BRT Apartments Corp. 10-K

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Overview We are an internally managed real estate investment trust, also known as a REIT, that is focused on the ownership, operation and, to a lesser extent, development of multi-family properties. These properties may be wholly owned or owned by unconsolidated joint ventures in which we generally have contributed a significant portion of the equity. At December 31, 2022, we: (i) wholly-own 21 multi-family properties with an aggregate of 5,420 units and a carrying value of $649.7 million, (ii) have ownership interests, through unconsolidated entities, in eight multi-family properties with an aggregate of 2,781 units, for which the carrying value of our net equity investment therein is $39.1 million and (iii) own other assets, through consolidated and unconsolidated entities, with a carrying value of $5.4 million. The 29 multi-family properties are located in eleven states; most of these properties are located in the Southeast United States and Texas. 2022 and Recent Developments. During 2022: Partner Buyouts We purchased the interests of our joint venture partners in ventures that owned 11 multi-family properties for an aggregate purchase price of $105.9 million (the "2022 Partner Buyouts"). As a result, these properties are wholly-owned and the accounts (including mortgage debt of approximately $236.6 million) and results of operations of these properties are included directly in our consolidated financial statements as of the applicable date of purchase. In 2022, (i) since the applicable Partner Buyout, these properties contributed in the aggregate $23.4 million in rental revenues, $10.2 million in operating expenses, $6.6 million in interest expense and $11.2 million in depreciation, and (ii) prior to the applicable Partner Buyout contributed an aggregate of $1.2 million in income from unconsolidated joint ventures. In 2023, we anticipate that these 11 properties will generate approximately $41.8 million in rental revenues, $18.0 million of real estate operating expense, $11.9 million in interest expense and $16.6 million in depreciation. These estimates for 2023 assume that rental income and real estate operating expense will remain at the same level in 2023 as in 2022 (although we anticipate that real estate operating expense will be higher in 2023 due to the master insurance program), and assumes an anticipated increases in 2023 from 2022 in interest expense due to a mortgage refinance that occured in May 2022 and depreciation as a result of the additional investments ( i.e. , the purchase price paid for the remaining interest) made in such properties . Since August, 2021, we completed the purchase of the remaining interests of our joint venture partners in 14 joint ventures including three partner buyouts completed in 2021 (the "2021 Partner Buyouts"; and together with the 2022 Partner Buyouts, the "Partner Buyouts"). Sales We recorded an aggregate gain of $64.5 million from the sale by unconsolidated subsidiaries, in four separate transactions, of four multi-family properties, and our share of the related aggregate loss on extinguishment of debt was $1.9 million. During 2022 (through the applicable sales dates) and 2021, these properties contributed a loss of $1.6 million (including our share of the early extinguishment of debt charge related to these sales) and income of $201,000 respectively, of equity in earnings (loss) of unconsolidated joint ventures. Financing; Other We: • entered into the Amendment to our Facility. Among other things, the Amendment (i) increased the amount we are permitted to borrow from $35 million to an aggregate of $60 million, subject to compliance with borrowing base requirements and other conditions, (ii) increased from $15 million to $25 million the amount that may be used for working capital (including dividend payments) and operating expenses, (iii) extended the term of the facility from November 2024 to September 2025, (iv) reduced the interest rate to the prime rate (subject to a floor of 3.5%) by eliminating the 25 basis point spread over the prime rate, (v) increased the number and value of the unencumbered properties we are required to maintain from two properties with a value of at least $50 million to three properties with a value of at least $75 million and (vi) requires that we maintain a tangible net worth of a least $140 million. • raised approximately $9.9 million of equity from the sale of 447,815 shares of our common stock pursuant to our at-the-market equity offering program. • implemented, effective with the dividend declared in June 2022, an 8.7% per share increase in our quarterly cash dividends from the immediately preceding dividend payment, and declared dividends of an aggregate of $0.98 per share. 