination fee in connection with refinancing a variable rate mortgage to a fixed rate mortgage. There was no comparable expense in the current three months. 27 Table of Contents Other equity earnings and gain on insurance proceeds. During the three months ended September 30, 2020, we recognized a $427,000 gain from the receipt of insurance proceeds related to a casualty loss, representing the proceeds received in excess of the assets written off. There was no comparable gain in the corresponding period of the prior year. Gain on sale of real estate. During the three months ended September 30, 2019, we sold two properties for an aggregate sales price of $33.2 million and recognized an aggregate gain of $9.9 million, of which $894,000 was allocated to the non-controlling partner. Loss on extinguishment of debt. During the three months ended September 30, 2019, we incurred $1.4 million of mortgage prepayment charges in connection with the sale of the Stone Crossing and Stone Crossing East Apartments, Houston, TX. Results of Operations – Nine months ended September 30, 2020 compared to nine months ended September 30, 2019. Revenues The following table compares our revenues for the periods indicated: Nine Months Ended September 30, (Dollars in thousands): 2020 2019 Increase (Decrease) % Change Rental revenue 20,422 $ 20,244 $ 178 0.9 % Other income 631 595 36 6.1 % Total revenues $ 21,053 $ 20,839 $ 214 1.0 % Rental revenue The increase is due to: • $1.9 million from the inclusion of revenues from the Partner Buyout, and • $609,000 from same store properties due primarily to an increase in the average rent, offset by slight decline in average occupancy. The increase was offset primarily due to the inclusion, in the corresponding period of the prior year, of $2.3 million from the Sold Properties. Expenses The following table compares our revenues for the periods indicated: Nine Months Ended September 30, (Dollars in thousands) 2020 2019 Increase (Decrease) % Change Real estate operating expenses $ 9,351 $ 9,242 $ 109 1.2 % Interest expense 5,400 5,865 (465) (7.9) % General and administrative 9,054 7,455 1,599 21.4 % Impairment Charge 3,642 — 3,642 N/A Depreciation 5,147 4,348 799 18.4 % Total expenses $ 32,594 26,910 $ 5,684 21.1 % 28 Table of Contents Real estate operating expenses. The increase is due to: • $1.1 million from to the inclusion of operating expenses from the Partner Buyout; and • $540,000 from same store properties, including increases in utilities expense and repairs and maintenance costs, and increased insurance expense due to increase insurance rates. The increase was offset by the inclusion, in the corresponding period of the prior year, of $1.5 million from the Sold Properties. Interest expense. The decrease is due primarily to: • a $504,000 decrease resulting from the reduction in the interest rate on our floating rate subordinated debt; and • the inclusion, in the corresponding period of the prior year, of $477,000 of interest from the Sold Properties. Offsetting the decrease is an increase of $589,000 due to the inclusion of interest expense from the property which is the subject of the Partner Buyout. General and administrative. The increase is due primarily to: • a $799,000 increase in professional fees and expenses, of which $688,000 was incurred in connection with the Restatement, • increased compensation costs of $425,000, including a $251,000 increase due to the non-cash amortization of restricted stock expense and • increased costs of $228,000 from our shared services agreement due primarily to the allocation of additional costs of part-time executives in connection with the Restatement. Impairment charge See "- Results of Operations - Three months ended September 30, 2020 compared to the three months ended September 30, 2019" for a discussion of this charge. Equity in (loss) of unconsolidated joint ventures. The table below reflects the condensed income statements of our Unconsolidated Properties. In accordance, among other things, with US generally accepted accounting principles, each of the line items in the chart below (other than equity in (loss) of unconsolidated joint ventures) is presented as if these properties are wholly owned by us though, as noted earlier, our equity interests in these properties range from 32% to 90%. (dollars in thousands) (see note 8 of our consolidated financial statements): 29 Table of Contents Nine Months Ended September 30, 2020 2019 Increase (Decrease) % change Rental revenues from unconsolidated joint ventures $ 94,726 $ 87,076 $ 7,650 8.8 % Real estate operating expense from unconsolidated joint ventures 45,298 42,612 2,686 6.3 % Interest expense from unconsolidated joint ventures 26,186 26,027 159 