2023-12-28 07:01:00 ET
Summary
- BRT Apartments Corp. is a REIT that owns and operates multi-family properties.
- Though there is a mixed picture regarding its liquidity and performance, there are enough things to like about the company.
- Nevertheless, investors are better off adding this to a watchlist and familiarizing themselves with those things in case the stock price ever decreases.
BRT Apartments Corp. (BRT), founded in 1972 and headquartered in Great Neck, New York, is a REIT that owns and operates multi-family properties in 11 states.
Though the company has been growing at a fast pace in recent years, has an attractive portfolio in the Sunbelt markets, and a safe dividend, investors need to know that its shares are fairly valued, which presents an opportunity risk at the least.
Portfolio
First, let's take a brief look at the REIT's portfolio. BRT Apartments currently wholly owns 21 multi-family properties consisting of 5,420 units and has ownership interests in seven more that aggregate 2,287 units. Most of these assets are in the Southeast United States and Texas.
This is certainly a well-diversified portfolio considering that Sunbelt markets have enjoyed high demand both in the last 3 years and more recently in comparison to other markets.
Performance
First, I wanted to take a look at the long-term historical operating performance of BRT Apartments, which is a bit underwhelming:
The lack of a definitive upward trend throughout the decades can to some extent be alleviated by the last decade's growth in revenue, operating income, and FFO within the context of the year 2020 and the subsequent return to growth in recent years.
When it comes to occupancy, the rate was 94.4% lately as reported in the last earnings call, which is more or less in line with other multifamily REITs' rates. It's also 100 basis points higher than the rate reported for the second quarter of 2022.
And speaking of more recent results, below I present the change between the latest quarterly figures annualized and the corresponding average annual ones of the last three fiscal years:
Rental Revenue Growth | 117% |
Same-Property Cash NOI Growth | 147.41% |
AFFO Growth | 29.32% |
No doubt, the more recent performance reflects the recent trend of Sunbelt markets' demand and consequent increasing rent prices. Such growth is also represented by the recent recovery of the stock price in 2020 before it was disrupted by the Fed rate hikes in 2022:
Leverage
When it comes to its debt, BRT has financed with it 63.8% of its assets, which is acceptable for a REIT. Its debt-to-EBITDA ratio is also a respectable 8.6x, while its interest coverage sits at a sufficient but low 1x.
This mixed picture is also fueled by the lack of a definitive trend that could be partly used to see where the leverage/liquidity level is headed. I find this lack more problematic than the low interest coverage.
But there are some good things to be said about its debt too. As of September 30, the long-term debt consists of mortgages and junior notes aggregating about $460 million. Now, mortgages carry a weighted average interest rate of 4.02%, which is very competitive in the current environment. Additionally, the interest rate on the notes was 7.63%, but they are valued at $37 million, a small portion of the debt.
This low cost of debt raises the obvious question regarding refinancing, of course. However, the near-term upcoming maturities represent a very small portion of its total debt, so I doubt that BRT is in danger of a suddenly higher cost of debt anytime soon:
Investor Presentation
Dividend & Valuation
Right now, the company pays a quarterly dividend of $0.25 per share which suggests a 5.3% forward yield. I believe the current payout to be relatively safe, considering the 62.51% payout ratio based on AFFO and the more recent payment record the REIT has established in the last 5 years, during which it increased its dividend every year:
Yes, the REIT wasn't paying a dividend for a very long time before that period, but that capital allocation decision seems to be in line with the concurring erratic operating performance we witnessed above.
Regardless, the shares are trading at a 4.61% implied cap rate. Considering the median implied cap rate of residential REITS and the average one for residential asset transactions, a slightly lower cap rate for Sunbelt multifamily exposure through a profitable company like BRT Apartments is deserved, which makes me conclude that BRT is more or less fairly valued right now.
Even so, I prefer buying REITs at a discount and that is a deal breaker for me. For others, the dividend yield may be high enough to make BRT a worthy addition to one's portfolio at that price. However, some risks are present and you should consider them before you make an investment decision.
Risks
First, the obvious is the risk concerning valuation. Buying real estate at a discount provides a margin of safety, the absence of which can shake one's confidence during market volatility. That's the case for me at least; the only way I will be confident to hold through thick and thin is if I have the conviction I bought an undervalued enterprise. Consider if the same applies to you.
There is also an opportunity risk here more present than with other REITs. With the dividend yield at ~5%, it is possible one may realize an opportunity cost that other higher-yielding dividend stocks could significantly offset these days. Let's keep in mind that REITs are most of the time slow growers because of their unexciting business model which may contribute to predictability but at the cost of a slow growth pace. Without a high dividend yield to create a wait-to-get-paid situation, one might regret buying a fairly valued low-dividend stock.
Verdict
Mostly because of the fair valuation, I must assign a hold rating on BRT for now, which I will definitely reconsider if the price gets around $16 per share, which would imply a 19.52% discount to NAV based on a 4.5% cap rate, a 24.26% upside, and a 6.25% dividend yield. For now, adding BRT to a watchlist seems like the wisest option to me.
Now, if you're looking for a cheap but growing multifamily REIT with adequate liquidity, low debt, and a diversified portfolio, you might be interested in reading my analysis of Equity Residential ( EQR ); though the stock price is 14.23% higher than when I published the post, the margin of safety remains attractive.
What's your opinion? Do you own BRT or intend to? Why or why not? Let me know below and I'll make sure to get back to you soon. Thank you for reading!
For further details see:
BRT Apartments: A Lower Price Would Seal The Deal