Jeffrey Gould - President and Chief Executive Officer George Zweier - Chief Financial Officer Ryan Baltimore - Chief Operating Officer David Kalish - Senior Vice President

Good day, and welcome to the BRT Apartments Corp. Fourth Quarter 2022 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I’d now like to turn the conference over to [Trip Sullivan] of Investor Relations. Please go ahead.

Thank you for joining us today for BRT Apartment's fourth quarter 2022 earnings conference call. On the call today are Jeffrey Gould, President and Chief Executive Officer; George Zweier, Chief Financial Officer; and 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 and Form 10-Q for a more complete discussion of risks and other factors that could affect these forward-looking statements. Except as required by law, BRT does not undertake any obligation to publicly update or revise any forward-looking statements. This call also includes a discussion of non-GAAP measures, including FFO, AFFO, NOI, 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 reported filings with the SEC. Please see these reports and filings for the definitions of each non-GAAP measures. 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.

Thank you, and welcome to the call. I'll have a few comments on our overall performance, the state of the company and some insight on the market environment. Then I'll turn it over to George for some additional color around our results. I'll ask Ryan to come out on at the end to discuss our 2023 guidance. I'm very pleased with what we've accomplished at BRT this year. We made significant progress on our strategic goals, such as growing the wholly owned portfolio, improving the balance sheet with most of our mortgage debt at fixed interest rates, driving NOI growth and creating value. The scale and importance of the transactions we completed in 2022 can't be emphasized enough. I'd like to thank our entire team for their contributions to our success. We remain in front of a number of long-term secular trends at BRT with our portfolio position in markets that are experiencing population and job growth. Some concerns have been expressed this quarter within our industry about the impact of inflation on the cost of living, new supply in several markets, and the timing and ultimate scale of a recession, among others. These are real challenges for us and for the industry. But I've said this before, and it's worth repeating. BRT's management has been through many economic cycles and is ready to take advantage of appropriate opportunities. Patience has been a virtue in the last several quarters. Any transactions we contemplate must still meet our stringent underwriting standards, so you can expect we will remain deliberate in our growth plans. The same applies to any potential asset recycling we might pursue. Until recently, price discovery has been the best term to describe what has been transpiring in the past several months. We are beginning to see some light…

Thank you, Jeff. Our results for the fourth quarter on a year-over-year basis continue to be driven by the positive impact from the partner buyouts and improved operating margins across the portfolio, offset by some expenses we incurred in the fourth quarter related to extreme winter conditions in the Southeast. The net loss attributable to common stockholders of $0.22 per diluted share was higher than the $0.08 loss per diluted share from a year ago, primarily due to: increased depreciation from partner buyouts, a decline in joint venture income due to an insurance gain we recognized in the prior year, and increased borrowing costs on our sub debt and credit facility, offset by improved portfolio results. FFO was $0.40 per diluted share compared to $0.35 per diluted share a year ago, primarily due to an increase in net insurance gains and recoveries and a decline in the early extinguishment of debt, offset by increases in real estate operating expenses, the result of costs incurred related to the extreme weather conditions and increased interest expense on our floating rate corporate debt. AFFO was $0.37 per diluted share compared to $0.41 per diluted share a year ago, primarily due to the same factors impacting FFO, excluding the net insurance gains and recoveries and the decline in the early extinguishment of debt. The expenses incurred due to extreme weather conditions that caused some damage to our properties were approximately $549,000 or $0.03 per share, and the increased borrowing costs represented approximately $367,000 or $0.02 per share. Our combined portfolio NOI was up 0.7% for the fourth quarter. That's a new measure for us. I want to take a moment to explain the rationale for providing this metric as we believe it provides additional transparency. With a substantial change in the composition of our…

