Item 7. Management’s Discussion and Analysis
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 owns, operates and to a lesser extent holds interest in joint ventures that own and operate multi family properties. At December 31, 2023, we: (i) wholly-own 21 multi-family properties with an aggregate of 5,420 units and a carrying value of $634.0 million, (ii) have ownership interests, through unconsolidated entities, in seven multi-family properties with an aggregate of 2,287 units, with a carrying value of $30.4 million and (iii) own other assets, through consolidated and unconsolidated entities, with a carrying value of $5.6 million. The 28 multi-family properties are located in 11 states; primarily in the Southeast United States and Texas.
During 2023:
• The unconsolidated joint venture that owned Chatham Court and Reflections, a 494 unit multi-family property located in Dallas, TX, and in which we had a 50% interest, sold such property. Our share of the (i) gain from this sale was $14.7 million, (ii) the related early extinguishment of debt charge was $212,000, and (iii) proceeds from the sale were $19.4 million. In 2023 and 2022, this property accounted for $54,000 and $753,000, respectively, of equity in earnings from unconsolidated joint ventures.
• We paid off our credit facility debt of $19.0 million - we accomplished this by using the proceeds of new mortgage debt of $21.2 million placed 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 repurchased 779,423 shares of our common stock for an aggregate purchase price of approximately $14.4 million ( i.e ., an average price per share of $18.47).
• Entered into an amendment (the "Amendment") to our amended and restated credit facility (the "Facility") with VNB New York, LLC, an affiliate of Valley National Bank (“VNB”), which converted the Facility's interest rate to one-month term SOFR plus 250 basis points, and increased the interest rate floor to 6%. Immediately prior to the amendment, the interest rate on the facility was 8.5%; immediately thereafter, the interest rate was 7.82%
From January 1, 2024 through March 1, 2024, we purchased 123,061 shares of our common stock for an aggregate purchase price of approximately $2.3 million ( i.e., an average price of $18.43per share).
Challenges and Uncertainties as a Result of the Volatile Economic Environment; Impact of Development Property
During the past two years, there has been a significant economic uncertainty due, among other things, to volatile interest rates and the challenges presented by an inflationary/potential recessionary environment. Due to this uncertainty and our belief that pricing for acquisition opportunities did not appropriately reflect market conditions, we were especially cautious in pursuing acquisition opportunities in 2023 and may continue to be cautious in pursuing such opportunities in the near future. Further, the competitive environment in several of our markets as well as anticipated expense increases create uncertainty as to our ability to improve income from continuing operations.
We have a 17.45% interest in a 240-unit development property located in Johns Island, SC. As of December 31, 2023, this project is substantially complete and lease-up has begun. We estimate that for 2024, we will record approximately $350,000 to $500,000 of equity in loss from unconsolidated ventures related to this property because the venture will begin recognizing revenue and expenses (and in particular depreciation and interest which had been capitalized during the development phase).
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Results of Operations
Comparison of Years Ended December 31, 2023 and 2022
The term "same store properties" refers to ten multi-family properties with an aggregate of 2,576 units that were owned for all of 2023 and 2022. The term "unconsolidated same store properties" with an aggregate of 2,287 units refers to seven properties that were owned for all of 2023 and 2022. As used in the comparison of the year ended December 31, 2023 and 2022, the term "Partner Buyouts" refers to our purchase in 2022 of the interests of our joint venture partners at 11 properties.
Revenues
The following table compares our revenues for the years indicated:
(Dollars in thousands): 2023 2022 Change % Change
Rental and other revenue from real estate properties $ 93,069 $ 70,515 $ 22,554 32.0 %
Other income 548 12 536 N/M
Total revenues $ 93,617 $ 70,527 $ 23,090 32.7 %
Rental and other revenue from real estate properties. The components of the increase include:
• $20.8 million from the Partner Buyouts; and
• $2.6 million from same store properties, substantially all of which is due to higher average rental rates.