29 Table of Contents • implemented a dividend reinvestment plan which allows our stockholders to purchase our common stock at a discount (currently 3.0% to the trading price) and which reduced our cash outlay for dividends paid in 2022 by $1.3 million. • maintained an average occupancy rate of 95.9% across our portfolio of multi-family properties. • began participating in a master insurance program which covers 17 wholly-owned properties comprising 4,316 units located in 10 states. Generally, the coverage limit is $100 million ($50 million for named hurricanes) per occurrence with a deductible of $100,000 for all other perils, and varying deductibles for, among other things, wind, flood, and earthquake damage. We also obtained, on a per occurrence per property basis, general liability and umbrella coverage of $1 million and $25 million, respectively. • used our available cash to pay-off $14.5 million of 4.29% mortgage debt of Avalon Apartments - Pensacola, FL, a wholly owned property. • used our credit facility in October 2022 to pay off $14.9 million of maturing mortgage debt at our Silvana Oaks-North Charleston, SC property. In February 2023, we obtained mortgage debt of $ 21.2 million on our Silvana Oaks - North Charleston, SC multi-family property; such mortgage debt matures in March 2033, bears an interest rate of 4.45% and is interest only for the term of the mortgage. We used the net proceeds of such mortgage debt to fully pay down our credit facility. On March 13, 2023, the unconsolidated joint venture that owns Chatham Court and Reflections, a 494 unit multi-family property located in Dallas, TX, and in which we have a 50% interest, entered into a contract to sell such property. We estimate that our share of the gain from this sale will be approximately $14.3 million and that our share of the related early extinguishment of debt charge will be $167,000. In 2022, this property accounted for $753,000 of equity in earnings from unconsolidated joint ventures. We anticipate that the closing of this transaction, which is subject to customary closing conditions, will be completed in the quarter ending June 30,2023, although we can provide no assurance that this transaction will be completed. In March 2023, the Company entered into an agreement to acquire a 238-unit multifamily property constructed in 2019 and located in Richmond, VA, for a purchase price of approximately $62.5 million. The purchase price includes the assumption of approximately $32 million of mortgage debt bearing an interest rate of 3.34% and maturing in 2061.The purchase is subject to the satisfaction of various conditions, including the completion, to BRT’s satisfaction, of its due diligence investigation, as well as the approval by the mortgage lender of the Company’s assumption of the mortgage debt. BRT anticipates that this transaction will be completed in the fourth quarter of 2023, although we can provide no assurance that this transaction will be completed. UPREIT Structure We are evaluating whether to establish an UPREIT structure to enhance our ability to acquire multi-family properties. There is no timetable for the completion of such evaluation or implementation of such structure and we can provide no assurance that we will implement an UPREIT structure and that if implemented, that it will be beneficial to us and our stockholders. Results of Operations Comparison of Years Ended December 31, 2022 and 2021 The term "same store properties" refers to seven multi-family properties with an aggregate of 1,608 units that were owned for all of 2022 and 2021. The term "unconsolidated same store properties" with an aggregate of 2,781 units refers to eight properties that were owned for all of 2022 and 2021. Revenues The following table compares our revenues for the years indicated: 30 Table of Contents (Dollars in thousands): 2022 2021 Increase (Decrease) % Change Rental and other revenue from real estate properties $ 70,515 $ 32,041 $ 38,474 120.1 % Other income 12 16 (4) (25.0) % Total revenues $ 70,527 $ 32,057 $ 38,470 120.0 % Rental and other revenue from real estate properties. The components of the increase include: • $37.1 million due to the revenues from the Partner Buyouts, including $13.7 million from the inclusion, for all of 2022, of the revenues from the 2021 Partner Buyouts; and • $2.6 million from same store properties, substantially all of which is due to higher rental rates. Offsetting the increase is a $1.2 million decrease due to the sale of the Kendall Manor Property - Houston, TX (the "Kendall Sale") in 2021 and a $191,000 decrease due to lower occupancy at same store properties. Expenses The following table compares our expenses for the periods indicated: (Dollars in thousands) 2022 2021 Increase (Decrease) % Change Real estate operating expenses $ 30,558 $ 14,202 $ 16,356 115.2 % Interest expense 15,514 6,757 8,757 129.6 % General and administrative 14,654 12,621 2,033 16.1 % Impairment charge — 520 (520) (100.0) % Depreciation 24,812 8,025 16,787 209.2 % Total expenses $ 85,538 $ 42,125 $ 43,413 103.1 % Real estate operating expenses. The components of the increase include: • $16.2 million from the Partner Buyouts, of which $6.0 million is from the inclusion, for all of 2022, of the expenses from the properties included in the 2021 Partner Buyouts; and • $1.0 million from same store properties, including increases of $440,000 in repairs and maintenance and replacement costs, which includes turnover costs, $160,000 in payroll costs, $132,000 in insurance costs and $106,000 in utility expense. The increase was offset by a $828,000 decrease due to the Kendall Sale. We anticipate that these expenses will increase in 2023 because of our implementation of the Insurance Program, industry-wide increases in the cost of property insurance coverage and the impact of inflation. Interest expense The change is due to a: • $9.6 million increase due to the Partner Buyouts, including $2.9 million from the inclusion, for all of 2022, of such expense from the properties included in the 2021 Partner Buyouts; • $612,000 increase in interest expense on our credit facility, due to a $7.9 million increase in the average outstanding balance during 2022; and • $592,000 due to the increase in the interest rate on our floating rate junior subordinated notes. The increase was offset by a (i) $1.8 million decrease due to the payoff of $61.3 million of mortgage debt since August 