Good morning. I'll be relying on the guidance tables and assumptions that we provided in both our earnings release and supplemental last night. As this is our initial outlook for the year, I want to preface my comments today with a reminder that these forecasts and assumptions are based on available data and trends as we have as of today, March 15, 2023. Let's start with the headline figure of AFFO of $1.50 to $1.61 per diluted share for 2023. That represents 2.3% growth at the midpoint when compared with full year 2022 results. For FFO, we're projecting a range of $1.08 to $1.19 per diluted share for 2023. We have outlined a number of assumptions to accompany these ranges, so let me walk through the big ones briefly. For ease of discussion, I'll generally refer to the midpoint of the ranges. First, I'd like to point out that except for the Chatham Court property disposition, these ranges do not include any additional acquisitions, dispositions or capital markets activity. The proceeds from this disposition are expected to total $19 million when it closes in the second quarter. Although we have an acquisition under contract for a potential closing in the fourth quarter, that Jeff mentioned earlier, we have not assumed a redeployment of these proceeds in our guidance. This disposition decreases FFO per share by approximately $0.05 and AFFO per share by approximately $0.04 to $0.05 for the full year. We have also assumed very little increase in the share count as well with 19.23 million weighted average shares outstanding for the year. Second, we are assuming very little utilization of the credit facility with our only other meaningful variable rate debt comprised of the junior subordinated notes at 200 basis points over LIBOR. Our interest rates we have assumed…

[Operator Instructions] Our first question comes from Gaurav Mehta with E.F. Hutton.

I want to ask you on the transaction market. I was hoping if you could provide some color on pricing and then maybe some color on the acquisition that you have under contract, including your plans to fund the remaining amount outside of the $32 million of mortgage debt that you guys are planning to assume?

Sure, yes. Good morning, Gaurav. Yes, generally speaking, the market is tough. It's difficult to buy. There's a lot of pent-up demand over the last couple of years. We've had a lot of interest. If you talk about just for a minute, the sale of one of our properties, we had incredible interest in the property, and it's not an easy time to buy. As far as what we're seeing -- and specifically, the acquisition that we're looking into and we're really excited about is probably in the low 4s, but you have to realize cap rate, but you have to realize the positive leverage that we're getting. Day 1, we have great finance in there with the HUD financing that we described. I would say, typically, just to give you some idea. The sale of the property that we've talked about and that we're moving forward with is probably in the high 4s, and that's like a 1986 construction job. Just to give you some idea. So overall, I would say, from the peak of where cap rates were in the 3.5% to 4% range, we're probably more in the 4.5% to 5% range as a general rule, I would say. We're getting a little bit more clarity as newer transactions are happening. But I would say from the high cap rates, maybe we're up 50 basis points to 100 basis points tops, there's a lot of demand out there. And as far as funding goes, basically, our plans to -- on the acquisition is to use the cash that we get from the Chatham sale as well as short-term using our line availability, which we will likely replace in some fashion through potential ATM, financial further sales, et cetera. So we're very focused on our line and the cost of our lines. So we want to keep that to a minimum if pulled it all. And we're very conscious of that. So we'll address it accordingly.

Okay. Maybe on the proceeds, the $19 million of proceeds from disposition. Do you guys plan to carry that on your cash balance until you acquire the property?

Yes. Like we said earlier, we have no outstanding line that we need to pay down. We are going to hold it for cash. We recognize that that's going to take the few months in between the sale and the new buy is going to not be ideal for us, but at the same time, it was an appropriate time to sell the Chatham property, and it's a short-term effect. So we're very comfortable with it. And yes, we will hold them the cash.

Okay. I also wanted to ask you on the value add. You talked about 47% ROI in 2022. Is that the kind of return you guys expect to get in '23 as well?

Hi, Gaurav, this is Ryan. I think that, that return will come down. That's partially due to the softening of the market in general. As we mentioned with our guidance, we are anticipating some moderation of rent growth that we've seen as well as some conservatism that we've built in with this economic backdrop right now. So we're not anticipating probably as high as that 47%, but we're generally looking in the 15% to 20% to even do the value add. So that's kind of our minimum metric there to even start that process.

Our next question comes from Aaron Hecht with JMP Securities.

Rental rate growth has, obviously, been pretty strong here, but occupancy looks like it was down across both the consolidated and unconsolidated portfolio. Has that kind of been planned to drive the rate growth? Do you expect that occupancy to kind of level off now? Kind of give us some thoughts on how we should think about the occupancy side of the business going into '23? And what's implied in guidance?

