In their recent fourth-quarter and year-end earnings call, BRT Apartments Corp (NYSE: BRT) outlined a strategic focus on property operations and portfolio optimization amidst a challenging operational environment. The company, which took full ownership of a majority of its properties in a move to simplify its business, reported no significant mortgage debt maturities until early 2026.
BRT Apartments Corp has pulled back on acquisitions in the past year, allocating capital to repurchase $16.7 million of shares. Looking ahead, the company expects the impact of new supply to challenge rent growth, occupancy rates, and operating margins, particularly in the Sunbelt region where BRT operates. Management emphasized a patient approach to asset growth and a commitment to stabilizing occupancy in 2024, with the possibility of more transaction activity later in the year. The company anticipates better growth prospects for 2025 and 2026.
Key Takeaways
- BRT Apartments Corp focused on simplifying operations and improving balance sheets in 2023.
- The company repurchased $16.7 million of shares, with no significant mortgage debt maturities until 2026.
- BRT anticipates challenges in rent growth, occupancy, and margins due to new supply and inflationary pressures.
- Management plans to prioritize occupancy stabilization in 2024, with a cautious outlook on transaction activity.
- The Sunbelt region remains a long-term strategic focus, with expectations of a challenging 2024 but better growth in the following years.
Company Outlook
- BRT Apartments Corp provided a 2024 outlook without specific earnings targets.
- The company expects to face similar operational challenges as other operators, including the impact of new supply on rent growth.
- Focus for 2024 will be on stabilizing occupancy to prepare for potential transaction activity later in the year.
Bearish Highlights
- Ongoing inflationary pressures are likely to affect operating margins.
- New supply in the market may hinder the company's ability to grow rents and maintain occupancy.
Bullish Highlights
- The Sunbelt region is seen as a strategic long-term location for BRT Apartments Corp.
- Management is confident in their approach to managing the portfolio through the anticipated challenges.
Misses
- Specific earnings targets for 2024 were not provided due to the uncertain operating environment.
Q&A Highlights
- Jeffrey Gould, CEO, acknowledged the quiet transactional environment and the difficulty in getting excited about purchases due to negative leverage.
- The company is comfortable with their share repurchase decisions, despite the stock price drop.
- Some markets have unexpected oversupply, but the company is confident in the net absorption and eventual lease-up.
- BRT Apartments Corp is patient with acquisitions, waiting for cap rates to align more closely with interest rates.
In conclusion, BRT Apartments Corp is navigating a period of operational challenges with a strategic focus on property management and cautious capital allocation. The company's conservative approach to acquisitions and share repurchases reflects a commitment to long-term growth and stability in the face of current market headwinds.
InvestingPro Insights
As BRT Apartments Corp (NYSE: BRT) navigates through uncertain market conditions, their strategic decisions are reflected in the company's financial metrics and management activities. According to InvestingPro, BRT's market capitalization stands at a modest $287.88M, which suggests a smaller player in the industry but with room for maneuverability. Notably, the company's management has been actively involved in share buybacks, a move that indicates confidence in the intrinsic value of the company despite the market's undervaluation.
InvestingPro Data shows that BRT has experienced a significant revenue growth of 51.23% in the last twelve months as of Q3 2023. This is a testament to the company's ability to increase its income amidst a challenging environment. Furthermore, the gross profit margin during the same period was a solid 56.77%, showcasing the company's efficiency in managing its cost of goods sold relative to its sales.
One of the InvestingPro Tips highlights that BRT has raised its dividend for 7 consecutive years, which is a strong sign of the company's commitment to returning value to shareholders and its financial health to sustain such payments. However, it's also trading at a high earnings multiple, with a P/E Ratio of 152.98, suggesting that investors are paying a premium for the company's earnings and future growth potential.
It's worth noting that BRT's price has fallen by 19.15% over the last three months, which could be an opportunity for investors to consider the stock at a more attractive valuation. For those interested in further insights and tips, InvestingPro offers additional information that can be accessed at https://www.investing.com/pro/BRT. Subscribers can use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription. There are 5 more InvestingPro Tips available, providing a comprehensive analysis of BRT's financial health and market position.
Full transcript - BRT Realty Trust (NYSE:BRT) Q4 2023:
Operator: Good day, and welcome to BRT Apartments Corp’s Fourth Quarter and Year-End Earnings Conference Call. Today’s conference is being recorded. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] At this time, I would like to turn the floor over to Tripp Sullivan of Investor Relations. Thank you. You may begin.