Offsetting the increase is a $1.0 million decrease due to a decline in occupancy from 96.4% to 93.6% at same store properties, including $343,000 at Bells Bluff-West Nashville, TN, which experienced a decline in occupancy due to increased supply in the market and change in demand for certain unit types.
Other Income
The increase is due primarily to increased earnings on our cash balances due to higher interest rates.
Expenses
The following table compares our expenses for the periods indicated:
(Dollars in thousands) 2023 2022 Change % Change
Real estate operating expenses $ 41,821 $ 30,558 $ 11,263 36.9 %
Interest expense 22,161 15,514 6,647 42.8 %
General and administrative 15,433 14,654 779 5.3 %
Depreciation and amortization 28,484 24,812 3,672 14.8 %
Total expenses $ 107,899 $ 85,538 $ 22,361 26.1 %
Real estate operating expenses. The components of the increase include:
• $9.4 million from the Partner Buyouts; and
• $1.8 million from same store properties, including:
– $880,000 due to the master insurance program implemented in December 2022 and increases in insurance costs overall.;
– $295,000 in real estate taxes due to increases primarily at four properties; and
– general cost increases, including $228,000 in property level payroll costs, $201,000 in utilities costs and $211,000 across other expense categories.
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Interest expense
The components of the increase include:
• $5.2 million due to the Partner Buyouts;
• $1.3 million due to the increase in the interest rate on our floating rate junior subordinated notes; and
• $372,000 of interest expense on the Silvana Oaks mortgage which was obtained in February 2023.
The increase was offset by a $139,000 decrease in interest expense on our credit facility primarily due to the payoff of the facility in February 2023 in connection with the receipt of proceeds from the Silvana Oaks mortgage.
General and administrative.
The components of the increase include:
• $379,000 due to the amortization expense related to the restricted stock granted in January 2023 (as a result of the higher fair value of the shares granted in 2023 in comparison to the restricted stock granted in 2018); and
• $232,000 of cash compensation and related payroll expense due to higher levels of compensation and increased employee headcount.
Depreciation and amortization
The increase is due $5.8 million from the Partner Buyouts, offset by a $2.1 million decrease due to reduced depreciation related to lease intangibles resulting from such buyouts.
Equity in earnings (loss) of unconsolidated joint ventures and equity in earnings from sale of unconsolidated joint venture properties .
Please see a detailed explanation of these categories in the next section entitled "Unconsolidated Joint Ventures - Results of Operations".
Casualty loss
During the year ended December 31, 2023, we settled the Takakura Lawsuit for $323,000. During the year ended December 31, 2022, we settled a personal injury lawsuit for $850,000
Insurance recovery of casualty loss
During 2023, we received insurance proceeds of (i) $323,000 in connection with the settlement of the Takakura Lawsuit and (ii) $470,000 as reimbursement for expenses incurred related to a winter storm in December 2022. During 2022, we received $850,000 in insurance proceeds upon the settlement of a personal injury lawsuit.
Gain on Sale of Real Estate
In 2023, we sold a cooperative apartment in New York for a sales price of $785,000 and recognized a gain of $604,000.
Loss on extinguishment of debt
In 2022, we incurred $563,000 of loss on extinguishment of debt related to the mortgage refinancing affected in connection with the buyout of our joint venture partner's interest in Brixworth at Bridge Street - Huntsville, AL.
Income tax provision
Income tax provision in the year ended December 31, 2023, decreased $767,000 (i.e. , from $821,000 in 2022 to $54,000 in 2023). The decrease reflects the inclusion, in 2022 of increased tax provision related to gains from the sale of properties by several joint ventures and the reversal, in 2023, of approximately $200,000 due to the over-accrual of taxes.