0.6 % Depreciation from unconsolidated joint ventures 31,184 29,121 2,063 7.1 % Total expenses from unconsolidated joint ventures 102,668 97,760 4,908 5.0 % Total revenues less total expenses from unconsolidated joint ventures (7,942) (10,684) 2,742 (25.7) % Loss on extinguishment of debt — (379) 379 (100.0) % Other equity earnings and gain on insurance proceeds 765 517 248 48.0 % Net loss $ (7,177) $ (10,546) $ 3,369 (31.9) % Equity in (loss) of unconsolidated joint ventures $ (4,731) $ (6,676) $ 1,945 (29.1) % Set forth below is an explanation of the most significant changes in the components of the income of our unconsolidated joint ventures. Same store properties at unconsolidated joint ventures represent 25 properties that have been owned for the entirety of both periods being compared and exclude two properties in lease-up. Rental revenue from unconsolidated joint ventures The increase is due primarily to: • $4.6 million from two properties currently in lease up, • $4.0 million from the inclusion, for the entire nine months ended September 30, 2020, of three properties that were only owned for a portion of the corresponding period in the prior year, • $2.0 million from one property acquired during the current period, and • $1.9 million from unconsolidated same store properties due to an increase in average rental rates at many properties partially offset by a decrease in average occupancy. Offsetting the increase is the inclusion, in the corresponding period of the prior year, of $2.9 million from a property that was sold in December 2019 and $2.1 million from the property that was the subject of the Partner Buyout. Real estate operating expenses from unconsolidated joint ventures The increase is due to: • $1.9 million from the inclusion, for the entire nine months ended September 30, 2020, of three p roperties that were only owned for a portion of the corresponding period in the prior year, • $1.7 million from unconsolidated same store properties primarily due to a $1.2 million increase in real estate tax expense, of which approximately $445,000 is due to the inclusion, in the corresponding period of the prior year, of refunds and tax reductions on a property from multi - year tax challenges and the balance is generally due to in tax rates and (ii) $422,000 of increased insurance costs as we have been experiencing increased rates on renewals, • $1.1 million from two properties which are currently in lease up, and • $727,000 in expenses incurred from one property acquired during the current period. Offsetting the increase is the inclusion, in the corresponding period of the prior year, of $1.7 million from a property that was sold in December 2019 and $1.1 million from the property that was the subject of the Partner Buyout. 30 Table of Contents Interest expense from unconsolidated joint ventures The increase is due primarily to: • $1.1 million from the inclusion, for the entire nine months ended September 30, 2020, of three properties that were only owned for a portion of the corresponding period in the prior year, • $693,000 in expenses incurred at one property acquired during the current period, and • $631,000 primarily from a property currently in lease up and at which expense was partially capitalized in the corresponding period of the prior year. Offsetting the increase is a $357,000 decrease due to the reduction in the interest rate on the variable rate construction debt secured by a property in lease up and the inclusion, in the corresponding period of the prior year, of: • $713,000 from unconsolidated same store properties primarily due to the Refinancing Transaction, • $592,000 from the property which was the subject of the Partner Buyout, and • $522,000 from a property that was sold in December 2019. Depreciation from unconsolidated joint ventures The increase is due primarily to: • $1.9 million from two properties which are in lease up and were in development in the corresponding period in the prior year, and are not being fully depreciated, • $1.2 million in expenses from one property acquired in the current period, and • $1.0 million from the inclusion, for the entire nine months ended September 30, 2020, of such expense on three properties that were only owned for a portion of the corresponding period in the prior year. Offsetting the increase is: • $858,000 from unconsolidated same store properties primarily due to a lower level of depreciation as lease intangibles on several properties have been fully depreciated, • the inclusion, in the corresponding period of the prior year, of $610,000 from the property which is the subject of the Partner Buyout, and • $507,000 from a property that was sold in December 2019. Loss on extinguishment of