Tripp Sullivan: Thank you for joining us today. On the call are Jeffrey Gould, President and Chief Executive Officer; George Zweier, Chief Financial Officer; Ryan Baltimore, Chief Operating Officer; as well as David Kalish, Senior Vice President. I would like to remind everyone that this conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on management’s current expectations assumptions and beliefs. Listeners should not place undue reliance on any forward-looking statements and are encouraged to review the company’s SEC filings, including its Form 10-K for a more complete discussion of risks and other factors that could affect these forward-looking statements. Except as required by law, BRT does not undertake any obligation to publicly update or revise any forward-looking statements. This call also includes a discussion of non-GAAP measures, including FFO, AFFO, NOI and combined portfolio NOI and information regarding our pro rata share of revenues, expenses, NOI, assets and liabilities of BRT’s unconsolidated subsidiaries. All the non-GAAP information discussed today has certain limitations and should be used with caution and in conjunction with the GAAP data presented in our supplemental earnings release and in our reports filed with the SEC. Please see these reports and filings for the definitions of each non-GAAP measure. As a reminder, the company’s supplemental information and earnings release have been posted on the Investor Relations section of BRT’s website at www.brtapartments.com. I’d now like to turn the call over to President and CEO, Jeffrey Gould. Please go ahead, Jeff.
Jeffrey Gould: Good morning. We’re approaching the end of the Q4 earnings cycle and the commentary we’ve all heard this quarter has focused on rental rates, transaction activity, expenses and the impact of new supply in the Sunbelt. We’ll be very brief with our commentary today, so we can drill down into those topics in Q&A. To quickly summarize 2023, I want to highlight the ongoing simplification of the business that we started in 2021 by taking full ownership of a majority of our properties, the improvement in our balance sheet and the disciplined approach to our capital allocation. We do not have any significant mortgage debt maturities until early 2026 and pulling back on acquisitions in the past year and investing disposition proceeds to repurchase $16.7 million of shares during the year and to date in 2024 were the right decisions. We made it our priority to focus on property operations and look to maximize portfolio performance where possible. It made for a relatively quiet year, but an important one, nonetheless. While we’re not providing specific earnings targets, the 2024 outlook we provided in our earnings release last night outlines our views on portfolio operations, transactions and other moving parts of the P&L. The big takeaways are that operational environment we’re anticipating this year is much like other operators. New supply is expected to impact the ability to grow rents. There will be continued pressure on occupancy and the ongoing inflationary headwinds are expected to impact operating margins. We intend to prioritize stabilizing occupancy this year with a view to being more constructive on potential transaction activity later in the year. Long term, we’re in the right region in the Sunbelt. We will be aggressive in how we manage the portfolio to earn what we anticipate will be a challenging 2024, but we will remain very patient on asset growth. We believe this strikes the right balance to position us for better growth in 2025 and 2026. Operator, will you please open the call to questions.
Operator: We will now being the question-and-answer session. [Operator Instructions] The first question comes from Michael Gorman with BTIG. Please go ahead.
Michael Gorman: Yes, thanks. Good morning. Jeff, I was wondering if you could just drill down a little bit in terms of – obviously, you spoke about the operating environment in these markets, and we certainly have heard a lot about that. Can you talk about what that’s leading to on the investment side, on the transaction side, what you are seeing there? And specifically, kind of how you are thinking about balancing additional share repurchases versus the kind of opportunities that may or may not be in the market today?
Jeffrey Gould: Yes, sure. Good morning. So as far as the transactional environment, things are, I’ve said this before, but things are very, very quiet. The reality is that continually with cap rates being somewhere in the mid-5s, call it and interest rates higher than that and the negative leverage. It is very difficult for people to get too excited about purchases, even transactional volume, just deals that we’re seeing are extremely slow. It’s really just basically a hold market right now. I think sellers are looking to hopefully have interest rates drop, so cap rates will drop and they can sell at a better time. There’s not a lot of pressure and a lot of issues with defaults right now in multi-family as in other sectors. So volume wise, it’s pretty quiet. On the share repurchase side, we were pretty active. We always have to check our cash balances and see where we are and our borrowing base and see if it makes sense at the right time based on the right price and our cost of capital to see if we want to buy shares back. But we were pleased that we did and we’re able to do that even though the stock dropped a little bit since then. We’re very comfortable with those purchases. But generally what’s happening in the market is it’s very simple. There’s some overbuilding in some of our markets, fortunately, not many of our markets, but some of our markets leading to a fight for occupancy and push on rents. So the conversations that we’ve seen about 2024 being kind of a rough year on growth I think is accurate. I think once these units get absorbed, I think 2025, 2026 are much brighter days because there’s very little in the permitting process and it’s going to be a sticky 2024 and a difficult 2024. But we have our heads down and we’re working hard to keep occupancy and keep our rents both through new leases and renewals.
Michael Gorman: That’s helpful. Thanks. And just on the share repurchases, as you think about it, obviously you touched on a couple of issues there. Do you give any consideration to the liquidity in the stock and how do you think about that in terms of the shareholder base, when you think about share repurchases and the scale of share repurchases over time?