2021 ($31.9 million in 2021 and $29.5 million in 2022) and (ii) $271,000 decrease due to the Kendall Sale. 31 Table of Contents General and administrative. The increase is due to a $1.5 million increase in non-cash compensation expense, including increases of: • $890,000 due to increased amortization expense from RSUs, of which increases of (i) $510,000 reflects amortization expense related to RSU's granted in June 2022 and (ii) $380,000 reflects net amortization expense primarily related to the RSUs granted in 2021; • $400,000 due to the amortization expense related to the restricted stock granted in January 2022 (as a result of the higher fair value of the shares granted in 2022 in comparison to the restricted stock granted in 2017); and • $254,000 due to the inclusion, for all of 2022, of the amortization expense related to the restricted stock granted in June 2021. Also contributing to the increase was a $461,000 increase due to higher levels of cash compensation. The increase was offset by the inclusion, in 2021, of $114,000 of professional fees related primarily to a terminated stock offering. Impairment charges In 2021, we recorded an impairment charge of $520,000 representing the excess of the book value of our investment in the Opop Tower and Loft properties, St Louis, MO, over the anticipated selling price of the investment. There was no comparable charge in 2022. Depreciation and amortization The increase is due $16.9 million of such expense from the Partner Buyouts, including $5.7 million from the inclusion, for all of 2022, of such expense from the properties included in the 2021 Partner Buyouts. Gain on sale of real estate In 2022, we recognized a gain of $6,000 on the sale of a vacant parcel of land in South Daytona Beach, FL. In 2021, we recognized a $7.3 million gain on the Kendall Sale and a $414,000 gain from the sale of a cooperative apartment unit in New York, NY. Casualty loss / Insurance recovery of casualty loss In 2022, we settled a personal injury lawsuit for $850,000. Our insurance carrier reimbursed us for this loss. Gain on sale of partnership interest In 2021, we sold our interest in a joint venture that owned Anatole Apartments - Daytona, Beach, FL and OPOP Towers and Lofts - St. Louis, MO (collectively, the Anatole/OPOP Sale) and recognized an aggregate gain of $2.6 million. There was no comparable gain in 2022. Loss on extinguishment of debt In 2022, we incurred $563,000 of loss on extinguishment of debt related to the mortgage refinancing that took place with the buyout of our joint venture partner's interest in Brixworth at Bridge Street - Huntsville, AL. In 2021, we incurred $1.6 million of prepayment charges and deferred loan fee write-offs on the payoff of three first mortgage loans and three supplemental loans with an aggregate outstanding principal balance of $31.9 million and the refinance of a mortgage loan in connection with the purchase of the interests of our joint venture partners in Crestmont at Thornblade - Greenville, SC. Income tax provision In 2022, income tax provision increased to $821,000 from $206,000 in 2021 due to an increase in state level taxes accrued. The increase is the result of income generated by property sales in 2022 and the unavailability of net operating loss carryforwards available in certain states to offset such income. 32 Table of Contents Unconsolidated Joint Ventures - Results of Operations. Equity in (loss) earnings of unconsolidated joint venture s The table below reflects the condensed income statements of our unconsolidated properties included in note 7 of our consolidated financial statements. In accordance with US generally accepted accounting principles, each of the line items in the chart below is presented as if these properties are wholly owned by us, although as reflected under " Item 1. Business - Our Multi- Family Properties ", our equity interests in these properties range from 32% to 80% (dollars in thousands): Year Ended December 31, 2022 2021 Increase (Decrease) % change Rental revenues from unconsolidated joint ventures $ 72,873 $ 121,906 $ (49,033) (40.2) % Real estate operating expense from unconsolidated joint ventures 33,086 56,507 (23,421) (41.4) % Interest expense from unconsolidated joint ventures 16,269 30,964 (14,695) (47.5) % Depreciation from unconsolidated joint ventures 17,798 35,636 (17,838) (50.1) % Total expenses from unconsolidated joint ventures 67,153 123,107 (55,954) (45.5) % Total revenues less total expenses from unconsolidated joint ventures 5,720 (1,201) 6,921 (576.3) % Other equity in earnings from unconsolidated joint ventures 121 54 67 124.1 % Impairment of assets (8,553) (2,813) (5,740) N/A Insurance recoveries from unconsolidated joint ventures 8,553 2,813 5,740 N/A Gain on insurance proceeds from unconsolidated joint ventures 567 2,179 (1,612) (74.0) % Gain on sale of real estate from unconsolidated joint ventures 118,270 83,984 34,286 N/A Loss on extinguishment of debt from unconsolidated joint ventures (3,491) (9,401) 5,910 N/A Net income $ 121,187 $ 75,615 $ 45,572 Equity in earnings (loss) and gain on sale of real estate of unconsolidated joint ventures $ 66,426 $ 30,774 Rental revenue from unconsolidated joint ventures The decrease is due to: • $31.0 million from the Partner Buyouts, including $11.0 million from the 2021 Partner Buyouts; • $10.3 million from the sale, in 2021, of The Avenue Apartments-Ocoee, FL and Parc at 980-Lawrenceville, GA (collectively, the "Avenue/Parc Sale"); • $9.3 million from the sale, in 2022, of Verandas at Shavano-San Antonio, TX, Cinco Ranch-Katy, TX, Vive at Kellswater-Kannapolis, NC