debt. During the nine months ended September 30, 2019, we incurred a swap termination fee in connection with refinancing a variable rate mortgage to a fixed rate mortgage. There was no comparable expense in the current nine months. Other equity earnings and gain on insurance proceeds. During the nine months ended September 30, 2020, we recognized a $765,000 gain from the receipt of insurance proceeds related to casualty losses, representing the proceeds received in excess of the assets written off . In the corresponding period of the prior year, we recognized a $517,000 gain from the receipt of insurance proceeds related to a casualty loss at a joint venture property. Gain on sale of real estate. During the three months ended September 30, 2019, we sold two properties for an aggregate sales price of $33.2 million and recognized an aggregate gain of $9.9 million, of which $894,000 was allocated to the non-controlling partner. Loss on extinguishment of debt. During the nine months ended September 30, 2019, we incurred $1.4 million of mortgage prepayment charges in connection with the sale of the Stone Crossing and Stone Crossing East Apartments, Houston, TX. 31 Table of Contents Liquidity and Capital Resources We require funds to pay operating expenses and debt service, acquire properties, make capital improvements and pay dividends. Generally, our primary sources of capital and liquidity have been the operations of our multi-family properties (including distributions from the joint ventures that own such properties), mortgage debt financings and refinancings, equity contributions for acquisitions from our joint venture partners, our share of the proceeds from the sale of properties, the sale of shares of our common stock pursuant to our at-the-market equity distribution program, our credit facility and our available cash (including restricted cash). Our available liquidity at November 1, 2020, was $35.1 million, including $15.8 million of cash and cash equivalents, $9.3 million of restricted cash and, subject to borrowing base requirements, up to $10.0 million of availability under our credit facility. We anticipate that through 2022, our operating expenses, $104.0 million of mortgage amortization and interest expense and $182.9 million of balloon payments (including $88.2 million and $108.2 million, respectively, from unconsolidated joint ventures) due with respect to mortgages maturing from 2020 to 2022, estimated cash dividend payments of at least $34.1 million (assuming (i) the current quarterly dividend rate of $0.22 per share and (ii) 17.2 million shares outstanding), will be funded from cash generated from operations (including distributions from unconsolidated joint ventures), sales of properties and our credit facility. Our operating cash flow and available cash is insufficient to fully fund the $182.9 million of balloon payments, and if we are unable to refinance such debt, we may need to issue additional equity or dispose of properties, in each case on potentially unfavorable terms. Capital improvements at (i) 20 multi-family properties will be funded by approximately $9.1 million of restricted cash available at September 30, 2020 and the cash flow from operations at such properties and (ii) other properties will be funded from the cash flow from operations of such properties. Our ability to acquire additional multi-family properties (including our acquisition of our partner's interest in properties owned by joint ventures) is limited by our available cash, and our ability to (i) draw on our credit facility (ii) obtain, on acceptable terms, equity contributions from joint venture partners and mortgage debt from lenders and (iii) raise capital from the sale of our common stock. Further, if and to the extent we generate ordinary taxable income, we will be required to make distributions to stockholders to maintain our REIT status and as a result, will be limited in our ability to use gains, if any, from property sales, as a source of funds for operating expenses, debt service and property acquisitions. Junior Subordinated Notes As of September 30, 2020, $37.4 million (excluding deferred costs of $322,000) in principal amount of our junior subordinated notes is outstanding. These notes mature in April 2036, contain limited covenants (including covenants prohibiting us from paying dividends or repurchasing capital stock if there is an event of default (as defined therein) on these notes), are redeemable at our option and bear an interest rate, which resets and is payable quarterly, of three-month LIBOR plus 200 basis points. At September 30, 2020 and 2019, the interest rate on these notes was 2.27% and 4.26%, respectively. Credit Facility We entered into