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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 6 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,
2023 2022 Increase
(Decrease) % change
Rental revenues from unconsolidated joint ventures $ 44,785 $ 72,873 $ (28,088) (38.5) %
Real estate operating expense from unconsolidated joint ventures 20,577 33,086 (12,509) (37.8) %
Interest expense from unconsolidated joint ventures 9,268 16,269 (7,001) (43.0) %
Depreciation from unconsolidated joint ventures 10,403 17,798 (7,395) (41.5) %
Total expenses from unconsolidated joint ventures 40,248 67,153 (26,905) (40.1) %
Total revenues less total expenses from unconsolidated joint ventures 4,537 5,720 (1,183) (20.7) %
Other equity in earnings from unconsolidated joint ventures 126 121 5 4.1 %
Impairment of assets — ( 8,553 ) 8,553 N/A
Insurance recoveries from unconsolidated joint ventures — 8,553 (8,553) N/A
Gain on insurance proceeds from unconsolidated joint ventures 65 567 (502) (88.5) %
Gain on sale of real estate from unconsolidated joint ventures 38,418 118,270 (79,852) (67.5) %
Loss on extinguishment of debt from unconsolidated joint ventures ( 561 ) ( 3,491 ) 2,930 (83.9) %
Net income $ 42,585 $ 121,187 $ (78,602) (64.9) %
Equity in earnings (loss) and gain on sale of real estate of unconsolidated joint ventures $ 17,037 $ 66,426
Set forth below is on explanation of the most significant changes in the components of the equity in earnings of unconsolidated joint ventures and equity in earnings from sale of unconsolidated joint venture properties. Same store properties at Unconsolidated Properties represent seven properties that were owned for the entirety of the periods being compared.
Rental revenue from unconsolidated joint ventures
The decrease is due to:
• $18.4 million from the Partner Buyouts;
• $7.5 million primarily 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 "2022 Sales"); and
• $4.4 million from the Chatham Sale.
The decrease was offset by a $2.7 million increase in rental revenue from unconsolidated same store properties, primarily due an increase in rental rates offset by a $729,000 decrease due to reduced occupancy.
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Real estate operating expenses from unconsolidated joint ventures
The components of the decrease include:
• $7.8 million from the Partner Buyouts;
• $4.2 million from the 2022 Sales;
• $1.8 million from the Chatham Sale.
The decrease was offset by an aggregate $1.2 million increase in such expenses including increases of $279,000 in utility costs, $260,000 in insurance costs, $245,000 in payroll and leasing commissions, and $191,000 in real estate taxes.
Interest expense from unconsolidated joint ventures.
The components of the decrease are:
• $4.5 million due to the Partner Buyouts;
• $1.8 million from the 2022 Sales; and
• $631,000 from the Chatham Sale.
Depreciation from unconsolidated joint ventures .
The components of the decrease are:
• $5.1 million due to the Partner Buyouts;
• $1.2 million from the 2022 Sales; and
• $878,000 from the Chatham Sale.
Impairment of assets from unconsolidated joint ventures. During 2022, the venture recognized $8.6 million of impairment charges related to a fire at Stono Oaks, a development project located in Johns Island, SC.
Insurance recoveries from unconsolidated joint ventures. During 2022, the venture recognized $8.6 million of insurance recoveries related to the Stono Oaks fire.
Gain on insurance recoveries from unconsolidated joint ventures
During 2022, we recognized $567,000 in gains primarily due to our receipt of insurance recoveries from claims on two properties located in Texas that were damaged in a February 2021 ice storm, which receipts exceeded the assets previously written off.
Gain on sale of real estate from unconsolidated joint ventures
During 2023, we recognized a gain on the sale of real estate of $38.4 million from the Chatham Sale. During 2022, we recognized gains on the sale of real estate of $118.3 million from the 2022 Sales.
Loss on extinguishment of debt from unconsolidated joint ventures
During 2023 and 2022, we recognized loss on the early extinguishment of debt in connection with the Chatham Sale and the 2022 Sales, respectively.
Comparison of Years Ended December 31, 2022 and 2021
As we are a smaller reporting company, this comparison is omitted in accordance with Instruction 1 to Item 303(a) of Regulation S-K.
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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.