and Water's Edge-Columbia, SC (collectively, the "Shavano/Cinco/Vive /Waters Edge sales"); and • $3.2 million from the Anatole/OPOP Sale. The decrease was offset by a $4.9 million increase in rental revenue from unconsolidated same store properties, primarily from an increase in rental rates. Real estate operating expenses from unconsolidated joint ventures The components of the decrease include: • $14.0 million from the Partner Buyouts, including $5.2 million from the 2021 Partner Buyouts; • $4.6 million due to the Avenue/Parc Sale; 33 Table of Contents • $4.4 million from the Shavano/Cinco/Vive/Waters Edge sales; and • $2.0 million from the Anatole/OPOP Sales. The decrease was offset by a $1.5 million increase from unconsolidated same store properties, including increases of $417,000 in real estate taxes, $403,000 in utility costs, $258,000 in repairs, maintenance and replacement costs and $224,000 in payroll and leasing commissions. Interest expense from unconsolidated joint ventures. The components of the decrease are: • $8.5 million due to the Partner Buyouts, including $2.7 million from the 2021 Partner Buyouts; • $2.5 million due to the Avenue/Parc Sale; • $2.3 million from the Shavono/Cinco/Vive/Waters Edge sales; and • $1.3 million from the Anatole/OPOP Sales. Depreciation from unconsolidated joint ventures . The components of the decrease are: • $10.3 million due to the Partner Buyouts, including $3.9 million from the 2021 Partner Buyouts ; • $3.5 million from the Shavano/Cinco/Vive/Waters Edge sales; • $2.4 million due to to the Avenue/Parc Sale; and • $1.3 million from the Anatole/OPOP Sales. Impairment of assets from unconsolidated joint ventures. During 2022, we recognized $8.6 million of impairment charges related to a fire at Stono Oaks, a development project located in Johns Island, SC. During 2021, we recognized $2.8 million of impairment charges related to the February 2021 Texas winter storm (the "Texas Storm"). Insurance recoveries from unconsolidated joint ventures. During 2022, we recognized $8.6 million of insurance recoveries related to the Stono Oaks fire. During 2021, we recognized $2.8 million of insurance recoveries related to the Texas Storm. Gain on insurance recoveries from unconsolidated joint ventures . During 2022, we recognized $567,000 in gains from insurance recoveries at Vernadas at Alamo-San Antonio, TX and Woodlands-Boerne, TX. In 2021, we recognized $1.9 million in gains from insurance recoveries at two properties ( i.e., Verandas at Shavano and Verandas at Alamo, both located in San Antonio, TX), that were damaged by the Texas Storm, and $325,000 from an insurance claim on Magnolia Pointe - Madison, AL, that sustained fire damage in a prior year. In each year, the gain represents the amounts received on insurance recoveries in excess of the assets previously written-off. Gain on sale of real estate from unconsolidated joint ventures In 2022, we recognized an aggregate gain of $118.2 million from the Shavano/Cinco/Vive/Waters Edge sales and in 2021, we recognized an aggregate gain of $84.0 million from the Avenue/Parc Sales. Loss on early extinguishment of debt from unconsolidated joint ventures The loss in 2022 is due to prepayment charges from the Shavano/Cinco/Vive/Waters Edge sales. The loss in 2021 is due to prepayment charges in connection with the payoff of the mortgages related to the Avenue/Parc Sale. Comparison of Years Ended December 31, 2021 and 2020 As we are a smaller reporting company, this comparison is omitted in accordance with Instruction 1 to Item 303(a) of Regulation S-K. 34 Table of Contents Funds from Operations; Adjusted Funds from Operations; Net Operating Income. In view of our multi-family property activities, we disclose funds from operations ("FFO") ,adjusted funds from operations ("AFFO") and net operating income ("NOI") because we believe that such metrics are a widely recognized and appropriate measure of the performance of a multi-family 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 adjusting FFO for loss on extinguishment of debt, our straight-line rent accruals, restricted stock and RSU compensation expense, fair value adjustment of mortgage debt, gain on insurance recovery, insurance recovery from casualty loss and deferred mortgage and debt costs (including, in each case as applicable, from our share from our unconsolidated joint ventures). Since the NAREIT White Paper does not provide guidelines for computing AFFO, 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 assures that the value of real estate assets diminish predictability 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 (loss) and cash flows from operating, investing and financing activities. Management also reviews the reconciliation of net income (loss) to FFO and AFFO. 35 Table of Contents The table below provides a reconciliation of net income determined in accordance with GAAP to FFO and AFFO for each of the indicated years (amounts in thousands): 2022 2021 GAAP Net income attributable to common stockholders $ 49,955 $ 29,114 Add: depreciation of properties 24,812 8,025 Add: our share of depreciation in unconsolidated joint venture properties 10,677 23,083 Add: impairment charge — 520 Add: our share of impairment charge in unconsolidated joint venture properties 1,493 2,010 Add: casualty loss 850 — Deduct: gain on sales of real estate and partnership interests (6) (10,325) Deduct: our share of earnings in earnings from sale of unconsolidated joint venture properties (64,531) (34,982) Adjustment for non-controlling interests (16) (16) Funds from operations 23,234 17,429 Adjust for: straight-line rent accruals 24 (18) Add: loss on extinguishment of debt 563 1,575 Add: our share of loss on extinguishment of debt from unconsolidated joint venture properties 1,880 4,581 Add: amortization of restricted stock and RSU expense 4,487 2,941 Add: amortization of deferred mortgage and debt costs 628 295 Add: our share of deferred mortgage costs from unconsolidated joint venture properties 227 542 Add: amortization of fair value adjustment for mortgage debt 148 — Less: insurance recovery of casualty loss (850) — Less: our share of insurance recovery from unconsolidated joint ventures (1,493) (2,010) Less: gain on insurance recovery (62) — Less: our share of gain on insurance proceeds from unconsolidated joint venture properties (432) (1,528) Adjustment for non-controlling interests (4) 4 Adjusted funds from operations $ 28,350 $ 23,811 The table below provides a reconciliation of net income per common share (on a diluted basis) determined in accordance with GAAP to FFO and AFFO. 2022 2021 Net income attributable to common stockholders $ 2.66 $ 1.62 Add: depreciation of properties 1.33 0.45 Add: our share of depreciation from unconsolidated joint venture properties 0.57 1.29 Add: impairment charge — 0.03 Add: our share of impairment charge in unconsolidated joint ventures 0.08 0.11 Add: casualty loss 0.05 — Deduct: gain on sales of real estate and partnership interest — (0.58) Deduct: our share of earnings from sale of unconsolidated joint venture properties (3.45) (1.95) Adjustment for non-controlling interests — — Funds from operations 1.24 0.97 Adjustment for: straight-line rent accruals — — Add: loss on extinguishment of debt 0.03 0.09 Add: our share of loss on extinguishment of debt from unconsolidated joint ventures 0.10 0.26 Add: amortization of restricted stock and RSU expense 0.25 0.16 Add: amortization of deferred mortgage and debt costs 0.03 0.02 Add: our share of amortization of deferred mortgage and debt costs from unconsolidated ventures 0.01 0.03 36 Table of Contents Add: amortization of fair value adjustment for mortgage debt 0.01 — Less: insurance recovery of casualty loss (0.05) — Deduct: our share of insurance recovery from unconsolidated joint ventures (0.08) (0.11) Deduct: gain on insurance recovery — — Deduct: our share of gain on insurance proceeds from unconsolidated joint ventures (0.02) (0.09) Adjustment for non-controlling interests — — Adjusted funds from operations $ 1.52 $ 1.33 Diluted shares outstanding for FFO and AFFO 18,782,695 17,936,465 FFO for 2022 increased $5.8 million, or 33%, to $23.2 million from $17.4 million in 2021. Contributing to the improvement were: • an $8.2 million increase in our incremental share of the operating income due to the Partner Buyouts (the "Incremental Impact"), including $3.4 million from the inclusion, for all of 2022, of the Incremented Impact from the 2021 Partner Buyouts; • a $3.7 million decrease in loss on extinguishment of debt; • a $3.1 million increase due to improved operating margins across our portfolio; • a $1.7 million decrease in interest expense; and • an $850,000 increase in an insurance recovery from a casualty loss. The increase was offset by: • a $7.6 million decrease from the sale of properties (including interests in properties), in 2022 and 2021; • a $2.0 million increase in General and administrative expense (including $1.5 million of non-cash compensation expense); • a $701,000 decrease in insurance recoveries and gains from insurance proceeds; and • an $615,000 increase in income tax provision. AFFO increased $4.5 million, or 19%, to $28.4 million in 2022 from $23.8 million in 2021, due to factors contributing to the improvement in FFO, excluding the $3.7 million loss on extinguishment of debt, $1.5 million in non-cash compensation expense, and a net $701,000 relating to insurance recoveries and gains. See “—Comparison of Years Ended December 31, 2022 and 2021” for further information regarding these changes. Diluted per share FFO and AFFO were impacted in the year ended December 31, 2022 by an $846,000 increase in the weighted averages shares of common stock outstanding primarily due to stock issuances pursuant to our at-the-market offering and equity incentive programs. 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. Same store NOI reflects the operations of seven of our ten wholly-owned properties. We compute NOI by adjusting net income (loss) to (a) add back (1) interest expense, (2) general and administrative expenses, (3) depreciation expense, (4) impairment charges, (5) provision for taxes, (6) loss on extinguishment of debt, (7) equity in loss of unconsolidated joint ventures, (8) casualty loss and (9) the impact of non-controlling interests, and (b) deduct (1) other income, (2) gain on sale of real estate (3) gain on sale of partnership interest, (4) equity in earnings from sale of consolidated joint venture properties, (5) insurance recovery of casualty loss and (6) gain on insurance recoveries. 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. 