Yes. I'll start, and then I'll pass that one to Ryan, a little bit too. So occupancy interesting enough comparing year-to-year. We recognized during COVID and the throes of COVID, people just weren't moving. There was a -- obviously, the freight around and just lack of movement of -- renewal activity was greater. So the occupancy -- the main trend and main reason year-to-year, the occupancy is down primarily because of COVID days versus more comfort with what's going on around the environment. Obviously, there's seasonality, but that's quarter-to-quarter the same. But we expect occupancy to jump up during the spring and summer months as they always do. Do you have anything to add to that?

No, no. I think that's the main driver, as Jeff mentioned. And we generally, as we've spoken about in the past, try to keep occupancy in the mid-90s. As we get higher, we look to push rents to bring that back down to where we believe we can maximize the revenue. So this wasn't surprising to us by any means. I think that, as Jeff mentioned, we had an abnormally high occupancy during these winter months last year. So this was more in line with what we had seen in the past.

Does the strategy change at all given the economic conditions? Do you prioritize occupancy a little bit more than rate growth given the difficulties out there?

Yes, I would say we'd like to focus on around that 95%, give or take number. So when we see occupancy dropping a little bit, we would do something as far as lowering rents to continue that occupancy. We've seen that as a sweet spot for us, generally speaking. And when we see activity or lack of activity in a certain product, whether it be a 1-bedroom or a 2-bedroom on a specific apartment complex, we'll make adjustments accordingly to keep close to that 95% occupancy if possible.

Yes. And also just to add on that real quickly in terms of kind of what we mentioned with the guidance, part of that is built into that conservatism that we included. We definitely didn't anticipate pushing rents nearly as aggressively as it had happened in 2022. So I think that's all kind of built into our guidance assumption.

Okay. And then on the guidance, the expense growth, obviously, higher than we've seen from some groups across the space. And understandably, you did some work on the insurance side, which is a big increase. And then I think 9.8% growth on the property tax side was the disclosure. How much of that property tax increase or how much variability do you see in there, given I would think you have assumptions that are baked in, was there any recoveries in '22 that impact '23? And then maybe you could talk on the insurance side about the decision to do a master agreement because that was a pretty big increase?

Yes. So Aaron, let me start a little more generally. As far as guidance go, look, it's our first time giving guidance, we wanted to be conservative. We want to be careful in this market. We've addressed this and said to ourselves that we think these are appropriate figures to use, and we're not surprised to hear you say that it's higher than some of our peers. But this is where we were comfortable at giving guidance. As far as specifics, Ryan can answer some of the questions regarding specifically as to why we went to this insurance change, which I think was a significant and positive thing for the company. Ryan, you can answer that?

Yes. So just to start on the taxes, we work with real estate tax consultants in all of our properties. We budget based on the municipality where we anticipate militates being based on what we know at the time. That being said, obviously, some markets are a little more aggressive than others and some markets reassess every 3 years, 5 years. That's all built into our assumptions and our guidance. We hope to do better if we can, but we don't -- we do it based on what we know at the time. So from a variability standpoint, there's obviously potential for that to be varied. But based on what we know today, that's where we were comfortable. And then on the insurance side, so obviously, this large increase, as I mentioned on the call, a lot of the increase is due to the timing of kind of accelerating these renewals that may have been more midyear. But as we're ending the year last year and had bought out these partners, we saw where the insurance market was heading. We wanted to bring that under our control as much as possible. So we were really able to take advantage before year-end, before these new treaty renewals and really jumped on a positive opportunity for us to bring this in-house and get a lot of our properties, 17 of the properties to be specific, all wholly-owned under our own control. So as we mentioned, in the short term, yes, this year is obviously a very large increase, but we hope as we grow with this portfolio and grow with this insurance program, to smooth that out over time.

This concludes our question-and-answer session. I would like to turn the conference back over to Jeff Gould for any closing remarks.

I just want to say thank you all for your time and continued interest in BRT. We're always available for any follow-up calls you may have. So please feel free to give us a ring. And that's pretty much it. So have a great day, and thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.