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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):
2023 2022
GAAP Net income attributable to common stockholders $ 3,873 $ 49,955
Add: depreciation of properties 28,484 24,812
Add: our share of depreciation in unconsolidated joint venture properties 5,292 10,677
Add: our share of impairment charge in unconsolidated joint venture properties — 1,493
Add: casualty loss 323 850
Deduct: gain on sales of real estate and partnership interests (604) (6)
Deduct: our share of earnings in earnings from sale of unconsolidated joint
venture properties (14,744) (64,531)
Adjustment for non-controlling interests (16) (16)
Funds from operations 22,608 23,234
Adjust for: straight-line rent accruals 93 24
Add: loss on extinguishment of debt — 563
Add: our share of loss on extinguishment of debt from unconsolidated joint
venture properties 212 1,880
Add: amortization of restricted stock and RSU expense 4,768 4,487
Add: amortization of deferred mortgage and debt costs 1,072 628
Add: our share of deferred mortgage costs from unconsolidated joint venture properties 106 227
Add: amortization of fair value adjustment for mortgage debt 613 148
Less: insurance recovery of casualty loss (323) (850)
Less: our share of insurance recovery from unconsolidated joint ventures — (1,493)
Less: gain on insurance recovery (240) (62)
Less: our share of gain on insurance proceeds from unconsolidated joint venture properties (30) (432)
Adjustment for non-controlling interests (15) (4)
Adjusted funds from operations $ 28,864 $ 28,350
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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.
2023 2022
Net income attributable to common stockholders $ 0.20 $ 2.66
Add: depreciation of properties 1.50 1.33
Add: our share of depreciation from unconsolidated joint venture properties 0.28 0.57
Add: our share of impairment charge in unconsolidated joint ventures — 0.08
Add: casualty loss 0.02 0.05
Deduct: gain on sales of real estate and partnership interest (0.03) —
Deduct: our share of earnings from sale of unconsolidated joint venture properties (0.78) (3.45)
Adjustment for non-controlling interests — —
Funds from operations 1.19 1.24
Adjustment for: straight-line rent accruals — —
Add: loss on extinguishment of debt — 0.03
Add: our share of loss on extinguishment of debt from unconsolidated joint ventures 0.01 0.10
Add: amortization of restricted stock and RSU expense 0.25 0.25
Add: amortization of deferred mortgage and debt costs 0.06 0.03
Add: our share of amortization of deferred mortgage and debt costs from
unconsolidated ventures 0.01 0.01
Add: amortization of fair value adjustment for mortgage debt 0.03 0.01
Less: insurance recovery of casualty loss (0.02) (0.05)
Deduct: our share of insurance recovery from unconsolidated joint ventures — (0.08)
Deduct: gain on insurance recovery (0.01) —
Deduct: our share of gain on insurance proceeds from unconsolidated joint ventures — (0.02)
Adjustment for non-controlling interests — —
Adjusted funds from operations $ 1.52 $ 1.52
Diluted shares outstanding for FFO and AFFO 18,931,026 18,782,695
FFO for 2023 decreased $626,000, or 2.7%, to $22.6 million from $23.2 million in 2022. Contributing to the change was a:
• $1.5 million decrease in insurance recovery from a casualty loss at an unconsolidated joint venture;
• $1.2 million increase in interest expense (including $465,000 of amortization of mortgage fair value costs);
• $499,000 increase in general and administrative expense (excluding non cash-amortization of restricted stock
and RSU expense); and
• $402,000 decrease in gains from insurance proceeds.
The decrease was offset by a:
• $2.2 million decrease in early extinguishment of debt;
• $767,000 decrease in income tax expense; and
• $536,000 increase in other income.
AFFO increased $514,000 or 1.8%, to $28.9 million in 2023 from $28.4 million in 2022. Contributing to this increase was a:
• $767,000 decrease in income tax expense;
• $536,000 increase in other income; and
• $470,000 of insurance recoveries
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The increase was offset by a:
• $725,000 increase in interest expense; and
• $499,000 increase in general and administrative expense .