37 Table of Contents The following table provides a reconciliation of net income attributable to common stockholders as computed in accordance with GAAP to NOI for the periods presented (dollars in thousands): For the year ended December 31, 2022 2021 GAAP Net income attributable to common stockholders $ 49,955 $ 29,114 Less: Other Income (12) (16) Add: Interest expense 15,514 6,757 General and administrative 14,654 12,621 Depreciation 24,812 8,025 Impairment charge — 520 Provision for taxes 821 206 Less: Gain on sale of real estate (6) (7,693) Gain on the sale of partnership interests — (2,632) Add: Loss on extinguishment of debt 563 1,575 Equity in (earnings) loss of unconsolidated joint venture properties (1,895) 4,208 Casualty loss 850 — Less: Equity in earnings from sale of unconsolidated joint venture properties (64,531) (34,982) Insurance recovery of casualty loss (850) — Gain on insurance recovery (62) — Add: Net income attributable to non-controlling interests 144 136 Net Operating Income $ 39,957 $ 17,839 Less: Non same store and non multi family (1) Revenues (43,009) (7,125) Operating Expenses 18,720 3,393 Same Store Net Operating Income $ 15,668 $ 14,107 ________________________ (1) Prior year amounts have been adjusted to reflect the current year composition to reflect only those properties that were same store for both the current and the prior year. In 2022, NOI increased by $22.1 million from 2021 primarily due to a $38.5 million increase in rental revenues resulting from the Partner Buyouts. The increase was offset by a $16.4 million increase, primarily due to the Partner Buyouts, in real estate operating expenses. Same store NOI increased in 2022 by $1.6 million from 2021 due to a $2.6 million increase in rental revenues (and in particular, the increase in average rental rates) offset by a $1.0 million increase in real estate operating expenses. See "-Results of Operations - Year Ended December 31, 2022 Compared to the Year Ended December 31, 2021" for a discussion of these changes. Liquidity and Capital Resources We require funds to pay operating expenses and debt service obligations, acquire properties, make capital and other improvements, fund capital contributions and pay dividends. Generally, in 2022, our primary sources of capital and liquidity were the operations of our multi-family properties (including distributions of $10.9 million from the operations of our unconsolidated joint ventures and $80.2 million of distributions from sale transactions), $4.4 million from property sales owned by consolidated entities, net mortgage proceeds of $19.0 million from the refinancing of mortgage debt in connection with the 2022 Partner Buyouts, $9.9 million from the sale of our common stock through our at-the-market equity offering program, and our available cash. Excluding funds held at our unconsolidated subsidiaries, at December 31, 2022 and March 1, 2023, our available liquidity was approximately $ 61.3 million and $75.3 million, respectively, including $20.3 million and $15.3 million, respectively, of cash and cash equivalents, and subject to compliance with borrowing base and other requirements, up to $41.0 million and $60.0 million, respectively, available under our credit facility. We anticipate that for the four years beginning January 1, 2023, our operating expenses, $133.9 million of mortgage amortization and interest expense (including $55.4 million from unconsolidated joint ventures) and $118.4 million of balloon payments due with respect to mortgages maturing through 2026, estimated capital expenditures ( for 2023 only) of $11.1 38 Table of Contents million (including an estimated $3.6 million for our value add program), estimated cash dividend payments of at least $76.4 million (assuming (i) the current quarterly dividend rate of $0.25 per share and (ii) 19.1 million shares outstanding) will be funded from cash generated from operations (including distributions from unconsolidated joint ventures), mortgage financings and re-financings, sales of properties, the issuance of additional equity and, if available as noted below, our $60 million credit facility. Our operating cash flow and available cash is insufficient to fully fund the $118.4 million of balloon payments, and if we are unable to refinance such debt on acceptable terms, we may need to issue additional equity or dispose of properties, in each case on potentially unfavorable terms. Our ability to acquire additional multi-family properties and implement value-add projects is limited by our available cash and our ability to (i) draw on our credit facility, (ii) obtain, on acceptable terms, 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. Disclosure of Known Material Contractual Obligations The following table sets forth as of December 31, 2022 our known material contractual obligations: Payment Due by Period (Dollars in thousands) Less than 1 Year 1 - 3 Years 3 - 5 Years More than 5 Years Total Long-Term Debt Obligations (1) $ 36,900 $ 110,875 $ 230,437 $ 554,800 $ 933,012 Operating Lease Obligations 237 497 517 3,237 4,488 Purchase Obligations (2)(3) 6,994 13,988 13,988 — 34,970 Total $ 44,131 $ 125,360 $ 244,942 $ 558,037 $ 972,470 ____________________________ (1) Reflects payments of principal (including amortization payments) and interest and excludes deferred costs. Includes all of the debt of unconsolidated joint ventures. See the following table for information regarding same. Assumes that the interest rate on the junior subordinated notes will be 6.41% per annum and the interest rate on the credit facility will be 7.50% per annun, which were the rates in effect at December 31, 2022. (2) Assumes that $1.0 million will be paid annually for the next five years pursuant to the shared services agreement and $ 1.5 million will be paid annually through December 31, 2027 for the Services. See "Item 1. Business—Our Structure." (3) Assumes that approximately $4.4 million of property management fees will be paid annually to the property managers of our multi-family properties, including $ 1.8 million related to unconsolidated joint ventures. Such sum reflects the amount we anticipate paying in 2023 on the multi-family properties we own