a credit facility dated April 18, 2019, as amended from time to time, with VNB New York, LLC, an affiliate of Valley National Bank. The facility allows us to borrow, subject to compliance with borrowing base requirements and other conditions, up to $10 million. The facility is available for the acquisition of, and investment in, multi-family properties, for working capital (including dividend payments) and operating expenses. It is secured by the cash available in certain cash accounts maintained by the Company at VNB, matures April 2021 and bears an annual interest rate of 50 basis points over the prime rate, with a floor of 5%. There is an unused facility fee of 0.25% per annum on the difference between the outstanding loan balance and maximum amount then available under the facility. The terms of the facility include certain restrictions and covenants which limit, among other things, the incurrence of liens, and which require compliance with financial ratios relating to, among other things, the minimum amount of debt service coverage with respect to the properties (and amounts drawn on the facility) used in calculating the borrowing base, the minimum number of wholly owned properties and the minimum number of properties used in calculating the borrowing base. Net proceeds received from the sale, financing or refinancing of wholly owned properties are generally required to be used to repay amounts outstanding under the facility. 32 Table of Contents Off Balance Sheet Arrangements We are not a party to any off-balance sheet arrangements (as such term is defined in Item 303(a)(4) of Regulation S-K). Nevertheless, you should be aware that we are joint venture partners in approximately 31 unconsolidated joint ventures which own multi-family properties and that the distributions from these joint venture properties ($3.7 million in the quarter ended September 30, 2020) are a material source of our liquidity and cash flow. Further, we may be required to make significant capital contributions with respect to these properties. At September 30, 2020, these joint venture properties have a net equity carrying value of $175.5 million and are subject to mortgage debt, which is not reflected on our consolidated balance sheet, of $825.8 million. Although BRT Apartments Corp. is not the obligor with respect to such mortgage debt, the loss of any of these properties due to mortgage foreclosure or similar proceedings would have a material adverse effect on our results of operations and financial condition. These joint venture arrangements have been, and we anticipate that they will continue to be, material to our liquidity and capital resource position. See note 9 to our consolidated financial statements. Cash Distribution Policy We have elected to be treated as a REIT under the Internal Revenue Code of 1986, as amended, which we refer to as the “Code.” To qualify as a REIT, accordingly we must meet a number of organizational and operational requirements, including a requirement that we distribute to our stockholders within the time frames prescribed by the Code at least 90% of our ordinary taxable income. Management currently intends to maintain our REIT status. As a REIT, we generally will not be subject to corporate Federal income tax on taxable income we distribute to stockholders in accordance with the Code. 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 are 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). Our net operating loss at December 31, 2019 was $16.8 million; therefore, we are not currently required by Code provisions relating to REITs to pay cash dividends to maintain our status as a REIT. Notwithstanding the foregoing, on each of April 7, 2020, July 9, 2020, and October 12, 2020, we paid a cash dividend of $0.22 per share. We are carefully monitoring our discretionary spending, particularly in light of the potential reduction in the base cash rent from tenants due to the economic challenges resulting from the pandemic. Our largest recurring discretionary expenditure has been our quarterly dividend (which was $ 0.22 per share of common stock, or in the approximate amount of $ 3.8 million, for the most recent quarter). Each quarter, our board of directors evaluates the timing and amount of our dividend based on its assessment of, among other things, our short and long- term cash and liquidity requirements, prospects, debt maturities, projections of our REIT taxable income, net income, funds from operations, adjusted funds from operations and the dividend policies of our peers. 