See “—Comparison of Years Ended December 31, 2023 and 2022” for further information regarding these changes.
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.
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,
2023 2022
GAAP Net income attributable to common stockholders $ 3,873 $ 49,955
Less: Other Income (548) (12)
Add: Interest expense 22,161 15,514
General and administrative 15,433 14,654
Depreciation 28,484 24,812
Provision for taxes 54 821
Less: Gain on sale of real estate (604) (6)
Add: Loss on extinguishment of debt — 563
Equity in (earnings) loss of unconsolidated joint venture properties (2,293) (1,895)
Casualty loss 323 850
Less: Equity in earnings from sale of unconsolidated joint
venture properties (14,744) (64,531)
Insurance recovery of casualty loss (793) (850)
Gain on insurance recovery (240) (62)
Add: Net income attributable to non-controlling interests 142 144
Net Operating Income $ 51,248 $ 39,957
Less: Non same store and non multi family (1)
Revenues 45,695 24,911
Operating Expenses 20,140 10,692
$ 25,555 $ 14,219
Same Store Net Operating Income $ 25,693 $ 25,738
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(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.
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In 2023, NOI increased by $11.3 million from 2022 primarily due to a $20.8 million increase in rental revenues resulting from the Partner Buyouts. The increase was offset by a $9.4 million increase, primarily due to the Partner Buyouts, in real estate operating expenses. Same store NOI remained flat in 2023 from 2022 due to a $1.8 million increase in rental revenues (and in particular, the increase in average rental rates) offset by a $1.8 million increase in real estate operating expenses. See "-Results of Operations - Year Ended December 31, 2023 Compared to the Year Ended December 31, 2022" 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, pay dividends and repurchase shares of our common stock. Generally, in 2023, our primary sources of capital and liquidity were the operations of our multi-family properties (including distributions of $6.3 million from the operations of our unconsolidated joint ventures), our $19.4 million share of the net proceeds from the Chatham Sale, and our available cash. Excluding funds held at our unconsolidated subsidiaries, at December 31, 2023 and March 1, 2024, our available liquidity was approximately $83.5 million and $81.2 million, respectively, including $23.5 million and $21.2 million, respectively, of cash and cash equivalents, and subject to compliance with borrowing base and other requirements, up to $60 million and $60 million, respectively, available under our credit facility. A significant amount of our cash and cash equivalents is maintained at our properties for general working capital purposes.
We anticipate that for the four years beginning January 1, 2024, our operating expenses, $127.8 million of mortgage amortization and interest expense (including $50.4 million from unconsolidated joint ventures) and $204.4 million of balloon payments due with respect to mortgages maturing through 2027 (including $76.7 million from unconsolidated joint ventures), anticipated capital expenditures (for 2024 only) of $10.1 million for both consolidated and unconsolidated properties (including an estimated $2.7 million for our value add program), estimated cash dividend payments of at least $74.0 million (assuming (i) the current quarterly dividend rate of $0.25 per share and (ii) 18.5 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, our $60 million credit facility. Our operating cash flow and available cash is insufficient to fully fund the $204.4 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 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 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, 2023 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)
$ 37,669 $ 211,328 $ 222,229 $ 435,591 $ 906,817
Operating Lease Obligations 242 507 528 2,977 4,254
Purchase Obligations (2)(3)
6,595 13,190 13,190 — 32,975
Total $ 44,506 $ 225,025 $ 235,947 $ 438,568 $ 944,046
____________________________
(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 7.65% per annum , which was the rate in effect at December 31, 2023.
(2) Assumes that $966,000 will be paid annually for the next five years pursuant to the shared services agreement and $1.6 million will be paid annually through December 31, 2027 for the Services. See "Item 1. Business—Our Structure."