at December 31, 2022. These fees are typically charges based on a percentage of rental revenues from a property. No amount has been reflected as payable pursuant thereto after five years as such amount is not determinable. Excludes $11.1 million of anticipated capital expenditures in 2023,including $3.6 million in connection with our value add program. Such expenditures subsequent to 2023 are not determinable. The following table sets forth as of December 31, 2022 information regarding the components of our long-term debt obligations: Payment due by Period (Dollars in thousands) Less than 1 Year 1 - 3 Years 3 - 5 Years More than 5 Years Total Mortgages on consolidated properties (1) $ 19,233 $ 56,262 $ 144,122 $ 301,017 $ 520,634 Mortgages on unconsolidated properties (1) 13,845 28,325 81,520 191,610 315,300 Junior subordinated notes and credit facility(2) 3,822 26,288 4,795 62,173 97,078 Total $ 36,900 $ 110,875 $ 230,437 $ 554,800 $ 933,012 ___________________________ (1) Includes payments of principal (including amortization payments), and interest and excludes deferred financing costs. (2) Assumes that the interest rate on the junior subordinated notes will be 6.41% per annum and includes $19 million on our credit facility which was paid off in February 2023. Corporate Level Financing Arrangements Junior Subordinated Notes As of December 31, 2022, $37.4 million (excluding deferred costs of $277,000) 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 39 Table of Contents 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. Although these notes provide for an alternate method of calculating interest when LIBOR becomes unavailable in June 2023, such alternative rate may not be available in which case we may have to negotiate a secondary alternative rate with the counterparties to such debt. If we and the counterparties to this debt are unable to agree to a satisfactory secondary alternate rate, our cash flow and operating results may be adversely affected. At December 31, 2022 and 2021, the interest rate on these notes was 6.41% and 2.13%, respectively. Credit Facility Our credit facility with VNB New York, LLC, an affiliate of Valley National Bank (collectively, "VNB"), allows us to borrow, subject to compliance with borrowing base requirements and other conditions, up to $60 million, (i) for the acquisition of, and investment in, multi-family properties, (ii) to repay mortgage debt secured by multi-family properties and (iii) for Operating Expenses ( i.e. , working capital (including dividend payments) and operating expenses); provided, that not more than $25 million may be used for Operating Expenses. The credit facility is secured by cash accounts maintained by us at VNB (and we are required to maintain substantially all of our bank accounts at VNB), and the pledge of our interests in the entities that own the unencumbered multi-family properties used in calculating the borrowing base. The credit facility bears an annual interest rate, which resets daily, equal to the prime rate, with a floor of 3.50%. The interest rate at December 31, 2022 and March 1, 2023, was 7.50% and 7.75% respectively. There is an annual fee of 0.25% on the total amount committed by VNB and unused by us. The credit facility matures in September 2025. As of March 1, 2023, there was no balance outstanding and up to $60 million was available to be borrowed thereunder. The terms of the credit facility include certain restrictions and covenants which, among other things, limit the incurrence of liens, require that we maintain and include in the collateral securing the facility at least three unencumbered properties with an aggregate value(as calculated pursuant to the facility) of at least $75 million, and require compliance with financial ratios relating to, among other things maintaining a minimum tangible net worth of $140 million, the minimum amount of debt service coverage with respect to the properties (and amounts drawn on the credit facility) 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 credit facility. As of December 31, 2022, we were in compliance in all material respects with the requirements of the facility. Other Financing Sources and Arrangements At December 31, 2022, we are joint venture partners in unconsolidated joint ventures which own eight multi-family properties. The distributions from the properties owned by these ventures, $6.5 million in 2022 are a meaningful source of our liquidity and cash flow. Further, we may be required to make capital contributions with respect to these properties. At December 31, 2022, our investment in these joint venture properties have a net equity carrying value of $39.1 million and are subject to mortgage debt, which is not reflected on our consolidated balance sheet, of $ 256.7 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. Prior to the 2022 Partner Buyouts, these joint venture arrangements were material to our liquidity and capital resource position. After giving affect to the 2022 Partner Buyouts, these arrangements will have a meaningful impact on our liquidity and capital resources. See note 6 to our consolidated financial statements. See Item 1. " Business-Mortgage Debt " for information regarding our mortgage debt at consolidated and unconsolidated subsidiaries. Inflation Substantially all of our multi-family property leases are for periods of one-year or less. The short-term nature of these leases generally serves to reduce our risk to adverse effects of inflation on our revenue. During 2022, we experienced inflationary pressures that drove higher operating expenses, primarily in personnel, repairs and maintenance, insurance and real estate taxes; such increases may continue in 2023 and thereafter, which will adversely affect our operating results. Inflation affects the overall cost of our debt. We mitigate the risks presented by inflation through the use of long-term fixed interest rate debt and interest rate hedges and by paying down, when we deem appropriate, our credit facility debt. However, increasing interest rates, which generally correlates to increasing inflation, may make it less attractive to obtain mortgage debt or use our credit facility in connection with acquisition, refinancing and value add activities. 