Jeffrey Gould: Yes, it’s a fair question. I mean we are already – we have a significant percentage owned by insiders and all. So the reality is the float, whether we buy or not is pretty minimal. So the most investors are in this for the longer haul with us, and obviously management has their money where their mouth is, and we have quite a large interest in the stock. So we don’t think it makes a tremendous difference on liquidity one way or the other. I mean, we’re not talking about a huge amount of share repurchase. But at the same time, we understand it doesn’t help it, but we still think the investment is probably the best investment we can make as compared to other alternatives. And long-term, we think it’s something that’s going to be smart for us just based on our valuations and where we see the future of the company.
Michael Gorman: That’s great. And then just last one for me on Stono Oaks. Can you maybe just give a little bit of color there on the lease up? How you see that trending and maybe – how that maybe varies from where you initially underwrote it? Obviously, long-term, probably still a great asset, but just a little bit more color on how that kind of plays out over 2024 and 2025.
Jeffrey Gould: Yes. Working – going well. As a general answer, a partner that we’ve done many development transactions with before, we had a slight hiccup that one of the buildings was actually – there was an arson of one of the buildings, but basically that was resolved and it slowed us down on one building for about three or four months. But units are online now. Renting has already started. It’s on time, on budget, as we expected, and it’s a great market still. So there is some supply there, but not a huge oversupply. And I think we’ll do well with the rent up and the lease up, and I think it’ll be good long-term project for us.
Michael Gorman: Great. Thanks for your time.
Jeffrey Gould: Sure. Thanks, Mike.
Operator: The next question comes from Barry Oxford with Colliers. Please go ahead.
Barry Oxford: Great. Thanks. Thanks, guys. Just to kind of build on the acquisition question, Jeff. Given your cost of capital, where would cap rates sort of need to kind of level out to kind of get you interested to come back into the market? Obviously, at 5.5%, you could arguably say sellers probably are a little unrealistic at that level. But at what level would you say? Okay, Barry, at this level, I feel good about coming back into the market where cap rates.
Jeffrey Gould: Well, Barry, it’s sort of two-fold. It’s the cap rates, but it’s also the interest rates, so where we’re seeing neutral, let’s call it, neutral leverage. I think that’s about where we play the game. So if you’re talking about an interest rate market of 5.5% and cap rates of 5.5%, that might be something more interesting to us. We’ve been very patient in the last couple of years. It’s been frustrating, and we think it’s been prudent and smart to be patient. And looking back, I’m glad we didn’t buy anything over the last year or two. A lot of investors were targeting and projecting some pretty substantial rent growth, and it’s not there at all. As a matter of fact, it’s not even close to what they anticipated. But I think realistically, I think when it gets to about a neutral and when things calm down and the tenure is not jumping all over the place as it is week to week now, I think we’ll be in a much better place to consider acquisitions for value add properties, as well as even more stabilized situations.
Barry Oxford: No, that makes sense. And then on the unconsolidated partners, are there any partners that are looking to monetize their position that could buy them out? Or no, not right now. Nobody’s really throwing their hand up.
Jeffrey Gould: Yes, things have been pretty quiet. As we said to you guys have maybe to everyone about a year or two ago we took care of the ones that were sort of the lower-hanging fruit, if you will.
Barry Oxford: Right.
Jeffrey Gould: And the partners that we have now, I think there’ll be an event when the maturities take place and the maturities on those partnership deals is typically happening between like 2027 and 2029 somewhere in that range. It may happen sooner, but I think the maturity event will cause a discussion and an outcome whether it’s we buy them, we sell they buy us, I’m not sure what the outcome will be, but it’s probably more targeted towards the maturities, and you have that information. So I expect it’ll be quiet for the next year or two and then things will ramp up on the – most of the rest of the partnership deals. So there will be an event that will take place at that time.
Barry Oxford: Great. Thanks for the color on that. And then last question. You indicated there’s definitely some supply coming on. Is there demand for that supply? What I’m driving at is, is there brisk net absorption to say, hey, look as we get towards the end of 2024, most of the supply should be leased up or Jeff, you have the mind let – this could be more kind of more longer process and lease-up that could bleed into 2025?
Jeffrey Gould: Combination answer. We went into some markets that in your wildest dreams, you probably won’t imagine to oversupply. And now we’re seeing in Hunstville, Alabama example, Pensacola, Florida. I mean, the typical market is Nashville, Dallas, you might have expected it.
Barry Oxford: Right.
Jeffrey Gould: We’re comfortable in all these markets. And again, fortunately a larger our portfolio does not have oversupply issues. But where we do we’re comfortable with the in-migration and the absorption will be good. I do think it may go on past 2024, and I think it may take longer than just the calendar 2025, into 2025, but I do think there’s net absorption and these will get filled up. And I think we’ll see much better days early in 2025, not sure right away, but early towards the first – second quarter of 2025.
Barry Oxford: Great. Thanks a lot, Jeff.
Jeffrey Gould: Sure.
Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Jeff Gould for any closing remarks.
Jeffrey Gould: Well, thank you all for your continued confidence in BRT and have a good day. If you have any questions that you need to talk with this about, please feel free to call Ryan Baltimore and myself. Thank you.
Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
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