33 Table of Contents Funds from Operations; Adjusted Funds from Operations; Net Operating Income We disclose below funds from operations (“FFO”) and adjusted funds from operations (“AFFO”) because we believe that such metrics are a widely recognized and appropriate measure of the performance of an equity REIT. We compute FFO in accordance with the “White Paper on Funds From Operations” issued by the National Association of Real Estate Investment Trusts (“NAREIT”) and NAREIT’s related guidance. FFO is defined in the White Paper as net income (calculated in accordance with GAAP), excluding depreciation and amortization related to real estate, gains and losses from the sale of certain real estate assets, gains and losses from change in control, impairment write-downs of certain real estate assets and investments in entities where the impairment is directly attributable to decreases in the value of depreciable real estate held by the entity. Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect funds from operations on the same basis. In computing FFO, we do not add back to net income the amortization of costs in connection with our financing activities or depreciation of non- real estate assets. We compute AFFO by deducting from FFO our straight-line rent accruals, loss on extinguishment of debt, restricted stock and restricted stock unit expense, deferred mortgage costs and gain on insurance recovery. Since the NAREIT White Paper only provides guidelines for computing FFO, the computation of AFFO may vary from one REIT to another. We believe that FFO and AFFO are useful and standard supplemental measures of the operating performance for equity REITs and are used frequently by securities analysts, investors and other interested parties in evaluating equity REITs, many of which present FFO and AFFO when reporting their operating results. FFO and AFFO are intended to exclude GAAP historical cost depreciation and amortization of real estate assets, which assumes that the carrying value of real estate assets diminishes predictably over time. In fact, real estate values have historically risen and fallen with market conditions. As a result, we believe that FFO and AFFO provide a performance measure that when compared year over year, should reflect the impact to operations from trends in occupancy rates, rental rates, operating costs, interest costs and other matters without the inclusion of depreciation and amortization, providing a perspective that may not be necessarily apparent from net income. We also consider FFO and AFFO to be useful to us in evaluating potential property acquisitions. FFO and AFFO do not represent net income or cash flows from operations as defined by GAAP. FFO and AFFO should not be considered to be an alternative to net income as a reliable measure of our operating performance; nor should FFO and AFFO be considered an alternative to cash flows from operating, investing or financing activities (as defined by GAAP) as measures of liquidity. FFO and AFFO do not measure whether cash flow is sufficient to fund all of our cash needs, including principal amortization and capital improvements. FFO and AFFO do not represent cash flows from operating, investing or financing activities as defined by GAAP. Management recognizes that there are limitations in the use of FFO and AFFO. In evaluating our performance, management is careful to examine GAAP measures such as net income and cash flows from operating, investing and financing activities. 34 Table of Contents The tables below provides a reconciliation of net loss determined in accordance with Generally Accepted Accounting Principles ("GAAP") to FFO and AFFO on a dollar and per share basis for each of the indicated periods (amounts in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 GAAP Net loss attributable to common stockholders $ (7,484) $ 3,272 $ (16,561) $ (5,292) Add: depreciation of properties 1,777 1,373 5,147 4,348 Add: our share of depreciation in unconsolidated joint ventures 6,624 6,366 19,823 18,526 Add: Impairment charge 3,642 — 3,642 — Deduct: gain on sale of real estate — (9,938) — (9,938) Adjustments for non-controlling interests (4) 889 (12) 859 NAREIT Funds from operations attributable to common stockholders 4,555 1,962 12,039 8,503 Adjustments for: straight-line rent accruals (10) (10) (30) (30) Add: loss on extinguishment of debt — 1,387 — 1,387 Add: our share of loss on extinguishment of debt from unconsolidated joint ventures — 273 — 273 Add: amortization of restricted stock and restricted stock units 461 372 1,360 1,110 Add: amortization of deferred mortgage costs 80 71 240 228 Add: our share of deferred mortgage costs from unconsolidated joint venture properties 156 246 479 831 Less: our share of gain on insurance proceeds from unconsolidated joint venture (350) — (519) (414) Adjustments for non-controlling interests 2 (123) 5 (121) Adjusted