(3) Assumes that approximately $2.5 million of property management fees will be paid annually to the property managers of our multi-family properties, including $1.5 million related to unconsolidated joint ventures. Such sum reflects the amount we anticipate paying in 2024 on the multi-family properties we own at December 31, 2023. 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 $10.1 million of anticipated capital expenditures in 2024,including $2.7 million in connection with our value add program. Such expenditures subsequent to 2024 are not determinable.
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The following table sets forth as of December 31, 2023 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) $ 20,683 $ 126,006 $ 109,792 $ 281,670 $ 538,151
Mortgages on unconsolidated properties (1) 14,125 79,600 106,715 95,549 295,989
Junior subordinated notes and credit facility(2) 2,861 5,722 5,722 58,372 72,677
Total $ 37,669 $ 211,328 $ 222,229 $ 435,591 $ 906,817
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(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 7.65% per annum.
Corporate Level Financing Arrangements
Junior Subordinated Notes
As of December 31, 2023, $37.4 million (excluding deferred costs of $257,000) 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 term SOFR plus 226 basis points. At December 31, 2023 and 2022, the interest rate on these notes was 7.65% and 6.41%, 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 three unencumbered multi-family properties used in calculating the borrowing base. The credit facility bears an annual interest rate, which resets monthly, equal to one-month term SOFR plus 250 basis points, with a floor of 6.00%. The interest rate at December 31, 2023 and March 1, 2024, was 7.85% and 7.82% 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, 2024, 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, 2023, we were in compliance in all material respects with the requirements of the facility.
Other Financing Sources and Arrangements
At December 31, 2023, we are joint venture partners in unconsolidated joint ventures which own seven multi-family properties which distributed $5.2 million to us in 2023. We may be required to make capital contributions with respect to these properties. At December 31, 2023, our investment in these joint venture properties have a net equity carrying value of $30.4 million and are subject to mortgage debt, which is not reflected on our consolidated balance sheet, of $247.0 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. 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.
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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 2023, 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 2024 and thereafter, which would 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, increases the interest expense on our junior subordinated notes and may make it less attractive to obtain mortgage debt or use our credit facility in connection with acquisition, refinancing and value add activities.
Cash Distribution Policy
We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended. Accordingly, 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.
We anticipate that if we do not sell any multi-family properties this year, that a significant amount of the dividends we will pay in 2024 will be treated for federal income tax purposes as a return of capital.
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 discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. On an ongoing basis, we reconsider and evaluate our estimates and assumptions.
We base our estimates on historical experience, current trends and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could materially differ from any of our estimates under different assumptions or conditions. Our significant accounting policies are discussed in Note 1 of our consolidated financial statements in this report. We believe the accounting estimates listed below are the most critical to aid in fully understanding and evaluating our reported financial results, and they require our most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain.
Equity method investments
We report our investments in unconsolidated entities, over whose operating and financial policies we do 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.
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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.
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.
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.
Equity-Based Compensation
We grant shares of restricted stock and restricted stock units ("RSUs") to eligible plan participants, subject to the recipient's continued service over a specified period and, with respect to the RSUs, the satisfaction of specified conditions over a specified period. A portion of the RSUs vest based upon satisfaction of specified metrics with respect to (i) total stockholder return(“TSR Awards”) and (ii) adjusted funds from operations(“AFFO Awards”), in each case as calculated pursuant to the applicable award agreement. We account for the restricted stock awards and RSUs in accordance with ASC 718, Compensation - Stock Compensation, which requires that such compensation be recognized in the financial statements based on its estimated grant-date fair value. The value of such awards is recognized as compensation expense in general and administrative expenses in the accompanying consolidated statements of operations over the applicable service periods. Grant date fair value is determined with respect to the (i) the restricted stock awards, by the closing stock price on the date of grant, (ii) TSR Awards, by using a Monte Carlo simulation relying upon various assumptions and (iii) AFFO Awards, by using the closing stock price on the grant date, subject to quarterly adjustment based upon management’s projection as to the achievability of the specified metrics related to the AFFO Awards. See Note 9 to our consolidated financial statements.