40 Table of Contents Cash Distribution Policy We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended. Accordingly, to qualify as a REIT, we must, among other things, meet a number of organizational and operational requirements, including a requirement that we distribute currently at least 90% of our ordinary taxable income to our stockholders. It is our current intention to comply with these requirements and maintain our REIT status. As a REIT, we generally will not be subject to corporate federal, state or local income taxes on taxable income we distribute currently (in accordance with the Internal Revenue Code and applicable regulations) to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to federal, state and local 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 taxes on our undistributed taxable income ( i.e. , taxable income not distributed in the amounts and in the time frames prescribed by the Internal Revenue Code and applicable regulations thereunder) and are subject to Federal excise taxes on our undistributed taxable income. It is our intention to pay to our stockholders within the time periods prescribed by the Internal Revenue Code no less than 90%, and, if possible, 100% of our annual taxable income, including taxable gains from the sale of real estate. It will continue to be our policy to make sufficient distributions to stockholders in order for us to maintain our REIT status under the Internal Revenue Code. Our board of directors will continue to evaluate, on a quarterly basis, the amount of dividend payments based on its assessment of, among other things, our short and long-term cash and liquidity requirements, prospects, debt maturities, net income, funds from operations, and adjusted funds from operations. Critical Accounting Estimates 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: Equity method investments We report our investments in unconsolidated entities, over whose operating and financial policies we have the ability to exercise significant influence but not control, under the equity method of accounting. Under this method of accounting, our pro rata share of the applicable entity's earnings or losses is included in our consolidated statements of operations. We initially record our investments based on either the carrying value for properties contributed or the cash invested. We evaluate our equity-method investments for impairment whenever events or changes in circumstances indicate that the carrying value of our investments may exceed the fair value. If it is determined that a decline in the fair value of our investments is not temporary, and if such reduced fair value is below its carrying value, an impairment is recorded. Determining fair value involves significant judgment. Our estimates consider available evidence including the present value of the expected future cash flows discounted at market rates, general economic conditions and other relevant factors. In 2021, we recorded an impairment related to our equity investment in the OPOP Properties. We sold our interests in these properties in November 2021. Carrying Value of Real Estate Portfolio We conduct a quarterly review of each real estate asset owned by us and through our joint ventures. This review is conducted in order to determine if indicators of impairment are present on the real estate. In reviewing the value of the real estate assets owned, if there is an indicator of impairment and the carrying value of the real estate asset is determined to be unrecoverable, we seek to arrive at the fair value of each real estate asset by using one or more valuation techniques, such as comparable sales, discounted cash flow analysis or replacement cost analysis. A real estate asset is considered to be unrecoverable when an analysis suggests that the undiscounted cash flows to be generated by the property will be insufficient to recover our investment. Any impairment taken with respect to our real estate assets reduces our net income, assets and stockholders' equity to the extent of the amount of the allowance, but it will not affect our cash flow until such time as the property is sold. 41 Table of Contents Purchase Price Allocations We allocate the purchase price of properties, including acquisition costs and assumed debt, when appropriate, to the tangible and identified intangible assets and liabilities acquired based on their relative fair values. In making estimates of fair values for purposes of allocating purchase price, we use a number of sources, including independent appraisals that may be obtained in connection with the acquisition or financing of the respective property, our own analysis of recently acquired and existing comparable properties in our portfolio and other market data. We also consider information obtained about each property as a result of its pre-acquisition due diligence, marketing and leasing activities in estimating the fair value of the tangible and intangible assets acquired.