funds from operations attributable to common stockholders $ 4,894 $ 4,178 $ 13,574 $ 11,767 35 Table of Contents Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 GAAP Net loss attributable to common stockholders $ (0.44) $ 0.20 $ (0.97) $ (0.33) Add: depreciation of properties 0.11 0.09 0.31 0.28 Add: our share of depreciation in unconsolidated joint ventures 0.39 0.39 1.16 1.17 Add: Impairment charge 0.21 — 0.21 — Deduct: gain on sale of real estate — (0.62) — (0.63) Adjustment for non-controlling interests — 0.06 — 0.05 NAREIT Funds from operations per diluted common share 0.27 0.12 0.71 0.54 Adjustments for: straight line rent accruals — — — — Add: loss on extinguishment of debt — 0.09 — 0.09 Add: our share of loss on extinguishment of debt from unconsolidated joint ventures — 0.02 — 0.02 Add: amortization of restricted stock and restricted stock units 0.02 0.02 0.08 0.07 Add: amortization of deferred mortgage costs — — 0.01 0.01 Add: our share of deferred mortgage costs from unconsolidated joint venture properties 0.01 0.02 0.03 0.05 Less: our share of gain on insurance proceeds from unconsolidated joint venture (0.02) — (0.03) (0.03) Adjustments for non-controlling interests — (0.01) — (0.01) Adjusted funds from operations per diluted common share $ 0.28 $ 0.26 $ 0.80 $ 0.74 Net Operating Income, or NOI is a non-GAAP measure of performance. NOI is used by our management and many investors to evaluate and compare the performance of our properties to other comparable properties, to determine trends at our properties and to determine the estimated fair value of our properties. The usefulness of NOI may be limited in that it does not take into account, among other things, general and administrative expense, interest expense, loss on extinguishment of debt, casualty losses, insurance recoveries and gains or losses as determined by GAAP. NOI is a property specific performance metric and does not measure our performance as a whole. We compute NOI by adjusting net income (loss) to (a) add back (1) depreciation expense, (2) general and administrative expenses, (3) interest expense, (4) loss on extinguishment of debt, (5) equity in loss of unconsolidated joint ventures, (6) provision for taxes, (7) the impact of non-controlling interests, and (b) deduct (1) other income, (2) gain on sale of real estate, and (3) gain on insurance recoveries related to casualty loss. Other REIT’s may use different methodologies for calculating NOI, and accordingly, our NOI may not be comparable to other REIT’s. We believe NOI provides an operating perspective not immediately apparent from GAAP operating income or net income (loss). NOI is one of the measures we use to evaluate our performance because it (i) measures the core operations of property performance by excluding corporate level expenses and other items unrelated to property operating performance and (ii) captures trends in rental housing and property operating expenses. However, NOI should only be used as an alternative measure of our financial performance. 36 Table of Contents The following table provides a reconciliation of net income attributable to common stockholders as computed in accordance with GAAP to NOI of our consolidated properties for the periods presented (dollars in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 GAAP Net loss attributable to common stockholders $ (7,484) $ 3,272 $ (16,561) $ (5,292) Less: Other Income (293) (161) (631) (595) Add: Interest expense 1,731 1,870 5,400 5,865 General and administrative 2,730 2,430 9,054 7,455 Impairment charge 3,642 — 3,642 — Depreciation 1,777 1,373 5,147 4,348 Provision for taxes 65 98 192 219 Less: Gain on sale of real estate — (9,938) — (9,938) Add: Loss on extinguishment of debt — 1,387 — 1,387 Equity in loss of unconsolidated joint venture properties 1,529 2,390 4,731 6,676 Add: Net loss attributable to non-controlling interests 34 799 97 877 Net Operating Income $ 3,731 $ 3,520 $ 11,071 $ 11,002 Less: Non-same store Net Operating Income $ (498) $ (264) $ (1,543) $ (1,543) Same store Net Operating Income $ 3,233 $ 3,256 $ 9,528 $ 9,459 For the three months ended September 30, 2020, NOI increased $211,000, primarily due to the Partner Buyout and the consolidation of such property. Same store NOI decreased $23,000 due to increased operating expenses of $278,000 offset by a $242,000 increase in revenues. For the nine months ended September 30, 2020, NOI increased $69,000, primarily due to the Partner Buyout and the consolidation of such property, offset by a decrease due to the Sold Properties. Same store NOI increased $69,000 due primarily to increased revenues of $550,000 offset by a $522,000 increase in operating expenses. 37 Table of Contents